September 2011

Let's Go Big

In case you missed it yesterday afternoon, CRFB put out its expectations for the Super Committee, urging them to Go Big! Given the severity of our debt challenge, enacting only $1.5 trillion savings over the next ten years is not enough. Compared to our Realistic Baseline, this amount would keep debt on an upward path relative to the economy, both over the medium-term and the long-term. 

 
So, what should the Committee do? Of course! it should exceed its mandate! Getting a $3 trillion to $4 trillion plan with legitimate savings would stabilize our debt in the medium-term and put it on a downward path. We also urged the Super Committee to Go Long, focusing on our long-term debt drivers, namely health care and retirement spending, even if some of those policies would have small deficit effects in the first decade. Focusing on the long-term is part of the statutory language of the Committee's mandate, so it should not be ignored.
 

 

We have also suggested that reducing the deficit is not just a counting exercise; it must also Go Smart in a way that focuses on economic growth, which is what CRFB president Maya MacGuineas reiterated today in an op-ed in The Hill:

"...done right, a smart debt-reduction plan is absolutely central to an economic-growth agenda...One benefit of a medium-term plan is that it can leave room upfront for the economic recovery to continue to take hold... The way to focus on the real drivers of the budget problem and the real keys to growth is for the super committee to choose to go big and tackle all these issues in one large deal."

In the short term, deficit-reducing policies should be phased in gradually to avoid harming the recovery. For long-term growth prospects, the Commitee should tackle tax reform that broadens the tax base and lowers rates. Also, it should consider reprioritizing spending to focus more on the investment elements of the budget.

Finally, we also urge the Super Committee to Go Honest by not relying on budget gimmicks and to Make It Stick  to reinforce savings once they are in place.

The perfect time for fiscal reform is now. The longer policymakers wait, the harder it becomes--both economically and politically.

 

CRFB's New Table of Overlapping Policies

As the first meeting of the Super Committee has come and gone, it is important to take a look at the policies that they could consider. CRFB's table of overlapping policies, which appears in our recent paper on what we hope to see from the Super Committee, is a great resource for looking at the sort of ideas that will get some attention in the upcoming negotiations.

The newest table uses policies that came up in either the House Republican budget, the President's Framework, the Domenici-Rivlin plan, the Fiscal Commission plan, or was under discus the myriad of debt limit negotiations. An "overlapping policy" is one that appears in multiple plans.

The table not only is a good resource for seeing which policies will be in the discussion, but also can be a good indication of how likely they are to be on the chopping block (watch out, farm subsidies). See the full table here.

 

 

The Updated CRFB Long-Term Realistic Baseline

Update: CRFB's newest policy paper, What We Hope to See from the Super Committee, shows CRFB Realistic projections for spending by category and revenues over the long-term. Check out the graph (posted below) and the rest of our recommendations!

In light of the Budget Control Act (BCA) that passed one month ago and updated budget and economic projections from CBO, CRFB has updated its 75-year Realistic Baseline.

As a refresher, the Realistic Baseline incorporates policies that seem likely to happen, not what we would like see happen. It assumes that all the 2001/2003 tax cuts are extended, the AMT is patched, physician payments are frozen instead of cut by 30 percent (the doc fix), the wars are drawn down as scheduled, discretionary spending stays within the BCA caps, the Super Committee does not produce any savings and the required trigger is not implemented.

In the long-term (beyond the ten-year window), we assume the cost containment mechanisms contained in the Affordable Care Act are only partially successful (or only partially remain in place), discretionary and other mandatory spending stay constant as a percent of GDP, and revenue grows as a percent of GDP to account for growth in real wages slowly pushing people into higher tax brackets.

Given the fact that the BCA did not do enough to stabilize our debt in the medium-term, it should be no surprise that it did not do nearly enough to stem the exploding tide of red ink that will come over the longer term (at least according to our baseline). Under the new baseline, debt climbs higher and higher, going from 81 percent of GDP in 2021 to 124 percent in 2035, 194 percent in 2050, and 399 percent in 2080. As you can see, the BCA made an improvement, but not much of one, over the long-term.

 

Also, as expected, entitlement spending will explode over the long-term. Total Social Security and Federal health care spending will climb from 9.7 percent of GDP in 2012 to 17.3 percent in 2050, and it will continue to go higher as health care spending grows as a percent of GDP.

 

We have a lot of work to do. It's up to lawmakers to put in place a comprehensive budget plan soon that makes our Realistic Baseline look much better.

Recent Proposals for Job Growth

Leading up to President Obama’s job speech tomorrow evening, there has been much speculation as to the measures the president will propose. The current expectations are that he will suggest a $200 - 300 billion jobs plan, including extensions of the payroll tax holiday, unemployment insurance, and certain business incentives. Also in the mix could be new infrastructure spending, possibly for repairing public schools, and a new tax cut for businesses that hire unemployed workers, perhaps similar to the HIRE Act that was in effect for most of last year.

Encouragingly, several reports suggest that these new proposals might be paid for with spending cuts and tax increases later in the decade, as we called for in a press release earlier this week.

Details of job creation plans from presidential candidates Mitt Romney and Jon Huntsman have also attracted attention in the lead-up to Thursday’s speech. Both plans call for job creation through permanent tax cuts, regultory reform, trade agreements, and various other measures that would not increase overall federal spending. With regards to tax policy, the Huntsman plan calls for comprehensive tax reform modeled on the Fiscal Commission’s pure zero-plan, wiping out tax expenditures to reduce marginal tax rates to 8 percent, 14 percent, and 23 percent—but uses the additional revenues this would raise to eliminate taxes on capital gains and dividends as opposed to reducing the deficit. The Romney plan also envisions comprehensive tax reform, but for now calls for extending current rates, eliminating the estate tax, and eliminating taxes on capital gains and dividends for people making under $200,000 per year. Both plans also call for reducing the corporate tax rates to 25 percent and moving to a territorial tax system to spur economic growth (although the Huntsman plan offsets the cost of doing so through base broadening.

As members of both parties discuss ways to promote growth and create jobs, they must be mindful of the fiscal implications of those policies. Any new spending or tax cuts should be offset with future cuts and/or revenue increases. As CRFB president Maya MacGuineas recently stated,

"...markets aren't going to react too kindly to legislation that makes the debt situation even worse than it already is. That's why we should pay for job measures today with gradual spending cuts or revenue increases... A sustained economic recovery is going to require that we stop adding to our debt burden."

Business Roundtable Deficit Forum Today

Starting in just a few minutes, Business Roundtable (BRT) will host a forum on the deficit -- “Meeting the Challenges of Economic Growth and Deficit Reduction” -- wherein experts will look at the work facing the Joint Select Committee on Deficit Reduction (Super Committee). The event will feature three panels, looking at the committee’s mandate, how the committee may meet their goals and what cuts or reforms might be in play, and tax reform and economic growth.

Among the 11 experts who will sit on the various panels are CRFB president Maya MacGuineas, CRFB co-chair Jim Nussle, and CRFB board members Doug Holtz-Eakin, Dan Crippen, and Alice Rivlin. The event is set to start at 1:30pm, so don't forget to tune in to the live stream (below).

 

‘Line’ Items: Back to Work Edition

Back to Work – Labor Day is behind us, but a lot of work lies ahead. Congress returns from its August recess this week with jobs on the top of the agenda, but budget matters are not far behind. Congress must act on the fiscal year 2012 budget before the end of the month and the deficit reduction Super Committee is ramping up its efforts.

Laboring to Control the Jobs Debate – In light of sluggish economic growth, politicians are rolling out the job creation plans to appease anxious voters. GOP presidential candidate Jon Huntsman proposed a plan last week that includes major tax reform that would eliminate tax breaks, simplify the tax code and reduce tax rates. The Huntsman tax plan is very similar to the Zero Plan suggested by the Bowles-Simpson Fiscal Commission, except that the Huntsman plan uses the extra revenue generated by eradicating tax expenditures to eliminate the tax on capital gains and dividends, as opposed to putting it towards deficit reduction as the Fiscal Commission proposed. Read more on tax expenditures here and here. Fellow GOP presidential candidate Mitt Romney will offer his economic plan today after giving a preview in a USA Today op-ed that ran yesterday. President Obama will lay out his jobs plan in a joint address before Congress on Thursday and follow up soon thereafter with a detailed deficit reduction plan that will go beyond the $1.5 trillion the Super Committee is charged with recommending over ten years. It will be interesting to see the net deficit savings the President proposes after the cost of his jobs plan is factored in.

Super Committee on the Job – The Joint Select Committee on Deficit Reduction, otherwise known as the Super Committee, is getting to work. It hired a staff director, Senate Finance Committee staffer Mark Prater, who is known as a tax expert and dealmaker. And it set its first organizational meeting for Thursday and its first hearing for September 13, which will feature testimony from CBO Director Douglas Elmendorf.

It Pays to Be Prepared – September is National Preparedness Month and Americans are urged to be prepared for disasters. In addition to stocking up on batteries and non-perishable food, the national preparedness discussion is increasingly centering on how to pay for the federal response to disasters. With Congress and the White House embroiled in a debate over how to properly budget for emergencies, CRFB called for emergency spending to be offset in a release today, while offering thoughts on budgeting for disasters far in advance in a blog last week.

Appropriations Work Gears Up – The Senate Appropriations Committee plans to mark up three spending bills this week – Agriculture, Energy-Water, and Homeland Security – and set the 302(b) allocations. The 302(b) allocations will be based on the $1.043 trillion cap for 2012 set by the Budget Control Act. The fiscal year concludes at the end of the month and Congress will have to hustle to approve of all 12 spending bills to fund the government before then. Stopgap measures temporarily funding the government seem quite likely.

OMB Updates Projections – The Office of Management and Budget (OMB) released its Mid-Session Review last week with updated budget and economic projections. OMB forecasts that the FY 2011 federal budget deficit will be $1.3 trillion and public debt is projected to be 68.6 percent of GDP. CRFB provided a reaction to the report and some analysis in the Bottom Line Blog (see here and here).

Key Upcoming Dates

September 6

  • Senate back in session.
  • GOP presidential candidate Mitt Romney unveils economic plan.
  • Senate Homeland Security and Governmental Affairs Committee hearing on the budget crisis at the U.S. Postal Service at 2 pm.

September 7

  • House of Representatives back in session.
  • Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.

September 8

  • President Obama addresses joint session of Congress to lay out White House jobs proposals at 7 pm ET.
  • The Joint Select Committee on Deficit Reduction (Super Committee) holds its first organizational meeting at 10:30 am.
  • Senate Finance Committee hearing on "Tax Reform Options: International Issues" ay 9:30 am.
  • Senate Appropriations Committee meets to mark up FY 2012 Agriculture, Energy-Water and Homeland Security spending bills and sets 302(b) allocations at 3 pm.

September 9

  • House Financial Services Committee hearing on exposure of U.S. banks to the European Union debt crisis at 10 am.

September 11

  • Ten year anniversary of the September 11, 2001 terrorist attacks on the U.S.

September 12

  • GOP presidential debate in Florida.

September 13

  • The Super Committee holds its first public hearing at 10:30 am.

September 15

  • House Speaker John Boehner gives jobs policy address to the Economic Club of Washington.

September 22

  • Second GOP presidential debate in Florida.

October 1

  • 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.

October 11

  • GOP presidential debate in New Hampshire.

October 14

  • Congressional committees must submit any recommendations to the Super Committee by this date.

October 18

  • GOP presidential debate in Nevada.

November 23

  • The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.

December 2

  • The Super Committee report and legislative language must be transmitted to the president and congressional leaders by this date.

December 9

  • 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.

December 23

  • Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.

CRFB Urges Policymakers to Offset Emergency Spending

In the wake of Hurricane Irene and last week's job report, calls for Washington to enact some form of emergency spending measures have intensified. Given recent events and the weak economy, such measures may indeed be warranted. Given our country's fiscal situation, however, we cannot afford to add to our already massive debt burden.

On that note, CRFB's latest press release urges policymakers to offset any short-term emergency spending measures with gradual spending cuts or revenue increases over the next five to ten years.

Offsetting stimulus measures is relatively straight forward. Since most of these policies will be in the form of higher mandatory spending or lower taxes (such as extended increases in unemployment insurance and food stamps, as well as a potential extension in the payroll tax holiday), one need only measure how much the policies will increase the deficit -- relative to current projections -- and identify sufficient mandatory cuts and/or revenue increases to equal that amount over five to ten years.

Disaster funding is a bit more complicated, especially in light of some important reforms enacted as part of the Budget Control Act (BCA). The BCA enacted caps on discretionary spending, but also created an explicit "cap adjustment" for a limited amount of disaster spending each year -- an amount equal to the average disaster spending over the previous 10 years (excluding the highest and lowest). The goal of this limit is to force policymakers to budget for regular but unpredictable events (like hurricanes and earthquakes), and it is a clear improvement over how we have been budgeting for disasters.

Yesterday, OMB calculated that we have about $6.7 billion in "known disaster relief needs" for FY2012 (including $1.5 billion from Hurricane Irene), compared to the allowable cap adjustments of $11.3 billion (based on the ten year average). Should further disaster spending be necessary in FY2012, bringing the total to above $11.3 billion, that spending will have to be offset -- through other discretionary reductions -- under the law.

Given our dismal fiscal state, CRFB would of course be supportive of those who want to go further by offering offsets even when they are not legally required. But as a matter of proper budgeting, policymakers must at least hold themselves to the budgets they have put in place; and must be prepared to offset any costs above that. As MacGuineas explained," We need to start abiding by the simple principle that if something is worth doing, it's worth paying for."

Click here to read the full press release.

Differing Economic Assumptions Between OMB and CBO

Back in February, we dinged the President's budget for relying on overly optimistic economic assumptions in 2012 and beyond. CBO's Analysis of the President's budget showed much higher deficits, in part because they used different assumptions about economic growth and employment. Now that there are updated baselines from both CBO and OMB, we can compare them again to see how they stack up.

To OMB's credit, in addition to their "official" economic estimates, they provide alternative economic estimates if the economy performs more poorly given recent economic and financial developments this summer. If these alternative projections were to come true, it would add another $180 billion to their deficit projections from 2012-2021. These projections (Alt. OMB) are included along with the Mid-Session Review (MSR), CBO's August baseline (CBO), and the President's budget (Feb. Budget) in the table below.

 

Economic Projections in CBO's August Baseline and OMB's Mid-Session Review
  2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
 Real GDP Growth (Calendar Year)
MSR 2.1% 3.3% 3.7% 4.0% 3.9% 3.7% 3.2% 2.7% 2.5% 2.5% 2.5%
CBO 2.4% 2.6% 1.7% 4.4% 5.0% 3.2% 2.8% 2.5% 2.5% 2.3% 2.3%
Feb. Budget 2.7% 3.6% 4.4% 4.3% 3.8% 3.3% 2.9% 2.6% 2.5% 2.5% 2.5%
Alt. OMB 1.7% 2.6% 3.5% 3.9% 4.1% 4.1% 3.7% 2.9% 2.5% 2.5% 2.5%
Unemployment Rate (Calendar Year)
MSR 8.8% 8.3% 7.7% 6.9% 6.3% 5.7% 5.3% 5.2% 5.2% 5.2% 5.2%
CBO 8.9% 8.7% 8.7% 7.9% 6.1% 5.4% 5.2% 5.2% 5.2% 5.2% 5.2%
Feb. Budget 9.3% 8.6% 7.5% 6.6% 5.9% 5.5% 5.3% 5.3% 5.3% 5.3% 5.3%
Alt. OMB 9.1% 9.0% 8.5% 7.8% 7.0% 6.1% 5.5% 5.2% 5.2% 5.2% 5.2%
Change in Consumer Price Index (Calendar Year)
MSR 2.8% 1.8% 1.9% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
CBO 2.9% 1.5% 1.3% 1.3% 1.8% 2.1% 2.3% 2.3% 2.3% 2.3% 2.3%
Feb. Budget 1.3% 1.8% 1.9% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Alt. OMB N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

 

Clearly, the Mid-Session Review has more realistic projections for the upcoming few years than the President's budget, lowering the growth prospects as the economy has slowed in the past few months. It still remains more optimistic than CBO's numbers, although the alternative projections are comparable or sometimes worse than CBO.

However, we should note that there should be a difference in economic projections between CBO and OMB since they use different policy assumptions. CBO uses current law assumptions, meaning, among other things, that the 2001/2003 tax cuts expire. OMB uses current policy assumptions, which extend most of the tax cuts, with other (generally) debt-increasing policies. The difference should be--and is--apparent especially in 2013, when the tax cuts expire in CBO's baseline, but are mostly extended in OMB's, preventing contractionary policy. Conversely, in the out-years, the higher levels of debt should weigh on the economy.

We do know that there should be a difference in the economic numbers due to differing policy assumptions. The question is: how much difference should it make? Luckily, CBO has quantified the economic effects of using current policy assumptions in their August update. Granted, they include some policies that OMB does not include (for example, the extension of the upper-income tax cuts), but these numbers are much more comparable to OMB's than their current law estimates. They provide four different economic measures in 2012, 2013, and 2021.

Comparing Economic Projections Under Current Law and Current Policy
  2012 2013 2021
 Real GDP Growth (Fourth Quarter to Fourth Quarter)
Mid-Session Review 3.2% 4.0% 2.5%
CBO Current Policy 2.9% 2.8% 2.1%
CBO Current Law 2.7% 1.5% 2.3%
Unemployment Rate (Fourth Quarter)
Mid-Session Review 8.2% 7.4% 5.2%
CBO Current Policy 8.4% 8.0% 5.2%
CBO Current Law 8.5% 8.7% 5.2%
Interest Rate on Ten-Year Treasury Notes (Calendar Year Average)
Mid-Session Review 3.8% 4.3% 5.3%
CBO Current Policy 3.2% 3.5% 5.7%
CBO Current Law 3.2% 3.3% 5.3%

 

So, even after accounting for policy differences, OMB is still significantly more optimistic than CBO, especially in the short term.

Spending and Revenues in the Mid-Session Review

Under the Administration's Mid-Session Review, the gap between spending and revenues is set to persist throughout the decade with barely any change in that gap, even if potentially $1.5 trillion in savings from the Super Committee materializes. Also noteworthy is that both spending and revenues will exceed their historical averages over the past few decades of about 21 percent of GDP for spending and about 18 percent of GDP for revenues.

Even if the Super Committee were to achieve its $1.5 trillion target (a target which we've shown is not up to the challenge of stabilizing and reducing our debt as a share of the economy) and the savings were allocated roughly 2/3 and 1/3 between spending and revenues, respectively, spending would still exceed 22 percent of GDP by 2021 and would be on an upward path.

 

 
The Mid-Session Review's revenue estimates include about $870 billion in additional revenues when compared against revenue projections with all the tax cuts being extended as a result of letting the tax cuts on upper-income earners expire and also setting the estate tax at 2009 levels instead of lower levels put in place by the 2010 tax cut package. By 2021, revenues would reach nearly 20 percent of the economy, assuming the Super Committee does not include new revenues.
 
Lawmakers need to focus on ways to eventually bring spending and revenues back in line which each other in subsequent decades. The Super Committee will be critical in advancing this goal, but unfortunately its current mandate won't be enough to get us there anytime soon.
 
Click here to read CRFB's reaction to the Mid-Session Review.
 

 

OMB Releases Mid-Session Review

OMB has just released its Mid-Session Review, incorporating the effects of the Budget Control Act and the Super Committee's target savings into its projections. The MSR shows significant improvement compared to the President's Budget, although deficits obviously are higher than under CBO's current law estimates. The MSR focuses more on where debt levels could be if the Super Committee succeeds and the upper-income tax cuts expire than on making new budget proposals--OMB estimates over 70 percent by 2021.

Deficits from 2012-2021 have dipped to $5.8 trillion compared to the $7.2 trillion that was projected in the President's Budget. The Budget Control Act accounts for a large portion of the decline in deficits, with significantly worse near-term economic projections offsetting some of the savings.

In the graph below, we compare debt under the MSR, the President's Budget, and the most recent CRFB Realistic Baseline.

 

Stay tuned to CRFB and The Bottom Line for more commentary on the Mid-Session Review.

Wartime Contracting Commission Finds Significant Waste in War Spending

The Commission on Wartime Contracting in Iraq and Afghanistan, created by Congress in 2008, has issued its final report, showing that there has been anywhere from $30 billion to $60 billion lost due to contract waste or fraud associated with the wars. Luckily, the report not only details the problems that have arisen with contracting over the past decade, but also gives fifteen recommendations on how to remedy the poor performance.

The Commission finds that there has been an over reliance on contractors with the two wars, and suggests better defining tasks that should be done by federal employees so that contracting activities can be scaled back. Other suggestions include greater general oversight (including establishing positions to do so), the use of contractor knowledge to develop better practices, and better enforcement and competition with regards to contracts.

Of course, rooting out waste in wartime contracting won't solve our fiscal problems (though it is a lot of money), and with the wars winding down, it will become less of a factor as the decade unfolds. However, it is important to fix this problem so that any future engagements will not cost taxpayers unnecessarily, and it is likely that we can take some of these lessons and extend them to other federal activities and agencies to improve oversight. Congress would be wise to take a look at the recommendations of the Wartime Contracting Commission to institute better oversight of and coordination with contractors.

To read the full report, click here.