We just released our in-depth analysis of CBO's Budget and Economic Outlook, published earlier today. In the paper we explain how CBO's current law projections differ from their March baseline, what underlying economic and policy assumptions they are making in their calculations, and what CBO's projections say about our fiscal situation. We also update our CRFB Realistic Baseline -- our own budget projections that make more realistic assumptions about what lawmakers will do -- and compare the two. And while CBO's current law baseline now shows debt declining (!) as a share of the economy by mid-decade, as you will see, the picture painted by our baseline is much gloomier.
A post on the CBO Director's Blog also explains a bit about why current law projections now show debt declining, and what things might more realistically look like should several current policies be extended.
If some of the changes specified in current law did not occur and current policies were continued instead, much larger deficits and much greater debt could result (see figure below). For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections.
We also wanted to point you to a slideshow from the report posted by CBO. Is it just us, or is the CBO graphics team getting more adventurous? (On a side note -- if you didn't see it, check out the neat infographic on Social Security projections CBO published recently.)
CBO's updated economic and budget projections, released this morning, show for the first time in many years a declining debt path under current law. Unfortunately, these projections are wildly optimistic, given that they assume things like the tax cuts and AMT patches expire in 2013. But we'll take whatever progress we can get!
Under current law, CBO projects debt to reach 67 percent of GDP this year, rise to about 73 percent in 2013, and then fall to 61 percent by 2021. Clearly, the current law scenario shows that if policymakers were to strictly adhere to PAYGO, our debt path would be much, much healthier.
The National Association for Business Economics (NABE) published the findings of its August 2011 Economic Policy Survey yesterday, in which 250 panel members were asked various policy questions between July 19 and August 2 of this year. The findings were very interesting, particularly that most panelists supported a mixture of spending cuts and revenue increases to reduce deficits.
When asked whether fiscal policy in the near-term was too stimulative, too restrictive, or just about right, about 49 percent of participants supported more restrictive fiscal policy whereas about 37 percent supported a more stimulative approach. While a large majority of respondents (over 70 percent) predicted that fiscal policy would be more restrictive over the next two years, about half expressed support for more restrictive fiscal policy.
Most participants expressed support for deficit-reduction that included a combination of both higher taxes and spending cuts. More specifically, respondents cited containing health care costs as the most successful way to reduce deficits, followed by comprehensive tax reform. The chart below shows how much support other policies received.
While a majority of survey participants favored a combination of tax increases and reduced spending to reduce the deficit, more panelists supported spending cuts than tax increases. Of those who favored such a combination approach, 44 percent favored a package with more spending cuts, compared to 37 percent who favored a package split equally between the two (less than 6 percent supported more tax increases than spending cuts). However, about 75 percent felt that if comprehensive tax reform is pursued, increased revenues should be a result.
Click here to read more about the survey's findings.
Defense spending is an area within the federal budget where significant savings can be found, and specifically within the military retirement system. Just take a look at the roughly 30 fiscal plans that have been proposed and you will see that several of them recommend savings from not just civilian but military retirement programs too. Reforms to military retirement are also being considered by the current Secretary of Defense, Leon Panetta, given comments he made in a recent speech.
With that in mind, the Defense Business Board (DBB) released the framework of a reform package of the military pension system, with a full report expected later this month.
First, the problems with the current system. According to the DBB, military retirement is based off a 100-year system that is tied to years served and thus lacks fairness to high-risk positions. Furthermore, 83 percent of those who serve receive no retirement benefit, and the system likely overpays with roughly 40 years of retirement benefits for 20 years of service. For those who serve more than 20 years, they receive a benefit more than 10 times greater than private sector equivalents with the federal government spending a total of $46 billion on military retirement in 2011.
With that in mind, the DBB offers a framework for a new system.
The new proposed system would move to a new defined contribution plan, based on the Uniformed Military Personnel Thrift Savings Plan, but would also include annual contributions from the federal government. The Uniformed Military Personnel Thrift Savings Plan is a defined contribution plan where the retirement income received depends on how much the user contributed to the account, and the earnings on it, during the working years. The plan would include an option for military member contribution and the ability for the plan to be transferred to the private sector, and back to the military after that if needed. It would apply to both reserve and active duty personnel.
The plan would vest after 3-5 years and would be payable after ages 60-65 or Social Security (the ranges depending on type of military position, accounting for things like risks involved). This is different from the current system that vests after leaving the military, which can happen after only 20 years of service (as early as someone in their late 30’s in some cases). Additionally, the level of government contribution is funded based on a percentage that is similar to the “highest end of a private sector plan”. Moreover, the plan would allow for certain payouts for education, home ownership or business acquisition.
Finally, a key element of the plan would be the adjustment for different military roles, something that is currently lacking. The plan would double contributions for years in “combat zones or high risk positions”, would increase contributions for “hardship tours,” or could even have lower retirement ages based on similar metrics.
The plan would not affect the current military retiree population and would exempt fully disabled veterans. Overall, this plan, while not having a cost estimate as of yet, is a proposal that warrants attention from lawmakers and should be on the table for deficit reduction. As Secretary of Defense Leon Panetta recently said, "[changes to retirement benefits are] the kind of thing you have to consider”.
To the Shores of Tripoli – With President Obama on vacation and Congress in recess, most eyes are turned away from Washington and towards developments overseas. The Middle East is being closely watched with a strongman in Libya on the verge of falling and another in Syria involved in bloody fighting to stay in power. But Europe also is worthy of attention with the debt crisis there compelling leaders to discuss major fiscal and economic policy changes. In the U.S., we are seeing the quiet before the storm, as the so-called super committee on deficit reduction takes shape and policymakers consider how to spark a flagging economy while also addressing the national debt. Finally, on Wednesday, the Congressional Budget Office (CBO) will release its latest update on the federal budget and economic outlook.
Europe Considers Fiscal Reforms – With Europe struggling to contain a debt crisis that threatens the economic union that the continent has worked so hard to build, leaders are considering major fiscal reforms to shore up the situation. The leaders of France and Germany are calling for all Eurozone governments to adopt constitutional balanced budget amendments to promote fiscal discipline. European leaders are also discussing closer fiscal integration among the European Union members as a result of the debt crisis.
The Other Paul Ryan Rumor – House Budget Committee Chairman Paul Ryan (R-WI) has been prominent in the news as of late due to persistent rumors that he is considering a run for president. The White House rumors have overshadowed news that Ryan plans to pursue major changes to the federal budget process. In a statement praising Speaker Boehner on his choices for the Super Committee, Ryan also stated that he asked Boehner not to be selected for the group so that he can pursue budget process reform in his Budget Committee. He said he plans hearings and mark ups this fall in parallel with the Super Committee’s work. The dysfunctional budget process is definitely in need of reform. The Peterson-Pew Commission on Budget Reform produced a detailed framework that fixes the budget process in a manner that will promote making and carrying out the fiscal policy decisions necessary to put the country on the right path.
Obama Working on Plan – President Obama has announced that he will unveil a plan to boost the struggling economy that also reduces the deficit shortly after Labor Day. The plan will include extending the payroll tax holiday for another year. Meanwhile, prominent commentator E.J. Dionne writes in his latest column that Obama must “go big, go long and go global.” Dionne recommends investments in infrastructure and aid to state and local governments now while also saying that, “[a]t the same time, Obama should put forward a plan of his own to close the long-term deficit.” We definitely must go big and long with a fiscal plan that reduces the deficit substantially and promotes long-term growth.
Administration Looks for Spending Cuts – Last week the Office and Management and Budget (OMB) sent to all department and agency heads a memo requesting that their FY 2013 budget submissions be at least 5 percent lower than their FY 2011 spending levels and to identify further cuts that could reduce the level to 10 percent below FY 2011 funding. The memo states that the effort is “to support the President's commitment to cut waste and reorder priorities to achieve deficit reduction while investing in those areas critical to job creation and economic growth.” As CRFB pointed out in a blog, it will also help the administration comply with the new spending caps under the Budget Control Act.
Key Upcoming Dates
- Congressional Budget Office (CBO) releases its update on the budget and economic outlook.
- Second quarter GDP revision from the Commerce Department.
- Senate back in session.
- House of Representatives back in session.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.
- GOP presidential debate in Florida.
- The Joint Select Committee on Deficit Reduction (Super Committee) must hold its first meeting by this date.
- Second GOP presidential debate in Florida.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- GOP presidential debate in New Hampshire.
- Congressional committees must submit any recommendations to the Super Committee by this time.
- GOP presidential debate in Nevada.
- The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Super Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Super Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.
On OMB's blog, OMB director Jack Lew talked about his instructions to agencies to cut 5 percent off their 2011 budget for their FY 2013 request. In addition, they are instructed to list additional savings that would result in a 10 percent cut.
This type of request is nothing new. Last year, the Administration requested that agencies do the same thing, asking for a 5 percent cut off of their 2010 budget for FY 2012. However, the purpose of that exercise was to maintain a proposed discretionary spending freeze. The purpose of this year's 5 percent cut is to adhere to the discretionary spending caps in the Budget Control Act (BCA).
The BCA has a FY 2013 discretionary cap at $1.047 trillion, which is about 2 percent below the 2011 number from the final CR. The Administration is overshooting that target by asking for 5 percent cuts from lower priority programs so they can plug some of the savings back into higher priorities. In addition, Lew instructed agencies to only hit discretionary spending rather than also hitting mandatory programs, a strategy Congressional Democrats used to "spread the pain" in the April 2011 CR.
|Discretionary Spending Under the BCA|
|Discretionary Caps (billions)||$1,067||$1,043||$1,047|
|Percentage Change from FY 2011||N/A||-2.2%||-1.9%|
|Discretionary Caps with Trigger (billions)||$1,067||$1,043||$948*|
|Percentage Change from FY 2011||N/A||-2.2%||-11.2%|
*Rough estimate based on a Bipartisan Policy Center table.
Although the purpose of the 10 percent cut is to provide an alternate way to cut deeper and re-invest in higher priority spending, it is worth noting that this cut would almost bring discretionary spending in line with the trigger that would hit if the Super Committee fails. That mechanism would further cut discretionary spending by roughly $100 billion below the $1.047 trillion topline number, corresponding to about an 11 percent cut from the 2011 total. The trigger comes down on January 1, 2013, so it would hit three months into FY 2013.
Obviously, the Administration is not planning on having to comply with the trigger, but they are clearly already planning ahead to life under the BCA caps.
In the Christian Science Monitor, Donald Marron argues that the distinction in fiscal policy should not be between hawks and doves, but rather foxes and hedgehogs. What separates a fox and a hedgehog, you ask?
"The fox knows many things, but the hedgehog knows one big thing," wrote the ancient Greek poet Archilochus. Both foxes and hedgehogs play important roles in the policy ecosystem in normal times. In times of great change, however, society needs more foxes and fewer hedgehogs. More citizens and leaders who can adapt to new conditions, and fewer who want to preserve the status quo.
In short, foxes are the ones taking more nuanced views of fiscal policy, while hedgehogs take stubborn, unyielding, and black-and-white views. For example, on taxes:
Revenue hedgehogs know one big thing: Taxes place a burden on taxpayers and the economy. Thus, they oppose all tax increases, even efforts to reduce the many tax breaks that complicate our tax code.
Revenue foxes see things differently. They recognize the burden that taxes place on taxpayers and the economy. But they also know that tax increases are not all created equal. Higher tax rates, for example, are usually worse for the economy than cutting back on tax breaks. Indeed, cutting tax breaks sometimes frees taxpayers to make decisions based on real economic considerations rather than taxes, thus strengthening the economy. That's why revenue foxes support eliminating many tax breaks.
The same goes for entitlements. Hedgehogs oppose any benefit changes whatsoever to (for example) Social Security, while foxes "know, in short, that the future will be different from the past and that the program needs to evolve to remain sustainable." Foxes recognize the importance of these programs, but they do not take that to mean that they are untouchable.
Marron comes to the conclusion--rightfully--that what we need right now is more fiscal foxes, people who are willing to make smart changes in order to improve our fiscal situation. These are the people who reject the lines in the sand that both sides of the political spectrum have drawn. Ideally, these are the people who would be on the Joint Committee.
Marron's attempt to shake-up the budget lexicon with new animals is not the first this year. Back in March, Ruth Marcus of the Washington Post called herself a "deficit panda," one who both cared about the deficit and believed in an active social policy for government. At CRFB, we're excited to muse on what animals are used next.
Faithful readers of this blog know by now how the trigger contained in the Budget Control Act generally works. The BCA creates a twelve-member Joint Committee that is tasked with finding $1.2 trillion in savings over ten years. If the Committee fails or Congress fails to pass legislation that saves at least $1.2 trillion, a trigger will make up the difference starting in 2013 (unless a balanced budget amendment passes Congress).
Those familiar with the broad outline of the trigger may not be as familiar with the details, though. Specifically, the total annual deficit reduction that the trigger would contain is calculated as follows:
- Start with $1.2 trillion
- Subtract savings from a joint committee bill
- Reduce that total by 18 percent to account for interest savings
- Divide the result by 9
If nothing is done, the trigger should generate a total of $984 billion of primary savings (savings excluding interest) from 2013-2021, or about $110 billion per year. So, the bill somewhat softens the blow of the trigger by allowing interest savings to be counted in the $1.2 trillion total.
The required primary savings would be taken half from defense and half from domestic spending, and the trigger would be pulled on January 1, 2013, more than a year after the Committee will have failed or succeeded in making its recommendations.
The trigger would reduce both mandatory and discretionary programs somewhat proportionally. For mandatory programs, the trigger would implement across-the-board outlay cuts (with exemptions), while the discretionary cuts would come from reducing the budget authority caps for defense and non-defense discretionary spending.
Within mandatory spending, most programs would be off limits -- including Social Security, Medicaid, and nearly all low-income programs. Medicare cuts would be limited to 2% of provider payments, and the cuts would come from reductions in those payments rather than benefit changes.
Discretionary spending reductions would be generated by taking the existing caps and reducing them further. Since the caps are on "budget authority" -- the amount of spending allocated -- they affect outlays with a little bit of a lag. As a result, some of the outlay savings from the triggers actually come after 2021 and therefore do not count toward the ten years savings.
The Bipartisan Policy Center has a very helpful table that shows the distribution of savings from each category, assuming the Joint Committee cannot reach agreement on any savings.
|Breakdown of Trigger Savings (billions)|
|ACA Cost-Sharing Subsidies and Related Spending||$7|
Importantly, the across the board cuts come on top of what was agreed to and on top of whatever is recommended by the Joint Committee -- so some categories could be hit twice or even three times if they are cut by an insufficient Committee plan and hit again by the trigger (after already being hit by the Budget Control Act's discretionary spending caps).
Of course, across-the-board spending cuts are not a good way to implement policy (never mind the fact that $1.2 trillion is too little in deficit reduction to put our fiscal house in order). The entire point of the trigger is specifically to be unpleasant, so that enacting a broader deal that saves more money than the trigger becomes more likely. From a fiscal perspective, we certainly hope to not have to see the trigger be used.
The three Democratic Senators on the Joint Committee--Max Baucus (D-MT), Patty Murray (D-WA), and John Kerry (D-MA)--have a lofty op-ed in the Wall Street Journal. In it, they talk about the need for bipartisanship and their willingness to contribute to a plan that helps solve the deficit problem.
This moment demands leadership, but it also demands consensus. The Joint Select Committee on Deficit Reduction was set up to require bipartisanship, and we are going to work hard to achieve it. We know that each of us comes into this committee with clear ideas on the issues and what our priorities are for our nation. But a solution can only be found by merging these priorities across party lines and finding a solution that works for the American people.
Also, since all three Senators have been around for three terms or more, they all can look back to their experience with the deficit reduction agreements of the 1990s.
We know it may seem like the problems we face are intractable. But we were around in the 1990s when Democrats and Republicans came together to balance the budget and put us on the path to eliminating our national debt. As a result of our bipartisan work back then, we helped usher in an era of unrivaled prosperity, tens of millions of new jobs, and greater wealth for American families. We did that by making tough choices and casting tough votes—including raising revenue. Some of our colleagues lost their seats because of the decisions they made. But we put our country on the right track, and American families and the world are watching closely to see if we can do it again.
Of course, our struggle will be different than the 1990s, since we have a longer way back to fiscal sustainability, but we hope that the bipartisan spirit that prevailed in the 1990s will result in the changes that we need in the 2010s. The real answer as to whether this will happen will not come in op-eds, but in the fall months when the joint committee meetings occur.
Yesterday, the United States Chamber of Commerce sent a letter to the members of the super-committee calling on it to exceed its mandate of $1.2 trillion in deficit reduction and create a plan that truly addresses our fiscal challenges.
The Chamber calls on the committee to reform our entitlement programs and enact comprehensive tax reform. In the letter, the group says:
While this magnitude of deficit reduction is a step in the right direction, it would fall far short of fixing the deficit and debt problem America currently faces; it would not stabilize the debt to GDP ratio and would not put this ratio on a downward trajectory; and it would fall far short of achieving a balanced budget. It alone would likely not prevent future downgrades to the debt rating of the United States. Even with successful implementation, the amount of publicly held debt outstanding by the United States would rise to $16 trillion at the end of 10 years. The Chamber urges you and your colleagues on the Joint Select Committee to make every effort to fundamentally address these issues by engaging in a true reform of entitlement programs and a complete restructuring of the U.S. tax code.
We couldn't agree more - $1.2 trillion, on top of the $917 billion in deficit reduction from the recent debt deal will not solve our problem. The Joint Committee is in a good position to enact real reform and save our nation from the fiscal crisis that is coming. CRFB continues to urge the members to exceed its mandate and create a plan that reduces our deficit by at least $3 trillion.
Today at 1:30, the Budgeting for National Priorities Project at Brookings will host a distinguished panel to discuss the challenges that the new Joint Select Committee will face in their task to reduce the federal deficit. The panel will talk about the implications of choosing a baseline for measuring deficit reduciton, the history of previous "super committees," and the congressional politics involved in any debt deal agreement. CRFB Co-chair Bill Frenzel will be among the panelists speaking at the event.
Click here to watch the full video of the event.
Today, one of the other big three credit rating agencies, Fitch Ratings, reaffirmed their AAA rating of the United States and held our outlook at "stable". This is, of course, a break from the recent S&P downgrade of the United States from AAA to AA+ with a negative outlook. For Fitch, AAA is their highest rating.
In a statement, Fitch said:
"The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of US's exceptional credit worthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks.'"
With this announcement, each of the three major rating agencies now have a different assessment of the United States. Moody's has also affirmed our AAA rating (which they call Aaa), but has put the U.S. on a negative outlook and warned that a downgrade might be on the horizon. Standard & Poor's (S&P), on the other hand, downgraded the U.S. to AA+ and put the country on a negative outlook for further downgrades.
In explaining its downgrade of the U.S., we explained last week that S&P did not dispute Fitch's assessment of the nation's economic capacity to repay its debt. Rather, their downgrade was primarily due to concerns over America's political capacity to put its debt on a stable path. As they said:
“[T]he downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned… we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon."
As CRFB policy director Marc Goldwein explained, "The country's most critical structural problem isn't employment or entitlements. It's Washington."
Even despite the recent affirmation of our AAA rating from Fitch, policymakers must remain vigilant in tackling our debt problems. As CRFB President Maya MacGuineas argued in our recent press release:
“Between now and December policymakers will either be involved in a serious national discussion over how to bring our debt under control or else another round of theater and brinksmanship... We still have a real opportunity to enact serious entitlement changes, tax reform, and an economic growth strategy. But if we fail, I fear other rating agencies will follow suit with S&P, with economically dangerous consequences.”