July 2011

CBO Scores the Reid and Boehner Plans

Update: CBO has just released its own comparison table of the Reid and Boehner plans, where it now breaks out the war and non-war interest savings under Reid's plan. This blog has been updated from its original posting to reflect the new numbers.

 

With the August 2 deadline approaching, Speaker Boehner's (R-OH) and Senate Majority Leader Reid's (D-NV) plans--or some variant--seem like the last ticket out of town. CBO has recently scored both plans (Boehner's and Reid's), showing that they save slightly less than the two had been claiming.

In this sense, neither leader should be accused of using a sleight of hand. The reason for the smaller savings is that they were unable to incorporate the effects of the final CR into the baseline they were measuring against. That alone knocks out about $200 billion of their savings from the discretionary spending caps.

Since the bills are easily comparable, we have presented the savings from sections of the bill side-by-side in the table below. Additionally, we have also separated out the savings that Reid gets from the war drawdown.

Ten Year Savings Under Boehner and Reid Plans (billions)
Provision Boehner Savings  Reid Savings
Discretionary Spending Caps -$756 -$752
Cap Adjustments for Program Integrity $15 $51
Subtotal, Discretionary Caps -$741 -$701
     
Program Integrity Savings -$16 -$18
Pell Grants $17 $18
Other Education -$22 -$18
Agriculture Programs $0 -$11
Subtotal, Mandatory -$20 -$29
     
Revenues (Program Integrity)* $0 $43
     
Interest Savings -$156 -$153
Total -$917 -$927
     
War Savings $0 -$1,044
Interest Savings $0 -$223
Total Including War -$917 -$2,194

*Reid program integrity includes $14 billion above the baseline for IRS efforts aimed at increasing tax compliance. Savings from this score as increased revenues of $43 billion.

On an apples-to-apples basis in which you ignore war savings, the plans would save $917 billion (Boehner) or $927 billion (Reid).

(Note: The outlay caps were in the original Boehner plan. The revised plan does not include outlay caps, which increases the savings from the discretionary spending cap total by $46 billion. In the original Reid bill, language on tax compliance was unclear, causing CBO not to score an increase in revenue. The updated Reid plan fixed the language, yielding $43 billion in added revenue from the IRS program integrity efforts. The below analysis on the two problems was written in reference to the original plans.)

There are a couple of interesting things that those savings numbers show. First, CBO scores outlays in 2012 and 2013 as $44 billion lower in the Reid plan than in the Boehner plan, despite nearly identical budget authority totals (and actually $2 billion higher for Reid). That is what causes Reid's discretionary caps to score higher savings. Why? Because the Boehner plan has explicit outlay caps in 2012 and 2013 to accompany his caps on budget authority -- outlay caps which are higher than the levels CBO would project outlays to be for those years under just the budget authority caps. So by setting outlay caps on top of his budget authority caps (which one might think would reinforce savings), Boehner actually loses $44 billion in scored savings. The assumption CBO is likely making is that appropriators will hit the outlay caps, even if it means having a different mix of appropriations than they otherwise would have.

Second, Reid's plan includes $20 billion in increased outlays for program integrity efforts at the IRS for activities to improve tax compliance. In theory, this $20 billion would help the IRS increase collections by reducing the tax gap, but CBO hasn't included any increased revenue as savings. CBO writes that "even if the base amounts specified in the bill are appropriated, there is no assurance that the amounts available for enforcement activities would be at least equal to the amounts projected in CBO's baseline." This basically means the Reid bill doesn't have scored savings from increased tax enforcement because there is no assurance that the bill even includes increased tax enforcement. CBO does assert that if the right accounts do receive increased funds as the Reid plan intends, there would be increased revenue as a result -- they just can't score it as it currently stands. For frame of reference on what savings could look like if done correctly, the President's proposal to spend $13 billion over the next decade on program integrity efforts to improve tax compliance was scored by CBO as saving $42 billion through 2021.

As the CBO scores of the plans show, the Reid and Boehner proposals as they currently stand are closer in savings than reports and especially talking points would have you believe. We suspect there will be an updated Boehner plan soon, since he has apparently started working on a new bill that would keep his promise of cutting more than he raises the debt ceiling (since his savings estimate came back lower than he expected). But for now, this is our best measure of the two fiscal plans that will likely form the framework for agreement on a debt limit increase -- and the fact that they seem on the same page in terms of savings suggests that a compromise proposal isn't far off.


MY VIEW: Alan Simpson, David Stockman and Bill Frenzel

CNN recently invited several former Washington leaders to offer their thoughts on Washington's debt-ceiling gridlock, and we are proud to say that three out of seven are CRFB board members: Alan Simpson, David Stockman, and CRFB co-chair Bill Frenzel. All three had interesting perspectives on the debt standoff.

Sen. Simpson wrote about his frustation that no meaningful action has been taken to stabilize and reduce our debt. He highlighted the importance of the Gang of Six proposal, saying:

As soon as the Gang of Six came out with its plan, the slings and arrows started zooming in from both sides. Yet that is the strength of the plan. Everyone would have "skin in the game." The best fiscal plan -- a plan of the magnitude necessary to right our fiscal ship and of the balance necessary to draw enough bipartisan support to actually be enacted -- is the one that offends the most folks on both sides.

So regardless of what happens in the coming days with the debt limit, I ask all of you who care so much about our nation's future; I say, just pray for the Gang of Six!

David Stockman pointed out that raising the debt ceiling is not the critical issue, our debt is:

The crisis lies in the debt, not the ceiling. Kicking the can with a six-month ceiling increase is the worst possible alternative because it allows the politicians of both parties to continue making the Big Fiscal Lie...In the meanwhile, both the Boehner plan and the Reid plan are just big numbers flimflam. Their 10-year discretionary caps can't be enforced, and the debt crisis is right now. In the next two years, where it really counts, each would save only $60 billion, or 1%, of the baseline spending of $7.5 trillion. That's a pathetic joke.

We are borrowing $6 billion per day with no end in sight and rolling the dice in the hope that apparently clueless bond fund managers will continue to buy the debt of a quasi-bankrupt country. One day soon, they won't. But then it will be too late.

Bill Frenzel expressed hope that even though comprehensive fiscal reform has been put off for now, it might still be possible. He concluded:

A debt ceiling bill is still a long way from home, but hopefully at least a temporary end to the game of chicken is in sight. The "Grand Bargain" is deferred but hopefully not abandoned.

There is hope that Congress will act responsibly and bring the nation back from the brink of economic chaos.

 

Click here to read the complete list of commentaries.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

What the Ratings Agencies Have Said

During the debt ceiling debate, what the credit ratings agencies have said can get lost in the shuffle. So, a summation of what each of the three major agencies has said about the debt ceiling and the enactment of a fiscal plan:

S&P's warning a few weeks ago is the most prominent one, because it not only warns about the disastrous effects of the government breaking the debt ceiling, it also warns of a downgrade on the long-term situation, even if the debt ceiling is raised. Specifically, they said:

We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

Their definition of a "credible solution" is one that reduces deficits by $4 trillion over the next ten years. The plans from Speaker Boehner and Leader Reid don't quite reach that threshold in their current form.

Moody's latest statement, which came in mid-July, came just before S&P's. Moody's announced it was putting the US's credit rating on review because of increased prospects for Washington failing to reach a solution. They did not specifically call for a comprehensive deficit reduction plan like S&P, placing more emphasis on what they would do in the event of a technical default.

The review of the U.S. government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.

Finally, Fitch has been less aggressive than the other two ratings agencies in sounding off on the debt ceiling debacle, although their latest statement is the most recent of any from the ratings agencies, coming just this past Monday. Like Moody's, they emphasized the shorter-term default issues, rather than the long-term debt path. Fitch said that technically defaulting on the debt would cause them to lower the rating on Treasuries from Aaa to B-plus as soon as August 4 -- a 13-grade drop. 

Bottom line: a default would be bad, likely causing downgrades on U.S. debt from each of the major ratings agencies, so in the immediate future, we have to increase the debt ceiling. However, not using this opportunity to take a big bite out of our deficits and debt would likely get us in hot water with the rating agencies down the road as well, so we should also be looking to enact a strong down payment of deficit reduction now with a credible process to achieve the rest of the $4+ trillion we're going to need to stabilize and reduce the debt in the medium- and long-term.

 

Low GDP Growth and Stalemate in the Congress

With the Bureau of Economic Analysis releasing tepid GDP numbers of only 1.3 percent growth and last night's failure of the House of Representatives to bring up Speaker Boehner's (R-OH) debt limit proposal, the markets opened down. Already a poor market showing this week, with the Dow Jones down 440 points through Thursday, today's news only highlights what is becoming an urgent need for policymakers to come to a deal and pass a debt ceiling increase as well as some sort of strong deficit reduction measure to send a signal to markets.

The House Rules Committee is scheduled to vote on a re-draft of the re-draft of Boehner's proposal at 11am this morning, which means that this bill may move to the floor soon. However, with the Senate saying this plan is dead on arrival, more negotiating between the two sides is needed.

With all of this in mind, President Obama is scheduled to speak at 10:20am this morning, addressing the current debt limit debates and how he plans to move forward. We plan on tuning in to see what he says, and let's hope something can be done to help end the stalemate.

If You’re Going to Rely on Savings Targets, Specify the Baseline

As CRFB has certainly been making clear, we would prefer a "big deal" that dealt with all areas of the budget and reduced debt as a share of the economy. But given the time constraints and the need to raise the debt ceiling, we’ve also argued that a two-step process with strong enforcement mechanisms could be the next best way to achieve a sustainable debt path. If lawmakers go with the two-step process that requires and enforces certain savings, how you measure those savings matters.

The Boehner proposal calls for $1.8 trillion in deficit reduction to come out of a joint congressional committee made up of 12 members -- but there has been some confusion about what the savings in Speaker Boehner’s proposal would be judged against, given that the legislation doesn’t specify which baseline it uses. However, by remaining silent and directing CBO to estimate the savings that come out of the joint committee’s recommendations under normal procedures, the Boehner proposal appears to require the committee’s recommendations be scored against CBO's current law baseline, which assumes expiration of all the 2001/2003/2010 tax cuts as well as no AMT patches or “doc fixes.”

As a result, a potential tax reform proposal which could result in $800 billion more revenues than a current policy baseline (in which all tax cuts are extended, and which was reportedly agreed to in the Obama and Boehner negotiations that broke down) would not count as deficit reduction. In fact, CBO would score such a proposal as increasing the deficit given that revenues would be lower than under current law.

However, targeted tax changes that do not address the expiring tax cuts one way or another, such as elimination of specific tax preferences or new taxes, would count as deficit reduction. Using a current law baseline for measuring savings would also allow the committee to claim savings from limits on OCO spending that take credit for the troop drawdown already in place, which CRFB has already described as a gimmick.

Reid's proposal would avoid the question of baselines and what savings would be counted by giving the joint committee the goal of reducing the deficit to 3 percent of GDP. However, the Reid proposal does not say when that goal would be achieved. It is also unclear whether the committee could achieve that goal by remaining silent on items such as the AMT, the “doc fix”, and by taking credit for the additional revenues and spending reductions assumed in the baseline, even though Congress would still need to deal with those issues.

In order to get beyond the baseline confusion and the potential for gimmicks to artificially inflate savings, CRFB supports debt-to-GDP targets and corresponding savings targets to ensure that legislation actually achieves the goal of reducing our debt as a share of the economy.

In the past, we have recommended that lawmakers institute a debt-to-GDP target of 60 percent by the end of the decade. The very minimum goal of any debt plan should be to stabilize the debt and put debt on a declining path by the end of the decade, as the National Commission on Fiscal Responsibility and Reform recommended. In addition, the plan should either be required to explicitly address expiring provisions or achieve the debt targets assuming they are extended in their current form.

CBO on Selling Excess Federal Property

Many of the fiscal plans produced over the last several months -- including the Gang of Six plan and the President’s budget -- propose selling excess federal property to help reduce our nation’s debt (see CRFB’s Comparison Tool to compare all the different fiscal plans). While agencies have the ability to sell off unwanted property under current law, many recent debt reduction proposals would expedite the process.

Supporters of this policy option assert that selling federal property would be a good way to increase federal receipts without having to increase taxes. However, in a testimony before the House Committee on Oversight and Government Reform, CBO noted that “legal, practical, and political obstacles to the sale of such property” would prevent this proposal from generating significant proceeds over the next decade.

Financial incentives, for instance, would be needed to encourage agencies to part with unneeded property. Any incentive scheme, such as one that would let agencies keep a portion of the proceeds, would mean reduced savings for deficit reduction. Under current law, some federal agencies retain and spend 100 percent of the proceeds from property sales. Under the President’s proposal, agencies would only be allowed to keep 40 percent of the net proceeds, which would unlikely be sufficient to incentivize increased federal property sales. In addition, there is a limited amount of surplus government property with significant market value. Properties with smaller values would not justify the costs of marketing and sales transactions.

CBO’s analysis also identified ways the government could increase proceeds from future federal property sales, including:

  • Creating a clear incentive to maximize proceeds: Many proposals only create incentives to dispose of excess property, rather than requiring valuable properties be auctioned to the highest bidder.
  • Exempting sales of property from existing laws: Current law limits the amount of federal property that can be sold. Proceeds could be boosted if future sales were exempted from laws that slow the disposal process or require agencies to offer properties at reduced prices to local and state governments or nonprofits.
  • Specifying in law which properties are to be sold: Rather than allowing agencies or a commission to determine which properties to sell, legislation could specify a definitive list of properties to be sold.

Selling excess federal property has popped up with quite a bit of frequency in all the deficit reduction plans, but what seemed like an easy way to achieve some savings has turned out to be not so clear-cut. Hopefully, CBO's latest report can help inform the discussion over excess property to help reduce future deficits and improve the efficiencies of federal agencies.

Fed's Beige Book Points to Slowing Economy

Fed’s latest Beige Book, released yesterday, pointed to slowing growth (but still positive growth) across many economic sectors and regions. On a region by region basis, the Fed found that Fed districts nearest the Atlantic seaboard were most affected by the economic slowdown while other districts such as the Atlanta District and the Dallas District felt their growth less impeded.

The report did find a recent boost in manufacturing activity, lending, and commercial real estate. However, other industries experienced a flattening effect. Although falling gasoline prices have encouraged more shopping trips and an overall pickup in consumption, price pressure from supplier inputs such as energy, cotton, and food has continued to reduce retail margins. Auto sales have shown little improvement, residential real estate sales remain stagnant, and labor market conditions have stayed soft.

The weather patterns of the last month have also adversely affected agricultural sectors. Drought has lowered crop yields in the Atlanta, Dallas, San Francisco, and Kansas City Districts while flooding has forced millions of acres to go unplanted in the Minneapolis and Chicago Districts.

While the economy continues to grow, this past month has seen that growth abated. While most factors are out of the control of policymakers, one of the hindrances of growth certainly is not: uncertainty over the debt ceiling and our fiscal future. One way to jump start investment and continue our path to a full economic recovery is for Washington’s leaders to raise the debt ceiling and adopt a credible comprehensive fiscal plan that reduces debt as a share of the economy. Such a plan would boost global confidence in our nation’s economic health and vibrancy, and would create substantial budgetary and economic benefits down the road. With the August 2nd deadline getting nearer by the hour, and with markets paying close attention to it, the time for a deal is now. With an economy that is already experiencing a slowdown, defaulting or delaying a debt deal merely exacerbates the problem.

Updated Boehner Proposal

Speaker of the House John Boehner has released an updated version of his debt ceiling proposal which, according to a new CBO score, achieves an extra $66 billion in deficit reduction, totaling $917 billion in savings. The difference comes from $46 billion more savings from his discretionary caps -- achieved by removing the outlay caps originally included in the plan for FY 2012 and 2013 -- and from $20 billion more in interest savings as a result of the increased discretionary savings.

As we pointed out in our blog earlier today, the outlay levels projected by CBO for FY 2012 and 2013 in its scoring of the Boehner plan were equal to the outlay caps included in the plan. However, CBO's score of the plan produced by Senate Majority Leader Harry Reid -- which includes nearly identical budget authority caps in FY 2012 and 2013 as those in the Boehner plan but which did not include outlay caps for those years as Boehner did -- included lower outlay levels for FY 2012 and 2013 (and therefore higher savings) than those scored for the Boehner plan, seemingly as a result of not having outlay caps. This may seem counter intuitive, since one would assume outlay caps on top of budget authority caps would only reinforce savings -- not decrease savings. As we suggested earlier, CBO seems to have assumed that appropriators would likely hit the outlay cap even if it meant having a different mix of appropriations than they otherwise would have under a no-outlay-cap scenario.

So to increase his savings total, Boehner simply removed the outlay caps in his plan, increasing discretionary savings by $46 billion and his interest savings by $20 billion (a high amount, since the discretionary savings are in the early years of the ten-year period).

Here is an updated version of the chart we posted earlier, including the scores for the updated Boehner plan:

Ten Year Savings Under Updated Boehner and Reid Plans (billions)
Provision Updated Boehner Savings
Reid Savings
Discretionary Spending Caps -$756 -$752
Cap Adjustments for Program Integrity $15 $51
Subtotal, Discretionary Caps -$741 -$701
     
Program Integrity Savings -$16 -$18
Pell Grants $17 $18
Other Education -$22 -$18
Agriculture Programs $0 -$11
Subtotal, Mandatory -$20 -$29
     
Revenues (Program Integrity)* $0 $43
     
Interest Savings -$156 -$153
Total -$917 -$927
     
War Savings $0 -$1,044
Interest Savings $0 -$223
Total Including War -$917 -$2,194

*Reid program integrity includes $14 billion above the baseline for IRS efforts aimed at increasing tax compliance. Savings from this score as increased revenues of $43 billion. 

Note: This blog has been updated to reflect CBO's comparison table of the two plans, which has slightly differen interest projections for war and non-war under Reid's plan.

More Support for the Gang of Six

As the debt-ceiling proposals from Rep. Boehner and Sen. Reid continue to be debated, support for the comprehensive, balanced proposal offered by the Senate's Gang of Six early last week continues to build.

In a letter to the editor of Illinois' State-Journal Register, fiscal commission co-chair Erskine Bowles praised Gang of Six member Dick Durbin (D-IL) for his willingness to compromise for the good of the country while at the same time sticking to his principles of protecting the truly disadvantaged. He writes:

I, for one, am encouraged that instead of playing politics with our economy, Durbin has been working hard with the Gang of Six and in meetings at the White House to come up with a serious, bipartisan deficit reduction proposal that reflects the principles of fairness and balance that were in the Fiscal Commission. He understands that in order to move our country forward, both political parties have to be willing to find a middle ground. It takes a lot of guts to put your name on a compromise proposal that your traditional supporters may not love. But that’s what principled compromise is, and that’s what America needs right now.

Another piece, an op-ed in the Idaho Statesman written by former Rep. Walt Minnick (D-ID), urges lawmakers not to further delay needed comprehensive fiscal reforms by enacting "a weak smoke-and-mirrors solution to the debt ceiling impasse, like those fallback plans now being discussed, which kowtow to the extremes but once again fail to solve the growing deficit problem." He continues:

Instead, let’s use the crisis to adopt a tough-minded debt control compromise like that hammered out by “The Gang of Six,” a group of three Republican and three Democratic senators led by our own Mike Crapo, after nearly a year of difficult give-and-take negotiation between senators representing every part of the political spectrum.

...Yes, we must raise the debt ceiling so we can pay our existing bills, but let’s do so by enacting fundamental reform like that advocated by the Gang of Six, which sets the nation on a fiscally responsible course for less federal government debt and renewed private sector growth. Demand all of our members in Congress agree to compromise their differences, work with the president and stop acting like children.

Recent Study Ranks U.S. Debt Fifth Largest Among Major Economies

A recent report from the Associated Press Global Economy Tracker found that the U.S. national debt (as a percentage of GDP) is the fifth largest among the world's major economies. According to the Tracker, which analyzes financial and economic data from thirty of the world's largest economies, U.S. debt in the first three months of the year equaled 95 percent of GDP. The only countries listed as having a higher debt as a percentage of GDP were Japan, Greece, Thailand, and Italy**.

As if we needed another indicator or reason to get our fiscal house in order, the AP just gave us another.

 

**India is also ranked above the U.S., but ranking is based on data from the fourth quarter of 2010 rather than the first quarter of 2011.

IMF Report Calls for Balanced, Comprehensive Fiscal Reform Plan

Earlier this week, the International Monetary Fund (IMF) released its annual report The United States: 2011 Article IV Consultation, highlighting the need for the United States to enact a comprehensive fiscal reform plan that would stabilize and reduce our debt. The report states that “fiscal consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging for the United States and for the rest of the world,” while offering thoughts on what the United States' fiscal, financial, and monetary policies should look like going forward.

More specifically, the report offers many recommendations on how the U.S. should look to craft a framework for fiscal reform. Among the broader points:

  • The most important priority of fiscal policy should be to stabilize the debt by mid-decade and then gradually reduce it
  • Congress should explicitly endorse the medium-term fiscal objectives of any deficit-reduction framework
  • Any deficit-reduction plan should include spending cuts, entitlement reforms and revenue increases
  • More savings than what President Obama proposed in his February budget and April deficit-reduction framework will be necessary
  • A debt “failsafe” mechanism could help keep fiscal consolidation on track, but should not be overly relied on (see here and here for more about debt enforcement mechanisms)
  • Fiscal consolidation would have long-term benefits for the US and global economy, but should be carefully balanced to avoid disrupting a fragile recovery

The IMF is the latest group to voice support for a comprehensive approach: "A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization."  As leaders in Washington debate raising the debt ceiling and reducing deficits, they must look to find a plan that would stabilize and then reduce our debt.

MY VIEW: Tim Penny and Bill Frenzel

In a new op-ed published in Investor's Business Daily, CRFB co-chairs Tim Penny and Bill Frenzel offer insight into how Democrats and Republicans in Washington can come together in the debt negotiations to avoid economic disaster, suggesting that the way out is by coming to "the type of principled compromise in which both parties are willing to accept things they don't like for the good of the nation."

"Much is at stake with a fiscal cliff fast approaching. Our nation's leaders need to find a way to compromise without compromising their principles, just as President Reagan and Democrats did in the 1980s."

Click here to read the full op-ed.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.