“I think I would do what everybody in this room would do,” Buffett said at the Economic Club of Washington’s 25th Anniversary Dinner Tuesday when asked how he would solve the country’s fiscal problems.
“If you asked everybody here how much the federal government should be raising annually in aggregate over the next 10 years, the answer would come in somewhere between 18.5 and 19.5 percent [of GDP] – which is close to what’s been the situation since World War II.”
Buffett said federal spending should come down drastically from its 2012 level of 24.3 percent of GDP.
“If you asked how much the government should be spending, it’d probably come in at 20.5 or 21.5 percent. You can have a two-percentage point deficit relative to GDP and the debt-to-GDP [ratio] will not grow.”
Buffett’s spending prescription is lower than what President Obama has proposed in his 2013 budget. Obama proposes to spend 22.5 percent of GDP per year over the next decade, running an average annual deficit of 3.3 percent of GDP.
Buffett also said he would enact something like the Simpson-Bowles plan of higher revenues, lower spending, and entitlement reforms.
“I would take the plan that 90 percent of the people here would come up with to get to that 19 percent of revenue and 21 percent [spending]. It can be Simpson-Bowles [or] it could be a bunch of different things and no one is going to agree 100 percent on every point.
“I think we do agree on the fact that we probably should be raising 18.5 to 19 percent [of GDP] and we should be spending 21 percent or thereabouts and that means getting more from taxes and it means cutting expenditures.”
President Obama – who created the Simpson-Bowles commission – famously rejected its findings in December 2010, choosing instead to offer his own budget that merely locked in the record spending levels that have characterized his first term.
Buffett’s tax proposal – that government return to its post-war average of 18.5-19.5 percent of GDP is also outside of what Obama has proposed. In his 2013 budget, Obama calls for tax rates in that range for only the first six years of the normal 10-year budget window. After 2019, Obama projects taxes will rise to 19.7 percent of GDP, eventually reaching 20.1 percent in 2022.
Further, the long-term projections included in that budget – which are long-term projections of the effects of Obama’s 2013 policies – show taxes locked in at 20 percent of GDP. Revenues of 20 percent of GDP would be historically high given that government has only taken 20 percent or more of the economy once since 1945 – in 2000 when revenues were 20.6 percent of GDP.
Buffett said that whatever politicians tried to do, the American system would continue to prosper. Sounding a resolutely optimistic tone, he said that the American system of government and economics had been working since 1776 and would continue to work well into the future.
“We’re not smarter than the people in 1930,” Buffett said, referring to those that suffered through the Great Depression. “We don’t work harder than the people in 1930. We just have a system that works and it’s been working since 1776 and it’s going to keep working.”