February 2012

Budget Reform Proposals in the President's FY 2013 Budget

This installment of the FY 2013 Budget Series focuses on some of the budget process reform proposals buried deep in the Analytical Perspectives section (chapter 14, to be exact) of the President’s budget. We have long argued that reforms to the budget process are not the solution to the mounting debt the country continues to accumulate. But such reforms can be a piece of the solution, and in these tough political times they can be the first steps taken that pave the way for broader action. The 2013 budget contains a number of reform proposals. This analysis covers just a few of the more well known, and less arcane ones.

STATUTORY PAY-AS-YOU-GO (PAYGO)
The current version was enacted in 2010, and we have long favored a strong statutory PAYGO rule. Responsible budgeting dictates that new spending or tax cuts be paid for by cuts or revenue increases elsewhere in the budget. And the Administration again calls for adjusting their baseline to include more realistic assumptions about the Alternative Minimum Tax patch and Medicare physician reimbursement freeze (the “doc fix”). However, we also continue to argue that even this version of PAYGO contains too many exemptions to successfully enforce a sustainable debt level. A stronger version, such as that recommended in the Peterson-Pew Commission’s 2010 report, Getting Back in the Black, would include essentially no exemptions, and would be accompanied by hard spending caps.

TRANSPORTATION TRUST FUND
The Administration proposes to transform the existing Highway Trust Fund (HTF) into a broader umbrella entity called the Transportation Trust Fund (TTF). There are two problems with the current HTF system: it has not collected enough revenue from fuel taxes to fund all the projects undertaken, and it is a strange hybrid of mandatory and discretionary budget treatment. (See page 172 of this pdf for the arcane details.) 

The Administration follows a recommendation made by the Fiscal Commission in creating the TTF, where everything is treated as mandatory spending and subject to PAYGO. Unfortunately, the needed supplemental funding for the expanded TTF would come in part form “ramping down overseas operations” – something we have described as a gimmick.

Drawing down spending on wars that were already set to wind down and that were deficit financed in the first place should not be considered savings. When you finish college, you don’t suddenly have thousands of dollars a year to spend elsewhere – in fact, you have to find a way to pay back your loans.

EXPEDITED RESCISSION AUTHORITY
Something we have also supported in the past, and that is included again this year, is the extension to the President of expedited Rescission Authority. As the budget states:

In order to make it easier to eliminate unnecessary spending, the Administration requests that Congress enact the President’s proposal for expedited rescission, transmitted May 24, 2010. That legislation would create an important tool for reducing unneeded funding. In short, the bill would provide the President with additional authority to propose a package of rescissions that would then receive expedited consideration in Congress and a guaranteed up-or-down vote.

In addition, as with the President's September submission, the budget has a trigger ensuring a certain path, which we go into detail on later in the blog series.

As with the overall budget, we see good and bad ideas in the handful of reforms reviewed here. In general, we prefer a package of stronger and more extensive budget process reforms that would get the budget on a more sustainable path to strengthen public finances. 

Stay tuned throughout the week for more in our FY 2013 Budget Series.

‘Line’ Items: Budget Day Edition

Big Day – Today is the big day in budget world. The White House released its fiscal year 2013 budget request. As you can imagine, CRFB has been busy going through the numbers and proposals. CRFB issued a statement earlier today with initial analysis and a paper examining the request is forthcoming. The budget would stabilize the debt at 76% of GDP in 2022. While stabilizing the debt as a percentage of the economy is a worthy goal, 76% is too high, and it would start climbing back up outside of the 10-year window. CRFB recommends a goal of stabilizing the debt at 60% of GDP and then putting it on a path to decrease further. There are lots of good ideas concerning controlling health care costs and tax reform in the budget, but more needs to be done. We see this budget as a good start in the right direction. We will have more analysis throughout the week on the Bottom Line blog.

Oh, No…OCO – One area of the budget that gives us pause is where the administration proposes to shift a portion of the so-called “war savings” from Overseas Contingency Operations (OCO) – the Iraq and Afghanistan conflicts that are winding down – to fund infrastructure proposals. CRFB considers this a gimmick. As we explain in our statement – “Drawing down spending on wars that were already set to wind down and that were deficit financed in the first place should not be considered savings. When you finish college, you don’t suddenly have thousands of dollars a year to spend elsewhere – in fact, you have to find a way to pay back your loans.”

Budget Reform Continues – Congress is not likely to adopt the White House budget and is equally unlikely to agree on its own. As Congress seems poised to go another year without a budget, ideas to revamp the budget process continue. Last week the House passed legislation to give the president an effective line-item veto through enhanced power to rescind items in spending bills. The House also passed a bill to require fair value accounting for federal credit programs and to put Fannie Mae and Freddie Mac on the budget. See more budget process reform ideas here.

That’s How We Payroll – After frantic negotiations over the weekend to strike a deal extending the payroll tax holiday and other items, policymakers remain divided over how to offset the extensions. Now there is word that the House may vote on a payroll tax cut without any offsets. This is clearly not what we would like to see out of the conference committee. Let’s hope Congress gets this right.

Ending in Sight for Greek Debt Tragedy? – Greek lawmakers approved of painful austerity measures over the weekend, qualifying for international loans needed to stave off a default. The country still faces deep turmoil over the cuts and some doubts that it will continue on this path.

Dirty Harry Wades into the Debt Pool – The Bowles-Simpson Fiscal Commission plan got an unlikely endorsement last week as actor/director Clint Eastwood gave it a thumbs up. Will lawmakers dare go against Dirty Harry? Congress, do you feel lucky?

Key Upcoming Dates (all times ET)

February 13

  • The President will submit his FY 2013 budget request to Congress.

February 14

  • Senate Budget Committee hearing on the President’s FY 2013 budget with Acting OMB Director Jeffrey Zients at 10 am.
  • Senate Finance Committee hearing on the President’s FY 2013 budget with Treasury Secretary Tim Geithner at 10 am.

February 15

  • House Budget Committee hearing on the President’s FY 2013 budget with Acting OMB Director Jeffrey Zients at 10 am.
  • House Ways and Means Committee hearing on the President’s FY 2013 budget with Treasury Secretary Tim Geithner at 10 am.
  • Senate Budget Committee hearing on the President’s FY 2013 budget request for transportation with Transportation Secretary Ray LaHood at 10 am.
  • House Appropriations Committee hearing on the President’s FY 2013 budget for Homeland Security with Homeland Security Secretary Janet Napolitano at 10 am.
  • Senate Finance Committee hearing on the President’s FY 2013 budget with Health & Human Services Secretary Kathleen Sebelius at 10 am.

February 16

  • Senate Energy and Natural Resources Committee hearing on the President’s FY 2013 budget request for the Energy Department at 9:30 am.
  • Senate Budget Committee hearing on the President’s FY 2013 budget with Treasury Secretary Timothy Geithner at 10 am.
  • House Appropriations Committee hearing on the President’s FY 2013 Defense budget with Defense Secretary Leon Panetta at 10 am.
  • Senate Banking, Housing and Urban Affairs Committee hearing on the European debt crisis and its implications at 10 am.
  • House Budget Committee hearing on the President’s FY 2013 budget with Treasury Secretary Timothy Geithner at 2 pm.

February 17

  • Dept. of Labor's Bureau of Labor Statistics releases January 2012 Consumer Price Index (CPI) data.

February 22

  • Arizona GOP debate sponsored by CNN at 8 pm.

February 28

  • GOP presidential contests in Arizona and Michigan.

February 29

  • The temporary payroll tax cut, unemployment insurance, and doc fix extensions will expire.
  • US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.

March 3

  • Washington Caucus

March 6

  • Super Tuesday - presidential contests in Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia.

March 6-10

  • Wyoming Caucus

March 9

  • Dept. of Labor's Bureau of Labor Statistics releases February 2012 employment data.

March 10

  • Presidential contests in Kansas and the Virgin Islands

March 13

  • Presidential contests in Alabama, Mississippi, and Hawaii

March 16

  • Dept. of Labor's Bureau of Labor Statistics releases February 2012 Consumer Price Index (CPI) data.

March 17

  • Missouri Caucus

March 18

  • Puerto Rico primary

March 19

  • Oregon GOP Debate sponsored by PBS at 9 pm.

March 20

  • Illinois primary

March 24

  • Louisiana primary

March 29

  • US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.

No Offsets? No Deal

It's no secret that the conference committee tasked with finding solutions for the expiring 2-month fix for the payroll tax cut, unemployment insurance, and the doc fix is having a difficult time agreeing on how to offset the costs of any extensions. But just because coming to an agreement isn't easy doesn't mean it's time to abandon offsets altogether. 

However, that is what the House is planning to do as a backup option to no agreement being reached in the next two weeks. Leadership in the House is reportedly looking to allow the payroll tax cut to be extended for ten months without offsets, but unemployment insurance and the doc fix would still have to be paid for. Unfortunately, they managed to pick by far the most expensive policy to deficit-finance this year, with a cost of $94 billion according to the estimate contained in the President's budget.

The inability to find palatable offsets should not be a reason to give up. Instead, it should push both sides to bring more options to the table in order to find common ground. They could, for example, take another look at all the low hanging fruit that has developed over the past several months. It should be clear by now that whichever policies are important enough to lawmakers that they have to continue them should be important enough for them to come together to find offsets.

But, as we said in our policy paper on the descisions in front of the conference committee, "Ideally, the Committee should view the extensions of these policies within the broader economic and fiscal context, using them as an opportunity to advance a comprehensive fiscal plan."

Key Fiscal Metrics in the President's Budget

With President Obama's FY 2013 budget out in the open for review (see our initial reaction and analysis) we will now more closely examine many aspects of the budget in a blog series over the coming week. Our first blog will introduce the broad framework.

Under President Obama's FY 2013 budget, due to a combination of policies designed to raise revenues and improve economic growth, revenue will rise nearly two percentage points from 15.8 percent of GDP to 17.7 percent in 2013. Beyond that, revenue will continue to rise, reaching 20.1 percent by 2022. 

Additionally, due to the improving economy and various deficit reduction policies, outlays will also start to fall. Although they will rise from 24.1 percent of GDP in 2012 to 24.3 percent in 2013, they will begin to gradually decline to 22 percent by 2018. However, due to pick-up in the growth rate of health care and Social Security spending, outlays will begin to rise again to 22.8 percent in 2022.

To put the previous numbers in context, during the previous 40 years, spending and revenue have averaged about 21 and 18 percent of GDP, respectively.

 

Deficits will fall over the next five years as spending and revenue converge, but they continue to remain too high to put our debt on a downward path. They will still be quite large in 2013--5.5 percent of GDP (although this is down from 8.5 percent in 2012)--and will remain at or above three percent through 2017. Deficits will then reach a low of 2.7 percent in 2018 and stabilize at 2.8 percent thereafter.

 

President Obama's budget stabilizes the debt at 76.5 percent of GDP in 2018, and it stays at or below that level through 2022 after reaching a peak of 78.1 percent in 2015. While these numbers are an improvement over the CRFB Realistic Projection, stabilizing the debt is only part of the solution--we need a plan which puts our debt on a downward path, something that this budget does not do. It is also very likely that debt will actually begin to rise past the 10-year budget window due to increasing health-care and Social Security costs.

 

President Obama deserves credit for proposing specific policies to stabilize our debt without resorting to rosy economic assumptions or assumed offsets, but he does not go far enough. As CRFB President Maya MacGuineas said earlier today:

[The President's budget] does stabilize the debt, but at too high a level and in a way that isn’t robust over the long-run. Still, this budget represents a positive step in the fiscal conversation, and I’m hopeful it will help to push for a broader debt deal this year.

CRFB's Reaction to the President's Budget

CRFB has just released its press release on the President's budget, including some basic analysis of the fiscal trajectory. The budget includes deficits of $6.7 trillion from 2013-2022 and would stabilize debt at over 76 percent of GDP later this decade. 

The budget includes $1.6 trillion of revenue increases, $360 billion of health care savings, and $270 billion of other mandatory savings, netted against $350 billion of short-term jobs measures. We praised the budget for replacing the across-the-board sequester cuts with more timely and thought-out policies, but felt that it did not go far enough. While debt would be stabilized later this decade, it would remain at an elevated level. And over the long-term, debt would likely continue rising.

In addition, we criticized the use of "savings" from the war drawdown to help pay for higher transportation spending.

In short, the budget represents a step in the right direction, but does not go nearly far enough to put our debt on a sustainable path in the long-run. As we said in the press release:

Achieving medium and long-term sustainability will require a “Go Big” approach that combines many of the elements in the President’s budget with further savings in all areas and with more ambitious entitlement reform designed to fundamentally change the trajectory of our health and retirement programs. Without these, our fiscal problems will remain.

Throughout the week, CRFB will be featuring a new blog series looking at various aspects of the President's latest proposals. Keep checking back to The Bottom Line for further analysis.

More Details on the President's Budget

In a post earlier this week detailing what's known about the President's budget, we discussed policies that were likely to appear on Monday. Now, the National Journal (via The Wall Street Journal) has more details (subscription required) about some of the numbers we may see come Monday.

These numbers confirm that the budget will look similar to the President's submission to the Super Committee in September. The budget will call for $350 billion of short-term stimulus spending, $360 billion of health care savings, and $1.5 trillion of tax increases, all similar numbers to those in the President's submission. In addition, the budget will revive a proposal from last year's budget to authorize $476 billion of spending over six years on transportation (although last year’s proposal included a higher total of $556 billion for transportation).

Some near-term numbers have also emerged. The FY 2012 and FY 2013 deficits are expected to be $1.33 trillion (8.5 percent of GDP) and $901 billion (5.5 percent of GDP), respectively; however, the Administration has already said that these deficits involve economic assumptions that they believe to be too pessimistic in light of recent improvement in near-term economic forecasts. 

We can expect many more details when the budget is released and President Obama speaks on Monday morning. Be sure to keep checking back to The Bottom Line for continued analysis and commentary of the President's budget.

Bowles-Simpson's Best Endorsement Yet?

Just when you thought you've seen it all, here's Clint Eastwood on CNBC's "Squawkbox" this morning touting the Fiscal Commission plan. Given the large deficits we face, he supports the idea of bringing it back up for consideration. See the full video below.

 

House Passes Modified Line Item Veto

Expedited rescission authority, a cousin of the line-item veto, has been considered countless times by Congress since the line item veto was declared unconstitutional in 1998. In fact, CRFB president Maya MacGuineas recently testified on this proposal, which can be found here. Yesterday, it has passed the House by a 254-173 vote.

The legislation--with the catchy title of the "Expedited Legislative Line-Item Veto and Rescissions Act"--is a bipartisan product of the top two members of the House Budget Committee, Chairman Paul Ryan (R-WI) and Ranking Member Chris Van Hollen (D-MD). The vote itself was also bipartisan, although a majority of Democrats voted against it.

Expedited rescission authority is a way to fast-track Presidential rescission requests. If the President makes such requests, Congress must act within 45 days with an up-or-down vote. This rescission authority is different from the line item veto in that the line item veto allows the President to directly cancel certain appropriations with Congressional action required to disapprove them. With this bill, however, Congress would vote to approve rescissions under an fast-tracked process, a change that is intended to prevent expedited authority from being declared unconstitutional.

As we have said in the past, this greater authority should help root out wasteful spending by making action, rather than inaction, on rescissions the norm instead of the exception. The authority can also act in a preventive manner by discouraging lawmakers from putting in extraneous spending. Although it is unknown what will happen with the bill next, we hope the Senate will consider and pass it.

Previewing the President's Budget

With less than a week before the President's budget comes out The Wall Street Journal has reported that it will be similar to the September submission to the Super Committee. The submission included a number of familiar tax policies like ending the 2001/2003/2010 tax cuts for people making more than $250,000 and eliminating tax expenditures for oil, gas, and coal companies. In addition, the September submission raised various user fees, reduced farm subsidies, reduced provider payments, and increased Medicare premiums for high-income earners, among other things. The submission also included the American Jobs Act, a stimulus measure that included an extended and expanded payroll tax cut, and increased spending for infrastructure.

Although the budget is expected to look familiar, the State of the Union address and other recent developments also produced a laundry list of policies that would differ from the September submission. Here's what we know:

  • New taxes: A big policy in the State of the Union was a fleshing-out of the "Buffett Rule," which states that millionaires' should pay at least a 30 percent effective tax rate. It is now in legislation that has been introduced in both chambers. In addition, President Obama called for a 10 percent minimum tax on multinational companies. No solid estimates are available yet for either of these policies, but we are certainly going to see them in the budget.
  • Manufacturing incentives: A lion's share of the address last month was devoted to talking about manufacturing. The Obama Administration has proposed a number of changes for manufacturers through the tax system. They would deny deductions for expenses associated with moving business operations abroad while providing a 20 percent credit for moving operations back to the US (a revenue-neutral change, according to them). They would eliminate the domestic production deduction for oil companies and expand the deduction for certain manufacturers (again, revenue-neutral). They would also introduce a $6 billion tax credit to finance projects in hard-hit communities, and they would extend tax incentives for clean energy manufacturing and the full expensing for equipment, measures which are scheduled to expire at the end of the year. Combined with a loophole-closer that would limit the ability of corporations to avoid taxes through intangible property transfers, these changes would be roughly revenue-neutral, although some of the revenue-raisers have been used in previous budgets.
  • Defense: Last month, Defense Secretary Leon Panetta laid out many specifics for how the Administration would make the necessary cuts in defense spending specified in the Budget Control Act.  The plan would reduce troop levels and reduce some vehicle acquisitions, among other things.  The cuts would reduce defense spending by almost $500 billion over ten years compared to the previous budget.
  • Veterans' hiring: After having passed an employer tax credit for hiring unemployed veterans last year, President Obama has proposed expanding on that by creating a "Veterans Jobs Corp." According to the Administration, the new Jobs Corp would employ 20,000 veterans. In addition, the Administration would make $5 billion in additional grant money available through a few existing programs, with that money targeted more towards communities that hire veterans.
  • Refinancing initiative: Last week, President Obama laid out a plan to break down barriers for homeowners to refinance their mortgages.  Under the plan, there would be fewer criteria for who would qualify for refinancing programs and refinancing would be available to private borrowers as well as for people whose loans are insured by Fannie Mae and Freddie Mac. The Administration put the cost of this proposal in the range of $5 to $10 billion.
  • Reorganization: A plan emerged in mid-January to consolidate six commerce- and trade-related agencies into one. The Administration estimated that this move would save $3 billion over ten years due to reduced overhead and fewer needed jobs.
  • Federal pay: In contrast with the House Republican plan to freeze federal pay for another year, indications are that the President's budget will recommend a small pay increase of 0.5 percent for 2013. It would be their first increase since 2010. As we noted at the time, this pay increase is about equivalent to the increase in the discretionary spending caps from 2012 to 2013.
  • Math and science education: President Obama requested this week $80 million to train 100,000 new teachers for science, technology, engineering, and math (STEM) education. The proposal is small, but it will be part of the Department of Education's budget for FY 2013.

We will see how the numbers shake out when the budget is released next Monday.

Integrating the Budget Process and the Campaign

Harvard Law School professor Howell Jackson has an interesting idea in a Reuters op-ed: if fiscal issues are going to be extremely important in the coming years, why not create a process that would encourage Presidential candidates to come up with a fiscal plan?

Jackson's idea is this: have Congress give fast-track authority to whoever wins the election to consider a fiscal plan immediately after Inauguration Day. The plan in consideration must meet certain fiscal benchmarks and be provided by the August before the election to be eligible for the authority. To some extent, this sounds like the Super Committee authority that Sen. Joe Lieberman (I-CT) proposed extending to any bipartisan fiscal plan that members of Congress produced.

In addition, Jackson proposes making CBO responsible for scoring candidates' fiscal plans since no formal authority currently exists in that realm (although US Budget Watch, a project of CRFB, will be releasing scores of the candidates' plans soon). This would ensure that the public had reliable numbers, rather than relying on claims by the campaigns themselves, and it would ensure that campaigns got specific enough about their proposals, since CBO would need specifics to be able to score them.

Jackson argues that the allure of having expedited consideration of a fiscal plan in Congress would compel the candidates to produce a plan, despite the traditional misgivings they have about getting specific. It would also elevate the fiscal debate to a much more visible stage and produce more honest discussion.

Overall, Jackson's proposal is a very interesting way of forcing candidates to truly engage in the fiscal debate that they need to be having. 

Military Retirement Needs Reform

Military pensions for high-ranking officers are going up significantly, according to a USA Today article. Due to a change in the Defense Authorization Act of 2007 that was intended to dispel concerns about losing too much of the top brass during wartime, pensions increased by as much as 63 percent for some officers. As a result, the highest pension that an officer can receive ($273,000 for a retired four-star officer with 43 years of service) is now higher than the most an active duty officer can make, including allowances.

The military retirement system overall has been looked at as a means for reform, especially in light of the defense spending cuts that are required. Last month, Defense Secretary Leon Panetta recognized the need for military pension reform, calling for a commission that would look at changes to benefits.

Source: USA Today

The benefits mentioned above are not the norm, but pensions are very generous. For those who qualify, they receive at least half of the pay in their highest three working years, and they can receive benefits as early as their late 30s while many of them are working another job in the private sector. The average benefit is about $24,000 and it will rise to about $32,000 in a decade. 

Reforming the military retirement system isn't about punishing military members, but about fixing problems with the system in ways that can also have positive budgetary impact. Since the vesting period for pensions is 20 years, most military members do not even receive benefits (only about 17 percent actually do, according to the Defense Business Board).

Also, under the current system, career paths are too often shaped by the incentives that the system provides. Military personnel who serve into a second decade are encouraged to stay on longer than they would otherwise since they would face getting no benefits for a long period of service, even if they had been in the military for 19 years. For those who reach the 20-year mark, the system encourages them to leave the military soon after, when they can collect a pension at a young age (as early as their late 30s) while being employed elsewhere.

Solutions for military retirement would deal with the ironclad vesting period, ensuring that more military members can receive pensions and that personnel decisions are not made for the sole purpose of qualifying for benefits.  As we said in our paper about reforming military and civilian retirement programs:

In light of the painful solutions we face, it is important that we bring the costs of federal military and civilian retirement under control. While many of the policies discussed in this paper would produce significant budgetary savings, just as importantly they would help correct inequities or flaws in the current federal retirement system while ensuring that federal and military retirees continue to have more generous retirement benefits than those typically received by employees in the private sector.

The Road to Economic Growth

The McKinsey Global Institute recently released a report assessing the efforts of the world’s ten largest mature economies (United States, Japan, Germany, France, United Kingdom, Italy, Canada, Spain, Australia, and South Korea) in deleveraging (essentially, reducing debt) in the aftermath of the great recession. While the analysis looks at both private and public sector debt, including all levels of  government (federal, state and local), there are some important lessons for those who are concerned with this country’s federal debt burden.

The report looks at the successful recoveries of Sweden and Finland during the 1990s for markers of success in those countries' deleveraging efforts and a return to strong economic growth. From that review, McKinsey identified six benchmarks associated with success:

  • The financial sector is stabilized and lending is rising
  • Structural reforms unleash private-sector growth
  • Credible medium-term public deficit reduction plans are in place
  • Exports are growing
  • Private investment has resumed
  • The housing market is stabilized and residential construction revives.

First, the good news. According to the analysis, out of the ten countries, the U.S. is most closely following the path of the two Nordic countries. At least in the private sector, the deleveraging process appears well underway, which is a necessary step to get the economy back to normal.

The bad news is that we don’t currently have a concrete medium to long-term deficit reduction plan in place, which is one of the keys to a successful recovery, and a path we have advocated repeatedly. McKinsey warns:

In contrast with the United Kingdom and Spain, the United States has not yet adopted a credible long-term deficit reduction plan. Its failed attempt to do so has had a very tangible result: the first credit rating downgrade of US Treasury debt ever, from AAA to AA+, in August 2011. While the US economy gained momentum in the second half of 2011, the lack of a credible long-term plan to bring down the deficit and head off the effects of rising costs of entitlement programs such as Medicare continue to hang over the US economy—affecting business and consumer confidence in the near term and raising questions about the sustainability of growth over the medium term.

As we have argued, we should put in place a plan now that begins to address our mounting debt over the medium and long term. This is a necessary step towards economic recovery, as the McKinsey report finds in its comparison. It is ideal to implement such a plan in a phased-in manner so that the still fragile recovery isn’t weakened, but implementing such a plan is a must do.