After hinting at how they would cut defense spending yesterday, the Obama Administration has given out another small detail of its upcoming budget. According to the Washington Post's Ed O' Keefe, the White House will request a 0.5 percent pay increase for federal employees in FY 2013, on the heels of a two-year pay freeze.
Of course, in budgeting, whether you view that as an additional cost or savings depends on your baseline. Republicans in Congress and GOP presidential candidates who have called for an extended pay freeze would view it as a cost. Others who view an increase with inflation as the "default" would label it as savings.
Either way, what is clear is that this is an effort by the Obama Administration to get the discretionary spending portion of his budget under the scheduled spending caps. As laid out in the Budget Control Act, the discretionary cap for FY 2013 will only grow by 0.4% over the FY 2012 cap (from $1.043 trillion to $1.047 trillion). Thus, this policy could be seen as a way to bring pay rate increases in line with the overall increase in the cap. In other words, the Administration is choosing to specify a policy it will undertake, at least in this case, to stay within the caps, something it declined to do in its submission to the Super Committee in September.
Keep in mind that the policy itself will have no impact on the deficit, since every budget baseline in use already assumes that lawmakers will adhere to the discretionary caps and this policy does not change the actual level of the caps. Again, it only states a policy that the Administration is using to stick to the caps that were agreed upon. The effect of this policy is to either give appropriators more room for other discretionary spending (relative to an inflation increase in pay) or less room for other spending (relative to a pay freeze), depending on your view. Indeed, this is the confusing nature of discretionary spending in a nutshell.
We will keep you posted as more and bigger details become available over the next month about the FY 2013 President's budget.
As is the case every first Friday of the month, BLS released its jobs data, which for December showed another solid month for employment. About 200,000 new jobs were added and the unemployment rate fell to 8.5 percent. The underemployment rate, a broader measure which includes workers who have stopped looking for a job and people who are working part-time for economic reasons, fell from 15.6 percent to 15.2 percent in December; this measure has declined by more than a percentage point over the last three months.
Of course, the economy is not close to a full or even partial recovery, and even the positive trend has been too short to declare success. But a more optimistic outlook for the economy would impact the numbers underlying many budgetary issues, even in the short-term. CBO's most recent economic assumptions from August projected that the unemployment rate would average 8.7 percent through 2012 and 2013. If they perceive a consistent downward trend in unemployment that can outpace the economic headwinds coming from Europe, those numbers should go down.
Beyond affecting the numbers in their January baseline, changing economic assumptions could also impact the upcoming extensions that must be done by the end of February; however, the direction of this effect is unclear. Clearly, a falling unemployment rate would decrease the cost of extended unemployment insurance benefits, but it would also increase the revenue lost from the payroll tax cut (albeit against a baseline of higher payroll tax revenue) because of expanding employment. If the two extensions were considered separately, a more optimistic economic outlook could increase the pressure to not pay for a longer-term payroll tax cut, since coming up with offsets would be more difficult. This effect would be magnified if Congress chose to extend it through 2013. On the flip side, paying for an unemployment insurance extension would become easier to do as the cost declines.
Of course, we'll have to see what happens when the new baseline comes out. CBO may decide that the troubles in Europe are enough to hold back the recovery and that the recent positive trend here in the U.S. will not continue. But if it makes its economic assumptions more optimistic, we may see an impact on upcoming extenders negotiations.
In evaluating the impact of Republican candidates' tax plans, Tax Policy Center has been an invaluable resource. After having scored Newt Gingrich's and Rick Perry's plans for revenue and distributional impact, they have done the same for Mitt Romney. The results are also similar, showing revenue losses even when compared against a baseline that extends the 2001/2003 tax cuts.
Romney makes a number of changes to the tax code, but they are not as structural in nature as Gingrich's and Perry's flat tax proposals or Herman Cain's 9-9-9 plan. For starters, Romney extends the 2001/2003 tax cuts, although he excludes the 2009 tax credit expansions that were part of the 2010 extension.
On the individual side, he indexes the AMT for inflation, repeals the tax increases contained in the Affordable Care Act, eliminates the estate tax, and eliminates taxes on investment income for people making less than $200,000. On the corporate side, he cuts the corporate tax rate to 25 percent, permanently extends the R&D tax credit, temporarily extends expensing of capital expenditures, and switches to a territorial system of foreign taxation.
According to TPC, the tax plan reduces revenue by $600 billion compared to current law and $180 billion compared to current policy in 2015 alone. While these numbers are eye-popping, they are actually much smaller than the numbers TPC estimated for Gingrich and Perry. Still, Romney would need significant spending cuts to offset the revenue loss and even more to bring the debt down to a reasonable level.
As we mentioned on Tuesday, Defense Secretary Leon Panetta was scheduled to roll out the strategic outline for the Pentagon's future. Earlier today, the Obama Administration released its strategic guidance report and held a press conference with both President Obama and Secretary Panetta speaking. The document does not go into specific policy details, but rather outlines the Pentagon's strategy and goals more broadly. Still, from the document, one can get a sense of some reductions we might be seeing in the President's budget next month.
Not surprisingly, with the drawdown of the wars in Iraq and Afghanistan, the number of ground forces will be reduced and the report indicates that the military's structure will emphasize more low-cost and "small-footprint" ways of carrying out its objectives. Although force reductions are already under way, it is quite possible that the Administration will choose to go further than scheduled.
Also, the report talks about making the Department run more efficiently. They do not go into specifics, but they mention the need to reduce manpower costs, reducing overhead, and implementing less costly business practices. It is notable that these broad goals sound similar to the policies that former Defense Secretary Robert Gates talked about a year ago (the "Gates efficiencies").
Beyond efficiencies, the report talks of reducing the rate of growth of military compensation and health care costs; however, it also mentions the need for sufficient support for veterans as they transition to the civilian workforce. The President's Submission to the Super Committee included small fees for TRICARE-for-Life and TRICARE recipients; one might expect this policy to be reprised in the Budget.
Finally, the report mentions that maintaining a sufficient nuclear weapons arsenal is important for deterrence purposes but indicates that this goal could be accomplished with a smaller nuclear force. This area has been a popular target for cuts among those who have proposed them (like the Sustainable Defense Task Force plan), so don't be surprised if this area takes a hit in the President's budget.
The defense cuts may not be in the flesh just yet, but we have a better idea of where President Obama may look to meet the defense spending caps. We will see the composition of policies that he uses next month in the FY 2013 budget proposal.
As some readers may already be aware, Urban has produced a series of very well-done videos over the past few years on many budget-related topics, such as the CLASS Act, the Budget Control Act, and many relevant tax issues. They are definitely worth checking out if you wish to learn more about various parts of the budget and budget process and where the policy and political disagreements lie.
Late in December, the Treasury Department released its annual Financial Report of the United States Government. The release date is fitting, since it is understandable that Treasury would put out a document with very bleak projections while everyone was heading out for the holidays.
This report is different from other budget projections, like the President's Budget or CBO's baselines, in that instead of providing snapshots of spending and revenue within given years, it uses accrual accounting methods to show governmental assets and liabilities well out into the future.
This difference can be shown first in the net operating cost of the government, which differs from the budget deficit in that the deficit only reflects what has been paid (outlays) and collected (revenue) this year. In addition to these, the net operating cost also shows the assets and liabilities that have been accrued but not paid during the fiscal year. The difference is mostly federal employee benefits, veterans benefits, and payments to government-sponsored enterprises such as Fannie Mae and Freddie Mac.
Although in past years, including FY 2010, the net operating cost of the federal government has sharply diverged from the deficit, they both were around $1.3 trillion this year. The sharp drop in the net operating cost is due to much lower expected liabilities with regards to all the categories mentioned above (employee benefits, etc).
Another measure that the Financial Report includes is total net liabilities. This measure includes the assets of the government and costs (employee benefits and debt held by the public) as well as social insurance net liabilities. The latter category is measured as the present value of all social insurance liabilities minus assets over the next 75 years. Obviously, Social Security and especially Medicare make up the vast bulk of net liabilities. As you can see in the table below, the government's liabilities have increased somewhat since last year, mostly due to increased debt held by the public and shifting the 75-year measuring window forward.
|U.S. Government Assets and Liabilities (billions)|
|FY 2012||FY 2011||FY 2010||FY 2009|
|Debt Held by the Public||-$11,332||-$10,174||-$9,060||-$7,583|
|Net Liabilities of Social Security||-$11,278||-$9,157||-$7,947||-$7,677|
|Net Liabilities of Medicare Part A (HI)||-$5,581||-$3,252||-$2,683||-$13,770|
|Net Liabilities of Medicare Parts B and D (SMI)^||-$21,593||-$21,320||-$20,130||-$24,337|
|Net Social Insurance Liabilities||-$38,554||-$33,830||-$30,857||-$45,828|
|Total Net Liabilities||-$54,655||-$48,615||-$44,330||-$57,284|
*Includes liabilities of federal employee benefits, veterans benefits, and other liabilities.
^Does not include federal general revenue transfers.
The report also has more familiar measures of debt, such as the 75-year fiscal gap, or the present value of the difference between spending and revenue over 75 years. Treasury estimates the gap to be 1.8 percent of GDP, which is an improvement over the 2.4 percent gap last year (mostly because of deficit reduction legislation). However, it also points that delaying action on the debt will only allow the fiscal gap to grow wider. By 2022, we will be facing a fiscal gap of 2.2 percent of GDP, and by 2032, there will be a 2.8 percent of GDP gap.
All of these numbers in the Financial Report show, unsurprisingly, that we have a lot of work to do. It's a good thing then that momentum continues to build for a comprehensive solution.
Note: The table in this blog has been updated to include the FY 2012 assets and liabilities numbers.
So you thought all of the 2011 retrospectives were done now that we're in the new year? Well, we have one more to contribute.
The first part of our lookback on 2011 is our favorite 11 blogs of 2011. Considering that we wrote 630 blogs last year, narrowing it down to our choice 11 was very difficult.
The blogs of the year address health care, Social Security, taxes, the long-term budget outlook, and various fiscal policy developments that arose as Congress and the President turned their attention toward addressing the debt.
As a side note, the blogs are not ranked by importance, but rather by chronological order. Also, we have thrown in related or follow-up blogs where applicable.
Without further ado, here are our favorite 11:
- What Happens if the Budget's Assumptions Aren't So Rosy? (and the follow-up We Could've Told You)
- Raising the Retirement Age Still Is a Good Idea (and the related Trustees Report Strengthens Case for Retirement Age Increase and Actually, Raising the Medicare Age Is Also a Good Idea)
- Ending Tax Breaks Will, In Fact, Help the Budget
- Understanding the Long-Term Budget Projections (and the related CBO Makes the Case for Strict Pay-As-You-Go (PAYGO) Rules)
- The Facts on the Chained CPI
- The Gang of Six...Simplified
- Agreement on Debt Limit Increase (and its predecessor Comparing the Reid and Boehner Proposals)
- How Other Countries Have Regained AAA Ratings
- Could a "Go Big" Approach Increase the Chances of the Super Committee Succeeding? (and the related Let's Add On Instead of Claw-Back)
- How to Save $600 Billion in Health Care While Protecting the Disadvantaged (and the follow-up Finding $600 Billion in Health Savings, Continued...)
- The Importance of the Sequester
2011 also saw the creation of a number of new tools and pages on the CRFB website. They are:
- The Moment of Truth Project
- Deficit Reduction Plan Comparison Tool
- Averting a Fiscal Crisis (Budget Slideshow)
- Overlapping Policies and Estimated Savings Across Fiscal Plans
- Go Big Resource Page
- Go Big Videos Page
Finally, here is a representation of the words we used in our blog last year.
Happy New Year!
According to today's New York Times, a report from Defense Secretary Leon Panetta will be revealed this week on how the Pentagon will meet its required spending reductions. The discretionary cuts agreed to by Congress and the White House this summer called for about $450 billion in defense reductions over ten years. However, the Pentagon could face an additional $500 billion in cuts from the automatic sequester if lawmakers allow it to go off.
The article discusses various possibilities for meeting the reductions. With the need to fight two wars at the same time now gone, reducing the size of the Army and the Marines is a definite possibility. Procurement will also likely be a target, as the Pentagon re-evaluates whether it needs things like the 2,500 F-35s that it has been planned on ordering. Reducing the nuclear arsenal and the cost of its related forces will also certainly be under consideration. In addition, military benefits may be targeted, although this is somewhat more controversial. Specifically, the article mentions increasing fees for TRICARE beneficiaries (healthy working-age retirees), capping pay increases, or making changes to the military pension system.
Conveniently, the Times also has a simulator that gives participants a number of options for reaching a target of $450 billion in defense savings over ten years. These cuts cover the options mentioned above, with particular emphasis seemingly on weapons/procurement reductions and personnel costs. The simulator highlights the difficulty of reaching the nearly $1 trillion of cuts that will be required if the sequester goes off while allowing users to see potential reductions that could meet the savings target.
Although achieving $1 trillion in defense cuts over the next decade may be difficult, Stimson Center fellow Gordon Adams notes in the article that this reduction would not be as deep as the previous three major drawdowns that occurred after Korea, Vietnam, and the end of the Cold War. Soon we will see the kinds of policies that Secretary Panetta endorses, and how far Congress and the Administration are willing to go on defense cuts.