Two massive spending bills that congressional leaders wanted to dispose of before hitting the road for Memorial Day have hit potholes as lawmakers grow more uneasy about deficit spending. However, proposals to assert some degree of fiscal responsibility have yet to leave the driveway.

Legislation extending tax cuts, expanded unemployment and COBRA benefits, and a “doc fix” has stalled due to rising concerns over adding to the federal debt. The original version of the bill had a price tag of some $188 billion, with only about $56 billion of it offset. When moderates balked, leadership pared down the net costs to $84 billion by curtailing the Medicare “doc fix” through only the end of next year and having the unemployment and COBRA benefits expire a month earlier. With the votes still not there, House leaders have cut further, jettisoning the COBRA subsidies and separating out the “doc fix.” The House is scheduled to vote later today while the Senate has decided to take up the issue after the recess.

Legislation providing supplemental funds for operations in Afghanistan and Iraq as well as some disaster aid has fared somewhat better. The Senate late Thursday adopted a $59 billion version. However, a scheduled mark-up in the Appropriations Committee of a more expansive House version was abruptly cancelled later in the day. Members there reportedly are concerned about the bill’s costs, which are not offset.

Hopefully the events will convince leaders in Washington that the wheels have come off their strategy of ignoring the mounting debt and continuing to deficit finance initiatives by labeling them “jobs” bills and “emergency” spending. But there still seems a long way to travel to get legislators to actually pay for their priorities.

The Senate Thursday set aside two amendments to the supplemental from Senator Tom Coburn (R-OK) that would each have fully offset the cost of the bill by rescinding spending elsewhere. And the body never got a chance to vote on a pending amendment from Senators Jeff Sessions (R-AL) and Claire McCaskill (D-MO) to institute a three year discretionary spending cap. The proposal has consistently received broad, bipartisan support and the sponsors made adjustments to achieve 60 votes. It is a shame that the Senate found time to vote on border security amendments, but had no time for a more germane proposal as it considered adding to the mounting debt.

Like many trips this weekend, the drive for fiscal responsibility will be a long one with many stops along the way.

The OECD (the Organization for Economic Cooperation and Development, the Paris-based think tank for the 31 richest countries) released its twice-a-year economic outlook yesterday. It presented a bleak fiscal picture for many of the member countries (including the United States) unless governments make policy changes, but, constructively, it also presented possible ways forward for countries to get their fiscal house in order. 

The bleak fiscal picture reflects the past (expansionary fiscal policies followed by most of the countries over the past decade; the kick-in of automatic stabilizers such as unemployment insurance when the great recession began; and measures to stimulate the economy taken by governments to head off a downward spiral as the economic and financial crisis took hold), the present (the result of emergency stimulus measures, general government debt will have increased by 30 percentage points from 2007-2011) and the future (the fiscal impact of aging will start to have a bite in the next 10 years).

For countries to get their fiscal houses in order, the OECD suggested a package of measures--coming no later than next year--featuring fiscal consolidation and structural reforms to boost overall future economic output. These reforms are very important to counteract the effects of the fiscal contraction as the economy adjusts to a new fiscal path and will in the longer run make things better by boosting the economy's efficiency.

Generally speaking, the OECD suggested that the make-up of the fiscal package be mostly spending cuts since historical OECD country experience has shown that efforts focused on spending cuts were more successful.

What does the OECD say about the way forward for the United States? In addition to the well-recognized principle that the Fed and administration "should gradually withdraw policy stimulus as economic growth becomes self sustaining" (which, it recognized, will not be easy to gauge), the OECD recommended:

"The Administration needs to develop sustainable medium term consolidation plans setting out in detail how improvements in public finances are to be achieved."

The OECD presents some illustrative fiscal paths for the United States and other OECD members in this context that are useful to study, as we think about our fiscal way forward.

What structural reforms does the OECD discuss for the US? It  focuses on the importance of financial sector reform and key tax reforms:

"[T]he improvement of financial sector regulation should foster household deleveraging over the medium term and could narrow the current-account deficit by further increasing the private savings rate. Also a tax reform including the elimination of distortionary tax incentives could support household saving (OECD, 2005). In particular, the mortgage interest deduction could be reduced and a value-added tax (VAT) introduced. The pricing of environmental externalities of fossil fuel use will also reduce the fuel intensity of the US economy and possibly fuel imports and the overall external deficit."

We have suggested possible areas for tax reforms, as well. A few days ago, we touched on the Wyden-Gregg proposal, which would eliminate some distortionary tax incentives, but leave many of the biggest offenders in place, including the mortgage interest deduction. Additionally, in the past we have looked at the potential for a carbon tax/cap-and-trade system or a value-added tax in our "Countdown to Tax Day" series; both could raise a significant chunk of change while promoting economically productive initiatives (reducing fossil fuel use and encouraging household savings, respectively.)

Finally, the OECD has a message that readers of this blog should be very familiar with:

The effects on GDP would depend on the timing of consolidation measures. If financial markets were convinced about governments' fiscal consolidation plans, then measures might be back-loaded with the most severe tightening delayed until the recovery had gathered momentum. Alternatively, and especially for those countries with the largest fiscal imbalances, it is likely that an early demonstration of intent would be required to establish credibility.

Sound familiar? The OECD message: if a country (including the U.S.) can announce a multi-year fiscal consolidation plan that is credible to financial markets, then it can phase-in adjustment measures so that the toughest are applied later on, when the economic recovery is on firmer footing. Credibility with the financial markets is critical and real, whether we all like it or not. This is particularly important for the United States, which relies on these markets, instead of domestic savings, to finance its fiscal needs.

We have in fact written extensively along the same lines. See for example "Time To Develop a Fiscal Recovery Plan".

The President's Fiscal Commission has been charged with proposing:

"Recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. The magnitude and timing of the policy measures necessary to achieve this goal are subject to considerable uncertainty and will depend on the evolution of the economy. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government."

This mission statement was either written by a 2nd grader, or, more likely, it is brilliantly vague.

The wiggle room that results from the incomprehensibility may actually be quite wise. It would be foolish to declare the Commission unsuccessful if it were able to produce recommendations that made meaningful improvements to the fiscal health of the country, whether or not the recommendations hit a specific 2015 target. Likewise, if the Commission produces a comprehensive Social Security reform plan but nothing on health-care reform, for instance, it would still have taken a meaningful first step towards dealing with the nation's long-term imbalances. Therefore, it may be quite wise to have made such a mushy mission statement, allowing any reasonable reform package be considered a success.

But it is worth clarifying that it is not necessarily the case that balancing the budget (not counting interest) would stabilize the debt. If a medium-term goal is achieved either through temporary measures (such as a temporary freeze on discretionary spending) or by policy changes that do not to get to the heart of the drivers of the long-term deficit problem (aging and health care-related programs) then the deficit and debt as a share of the economy will again start to grow after the medium-term target is achieved. Using the medium-term goal as the first step in keeping the debt stable only works if you use the right policies.

Furthermore, even if the 2015 target is hit in a way that does stabilize the debt, it would still not be at an acceptable level. This would leave the debt held by the public at roughly 75% of GDP indefinitely. As we and others have argued, 60% of GDP is a far more desirable goal, and even that is too high to allow the nation needed fiscal flexibility and should be gradually brought down closer to traditional levels below 40% of GDP.

But the critical thing in picking the right fiscal goals is not the exact number or the exact year (Peterson-Pew has argued for 60% of GDP by 2018 and lower thereafter, Donald Marron has proposed 60 in 2020—certainly, the best bumper sticker of the three—and the NRC/NAPA study has argued for 60% of GDP by 2022,) but the point that both medium- and long-term goals are necessary.

The purpose of the medium-term fiscal target is to reassure credit markets that the US remains a safe place to lend and that our fiscal situation does not pose a threat to our creditworthiness. The purpose of a long-term fiscal target is to rebalance federal budget commitments that have grown out of whack with projected revenues because of massive unfunded promises in our major aging and health care programs.

Failing to focus on a medium-term goal, even while making progress on the long-term, would leave the US dependent on excessive borrowing over the next decade, which could lead to a dangerous debt spiral, where the US has to borrow more and more just to cover our interest payments, interest rates go up, and economic growth suffers either gradually or through a more abrupt fiscal crisis. At some point it would lead to a crisis of confidence in the credit markets.

Failing to focus on the long-term goal will mean that unavoidable changes to Social Security, Medicare, and Medicaid would not be made enough in advance to phase changes in gradually and allow program participants time to adapt, and would allow these underfunded programs to continue to squeeze out other areas of the budget in the meantime, including important, necessary government investments.

Achieving either a reasonable medium- or long-term fiscal target will be difficult, and it may take a couple of rounds of reforms to get there. But there's no denying that the country will have to achieve both.

A close vote is expected today to end debate in the senate on a $59 billion supplemental that includes funding for operations in Iraq and Afghanistan and some disaster aid. The spending is labeled as “emergency” in order to avoid the need for offsets, although the wars are not new developments.

Before the cloture vote, the senate will vote on two amendments sponsored by Senator Tom Coburn (R-OK) to fully pay for the bill's costs by rescinding spending in other areas. The rescissions proposed by Senator Coburn include cutting budgets of members of Congress, selling unused government property and equipment, reducing printing and publishing costs of federal documents, and eliminating bonuses for poor performance by government contractors.

CRFB has called for war costs to be paid for and has decried the use of the “emergency” designation to evade pay-as-you-go requirements. The supplemental and even-larger “tax extenders” bill being considered would add significantly to the federal debt at a time that other countries are paying the price for mounting red ink. Just because a bill is critical doesn’t mean it shouldn’t be paid for. Lawmakers should be prioritizing their projects and finding responsible ways to budget for them.

The President's Fiscal Commission is holding its second public meeting, which is being webcast live on the White House's website. We've embedded the webcast below for your convenience.

The meeting will provide updates on the workings of the commission's sub-groups, including the Discretionary, Mandatory, and Tax Reform working groups.