April 2012
Graphs, Graphs, Graphs: Comparing the FY 2013 Budgets
Just in case the whirlwind of plans out last week gave you a headache, the Bipartisan Policy Center has a number of comparisons for all the alternative budgets that have been presented for FY 2013. See, for example, this page which includes the Cooper-LaTourette budget, the House Democratic budget, and the House Republican budget alongside the President's budget, Domenici-Rivlin, and Simpson-Bowles. They also do a comparison involving the Progressive Caucus budget and the major plans.
These pages are useful not only for comparing spending, revenue, and debt numbers, but also for different parts of the budget such as defense or health care. For example, the graph below shows non-defense spending as a percent of GDP under various plans.
BPC's comparisons are helpful for showing not only topline fiscal numbers, but also for showing the relative priorities for each plan. Be sure to check these pages out to keep all the plans straight...or maybe to confound you even more.
GAO's Long Term Outlook
The Government Accountability Office (GAO) has released its Long Term Outlook for the federal budget, showing an ever-climbing debt path as a percentage of GDP over the long term. Under both its Baseline Extended and Alternative scenarios, debt rises rapidly as increasing health care spending, among other things, overtakes revenue. This is especially true of the Alternative, which assumes that expiring tax policies are extended and that revenue and discretionary spending are held to their historic averages over the long term.
GAO's outlook differs somewhat from CBO's outlook, which shows a disastrous fiscal path in its Alternative Fiscal Scenario but relatively stable debt in its Extended Baseline. The differences reflect different assumptions about each part of the federal budget (you can read a summary of CBO's assumptions here). In general, GAO's baseline builds off of CBO's ten-year projections from January. Their technical assumptions are the following:
- Revenue: GAO's Baseline Extended assumes that all expiring tax policies do so as scheduled. In the long term, GAO assumes that lawmakers will cut taxes to keep revenue constant as a percent of GDP at 21 percent (CBO assumes revenue will grow over the long term). In the Alternative scenario, GAO assumes that expiring tax policies are extended and that revenue remains at 18 percent of GDP beyond this decade.
- Social Security and Health Spending: The GAO Baseline Extended uses CBO projections of these categories for the first ten years and Social Security and Medicare Trustees current law projections (using the health care growth rates for other health spending) beyond that. The Alternative differs from the Baseline Extended by using the alternative Medicare Trustees projections, which have higher health care growth rates and incorporate the effect of the doc fix.
- Other Non-interest Spending: The GAO Baseline Extended uses CBO current law projections for the first ten years, and keeps these categories constant as a percent of GDP beyond that. The GAO Alternative assumes a repeal of the sequester during the first ten years and ramps these categories up to their historical averages beyond that (pushing up discretionary spending by two percentage points of GDP relative to the Baseline Extended).
Given the assumptions of the Alternative scenario, spending rises sharply, mostly from health care spending and interest on higher debt.
In addition, GAO shows the 75-year fiscal gap--the present value of the gap between spending and revenue--and what would be required to close it in each scenario. Also, they quantify how much more difficult solving the problem gets when action is delayed for ten years.
GAO's outlook underscores a point that remains constant: we will need to deviate from current projections or historical averages--or, more likely, a combination of both--in order to keep our fiscal path sustainable.
An Addendum to the Fiscal Cliff
Via Twitter, Tax Policy Center director Donald Marron (@dmarron) makes a good point after reading our analysis last week of the "fiscal cliff" at the end of the year: that various revenue measures from health care reform will also take effect in 2013. These were not included in the analysis because -- whether the Supreme Court upholds the law or not -- Congress is unlikely to do anything with them at the end of the year. These measures are already contained in both current law and current policy projections, and do not represent a decision point for lawmakers, unlike the tax cut expirations and the sequester. However, it is certainly an interesting element to think about in terms of the fiscal impact facing lawmakers and the economy at the end of this calendar year.
The Kaiser Foundation has a handy timeline that shows when different provisions of the 2010 health care reform legislation are scheduled to take effect. The tax increases that will take effect in 2013 include:
- Increasing the HI tax by 0.9 percent for people making over $250,000 and applying the full 3.8 percent tax to net investment income for those people
- Increasing the floor for the unreimbursed medical expense deduction from 7.5 percent to 10 percent of adjusted gross income
- Imposing a 2.3 percent excise tax on medical devices
- Limiting annual contributions to Flexible Spending Accounts to $2,500
- Eliminating the employer deduction for Part D retiree subsidy payments
In order to estimate the revenue impact of these provisions, we go back to the original score of the bill. The results? The impact of these revenue provisions is roughly $50 billion in 2013 and 2014. As you can see below, most of that is from the changes to the HI tax.
| Deficit Impact of 2013 Health Reform Tax Increases (billions) | ||
| 2013-2014 | ||
| HI Tax Changes | $38 | |
| Medical Expense Deduction Floor Increase | $2 | |
| Medical Device Tax | $5 | |
| FSA Limit | $4 | |
| Employer Subsidy Deduction Elimination | $1 | |
| Total | $48 | |
Note: Numbers may not add up due to rounding
To some extent, the revenue number is not entirely indicative of the total economic cost of these changes. The tax increase on investment income will cause timing shifts for capital gains realizations, pushing up revenue in 2012 and pushing it down in 2013 (realizations are projected to balloon from $428 billion in 2011 to $651 billion in 2012 before falling to $420 billion in 2013). Thus, the amount of revenue raised somewhat obscures the provision's economic effect in the short term.
If one were to consider the fiscal impact of these tax increases along with the rest of the policies in the fiscal cliff, it would total slightly over $1 trillion in 2013 and 2014.