This week the OECD released its biennial Economic Surveys on the United States, with the organization's economic recommendations for policymakers. The report identified needed short-term reforms in response to the sputtering U.S. economy but also examined the unique challenges of the U.S. in the future. Not surprising, fiscal issues were prominently featured in the OECD report. The OECD warned of the "fiscal cliff" and favored a slower and better targeted fiscal consolidation strategy:
The Survey suggests that broadening the tax base through reduced tax expenditures, such as for mortgage interest, as well as harmonizing the tax treatment of different forms of capital income while simultaneously lowering the corporate tax rate could help to reduce income inequality and at the same time boost investment and long-term growth.
For the short term, the Survey recommends that monetary policy continues to support the recovery and that current legislation be amended to avoid a sharp fiscal tightening in early 2013. Fiscal consolidation instead should be implemented at a gradual pace and as part of a medium-term framework to restore fiscal sustainability.
If this sounds familiar, it is because these recommendations are what comprehensive fiscal consolidation and tax reform plans like Simpson-Bowles, Domenici-Rivlin, and others hope to achieve. In many of these plans, tax expenditures would be eliminated and marginal rates for corporations and individuals would be allowed to fall, raising revenue and likely increasing growth prospects.
The OECD also warns that health care will likely need more cost control measures, especially if reforms under the ACA prove ineffective at bending the cost curve. There is not a lack of good cost control reforms to Medicare and Medicaid, but lawmakers will need to work toward bipartisian agreement in order for the country to get a grip on rising costs. The OECD claims that a plan could restore market confidence in the U.S. political system.
In view of these challenges, it is essential that the US authorities achieve bipartisan commitment to a medium-term fiscal plan. Adopting a medium-term fiscal framework could entail fiscal rules or transparency requirements that would increase accountability for fiscal outcomes and reduce uncertainty.
Sound fiscal policy will be important, because the OECD argues that the United States needs to be doing more with innovation, investment, and education. Yet our current path will have the government spending more--and eventually all--of its yearly revenues on rapidly compounding interest costs and rising health care and retirement costs. A well-designed fiscal consolidation plan can assure that the federal government will have the resources it needs to fund its necessary priorities.
The full report can be found here.
In a new report released yesterday, the Congressional Budget Office looked at the difference in accounting methods used to score federal credit programs. This was a follow up to a previous report which we analyzed back in March about how the costs of federal loan and loan guarantee programs would look if we changed the way we accounted for them.
To recap, under current rules enacted in the Federal Credit Reform Act of 1990 (FCRA), the lifetime cost of federal direct loans and loan guarantees are shown in the year that the loan is made on an accrual basis unlike most other items in the budget. All future costs and interest repayments associated with the loan are discounted to the present using interest rates on Treasury debt with a duration that matches the underlying loan. These estimates do not reflect the cost of market risk which the government is exposed to through loans and loan guarantees (although the probability of default by borrowers is accounted for). Another method that has recently gained attention is the "fair-value" approach, which would measure these programs’ costs at market prices by applying discount rates on expected future cash flows that private financial institutions would apply (i.e. higher rates than those on Treasury bills). It should be noted, however, that some federal programs already incorporate fair-value accounting, including payments to the IMF and the Troubled Asset Relief Program.
Looking at 2013 alone, CBO finds that expected new loans and loan guarantees in the amount of $635 billion will reduce the deficit by $45 billion over their lifetime using current FCRA standards. However, if fair-value accounting was employed for the same year, the loans and loan guarantees would have a lifetime cost of $11 billion. Other highlights of the report include:
- Fair-value subsidy rates are about 9 percent higher than FCRA subsidy rates because the annual market risk premium is added to the corresponding return on Treasury securities.
- 33 of the 38 discretionary credit programs CBO examined increase the deficit under the fair-value approach, whereas they reduce the deficit using FCRA procedures.
- Some fair-value estimates still show net savings, such as federal student loan programs which reduces the deficit by $5.5 billion in 2013 (compared to a reduction of $36.3 billion under FCRA).
While several proposals to use fair-value accounting have been proposed in Congress (most recently passing the House), there still remains some contention over using this method. Opponents have argued that using market-based rates for discounting loan repayments to the government is inappropriate because the federal government can fund loans using Treasury debt with little to no market risk. However, CBO contends if taxpayers were to finance such loans as private investors, they would use discount rates that account for market risk. CBO does admit there are several challenges to fair-value estimating, such as additional expenses needed to train staff in government agencies, volatility over time due to market conditions, and judgments about discount rates leading to inconsistency.
Overall, this report gives us a deeper look into understanding the true costs for some federal credit programs. Providing policymakers with more accurate budgetary analysis is important as they consider spending proposals and choose between credit assistance and other forms of federal aid. This is especially timely as Congress currently considers whether to extend a 3.4 percent interest rate extension on Stafford loans set to expire on Sunday.
According to CNN, the White House has floated a plan to deal with the fiscal cliff, one which would turn off a few provisions temporarily. Their plan? Turn off the sequester for six months in exchange for letting the upper-income tax cuts expire for a year. Thought of another way, it would repeal the spending cuts set to go into effect by extending the 2001/2003/2010 tax cuts for most people. In a world where elected leaders sought to pay for all new policies (a world us budget folks call PAYGO), that would equate to "paying for" a roughly $70 billion spending increase with a roughly $200 billion tax cut.
The Administration would be able to claim the upper-income tax cut expiration as a pay-for by using a "current policy" baseline in which all the 2001/2003/2010 tax cuts and the Alternative Minimum Tax patch are assumed to be extended and that the sequester would be turned off. We're not saying that using a current policy baseline is necessarily deceptive (we make one, in fact). It is a useful prediction of the budget path we're heading for if we don't make changes. But that's a far cry from the financially responsible path the country should be on.
CRFB believes that lawmakers should enact a comprehensive debt reduction package that puts debt on a downward path as a share of the economy. That package, if large enough, could include a repeal of the sequester at the end of the year and a retention of the tax cuts set to expire at year's end. In fact, any smart plan would avert the fiscal cliff and enact trillions of alternative savings more gradually. But even worse than the fiscal cliff would be adding to our debt indefinitely.
Absent a comprehensive plan, lawmakers should at least be willing to pay for policies that increase the deficit relative to current law. Unfortunately, this proposal from the Administration would fail to live up to that rule. As we said in the beginning, waiving the sequester for six months would cost about $70 billion and extending the majority of the tax cuts would cost somewhere in the range of $200 billion (excluding the AMT patch). The fact that the cost of extending the tax cuts is $200 billion rather than, say, $250 billion does not mean that we've saved any money--it just means we're borrowing less.
Note that even if lawmakers honestly paid for each one-year extension of the tax cuts, sequester, doc fix, and AMT patch, they would just be doing the minimum to get the debt on a clear downward path. Below we have modeled what debt would do if the current policies in the CRFB Realistic Baseline were extended one year at a time and offset with savings in the following ten years (for example, offsetting the cliff in 2020 with savings from 2021 to 2030). In this scenario, we would have higher debt than under current law or comprehensive plan such as Simpson-Bowles. It would put debt on a downward path, but with little room for error.
Source: CBO, CRFB, Moment of Truth Project
In terms of the cliff, the best thing would be to enact a smart and comprehensive fiscal plan that puts debt solidly on a downward path. Absent that, "PAYGO-compliant" extensions are a substitute but clearly not as good. What we should definitely not do, though, is to simply put off the cliff permanently.
Today, the Supreme Court announced its ruling on the constitutionality of the 2010 healthcare law, the Patient Protection and Affordable Care Act (PPACA). In a 5-4 decision, the Court upheld the individual mandate in the law as within Congress’s power of taxation. Under the law, individuals who do not purchase health insurance will be required to pay a tax - a penalty of the greater of $95 or one percent of income in 2014, $325 or two percent of income in 2015, and $695 or 2.5 percent of income in 2016 and beyond. Individuals will lawfully have the ability to choose to forgo health insurance and end up paying higher taxes, or buy health insurance and pay lower taxes. One interesting thing to note, the law states no criminal action or liens can be imposed on individuals who do not pay the tax.
The Court also ruled that Congress did in fact act constitutionally in offering states funds to expand Medicaid up to 133 percent of the federal poverty level, but it ruled that the government does not have ability to take away all Medicaid funding for states that refuse to participate in the expansion. This means states can choose to continue their Medicaid programs as they currently stand, without losing their entire ability to draw down federal Medicaid dollars for previously eligible beneficiaries. They would only lose funds for the newly covered population.
The budget impact of this decision will depend on what states choose to do. This could lower the costs to the federal government if fewer states participate. The outcome is uncertain right now. According to a CBO post this morning, they are "in the process of reviewing the Supreme Court’s decision related to the Affordable Care Act to assess the effect on CBO’s projections of federal spending and revenue under current law. We expect that this assessment will probably take some time."
However, the law included a few noteworthy incentives for states to participate in the Medicaid expansion. Under the law, the federal government will pay 100 percent for newly eligible individuals in Medicaid under the expansion for the first three years (2014-2016). Federal support will phase down slightly over the following several years, so that it will pay between 90 percent and 95 percent of costs. After 2020, the federal government will pay 90 percent of the costs of covering these individuals. According to CBO, the federal government will pick up $931 billion of the cost of the Medicaid expansion, while states will pay roughly $73 billion, or 7 percent, from the time the expansion begins in 2014 through 2022. CBO also predicts 16 million to 17 million additional individuals will be enrolled in Medicaid and CHIP due to this provision.
With today’s ruling, it is now time to focus on the next health care battle: how to tame federal health care spending. PPACA’s deficit reducing provisions, which were unaffected by the decision, were good first steps toward beginning to address rising costs, but they do not come close to controlling the dual challenges of rising health care cost growth and an aging population.
Yesterday, we laid out a number of ideas that could help tackle the rising cost of providing health care in the United States. Many of these proposals have been around for years; however, it is imperative that Congress act now to pass further health care cost controls and reforms to other areas of the budget as we approach year's end. At the end of this year, the fiscal cliff – which includes a $123 billion Medicare sequester and a scheduled 27 percent payment reduction for providers, in addition to significant and abrupt spending cuts in other areas and tax rate increases – is forcing the hand of policymakers to finally act in order to stave off future fiscal turmoil. Reforming health care spending must be an integral part to a long term budget deal, but across the board cuts and reductions that lay ahead do not holistically address bending the cost curve and creating a more efficient delivery system. Our paper highlighted ways to go further than just ways to reduce spending on providing health care (which we dubbed “savers") and looked at "curve benders" that slow the growth of health care costs and "fundamental reforms" to the way health care is administered and financed. These deficit reducing options are places where lawmakers can go beyond what PPACA and earlier reforms have done.
We've argued before that there needs to be a permanent deficit reduction deal this year and not another temporary patch causing further delay and greater uncertainty in the market. As Aetna CEO Mark Bertolini aptly pointed out, regardless of the Court's ruling, we need to move forward with policies that bend the health care cost curve if we are truly committed to putting our debt on a downward path. The Court battle may be over, but the work of providing better and more affordable health care is far from finished.
It's no secret that Congress hasn't been making the IRS's life very easy. In a time of discretionary spending caps, they are looking to reduce the agency's budget all while they add further to the complexity of the tax code. National Taxpayer Advocate Nina Olson has frequently said that the IRS is underfunded to do the enormous task lawmakers are asking of it, contributing to the large gap ($385 billion in 2006) between total tax liability and actual revenue collected.
A blog post in The Hill highlights the further difficulty that irresolution of the fiscal cliff will cause for tax administration. Both Olson and IRS Commissioner Doug Shulman have expressed concerns that the 2013 filing season could be very messy. While the fiscal cliff involves a lot of provisions that will expire at the end of the year, it includes a number of tax breaks that have already expired and could be enacted retroactively. The Alternative Minimum Tax patch and a whole host of temporary tax extenders expired at the end of 2011, and a late resolution to the fiscal cliff could create an administrative nightmare for tax filing. The tax law that had prevailed for most of 2012 would suddenly be changed, causing tax burdens to suddenly change and causing the IRS to have to change its forms for calculating liability. In short, the administrative burden would grow significantly for the IRS.
Problems of administration would extend to 2013 if lawmakers kicked the can a few months at a time. Issuing withholding tables, for example, would become difficult since the IRS would constantly need to be ready to change them as tax law changed. The complexity of the tax code that prevails year after year would suddenly become magnified within a single year.
Certainly, the IRS isn't an agency likely to elicit sympathy from taxpayers, but Congress could do better by them. The agency had difficulty enough dealing with the late resolution to the 2010 tax cut, but they could make things much worse this year if they don't enact a long-lasting solution to the cliff.
UPDATE: Congress has reached a deal on a two-year highway bill.
There is a lot happening this week in addition to the Supreme Court's decision on the health care reform law. Both the current highway bill and the 3.4 percent interest rate on Stafford loans are set to expire at in the next three days. The Senate has reached a deal on a pay-for for the interest rate extension, but it has not yet been agreed to by the House. By contrast, the highway bill's status is more urgent and up-in-the-air, with Senate Majority Leader Harry Reid (D-NV) saying that a deal had to be done by today or a bill would not be passed in time.
On transportation, the Senate passed a highway bill three months ago, a bill that closes the Highway Trust Fund's financing gap with some small revenue measures, but mostly relies on general revenue transfers. We commented before that that is not good for the long-term solvency of the HTF, but at this point, passing the Senate bill would be better than passing no bill in the short term. Why? Once the current authorization expires, the federal government will not be able to collect 14.2 cents of the 18.3 cent gas tax. With most of the HTF's revenue source gone but an estimated $50 billion of pre-approved spending still needing to be financed, that money would have to come from general revenue, thus worsening the budget situation.
In addition, the expiration date would create a funding cliff for the HTF since no new money would be allowed to be obligated or spent after June 30. Thus, even a stopgap measure would be preferable than letting the authorization expire.
In terms of student loans, the Senate reached a deal to offset the $6 billion cost of extending the 3.4 percent interest rate (set to go to 6.8 percent) on federal Stafford loans for a year with an increase in premiums charged by the Pension Benefit Guaranty Corporation. In addition, the length of loans would be limited to 150 percent of the program's length--for example, six years for a four-year undergraduate proram. The House has not yet signed on to this deal, but they have only three days to either do just that, come up with alternative offsets, or let the rate go back to 6.8 percent. It is disappointing, though, that the Congress seems primed to turn the 3.4 percent interest rate into another temporary extender.
As always, it will come down to the last minute for deals on both highway funding and student loans--if they happen at all.
Today, CRFB released its newest paper outlining options for controlling federal health care costs. Federal health spending is projected to grow at a high rate and threaten the fiscal health of our economy. According to CBO, net federal health care spending will rise from $750 billion in 2012 to $1.6 trillion in 2022, about 4.9 percent and 6.7 percent of GDP respectively. Over the longer term, it will rise even further--possibly to 9 percent of GDP by 2035 and 11 percent by 2050.
In this paper, we lay out a number of policy options to achieve savings and classify them into three categories: savers, curve benders, and fundamental reforms.
- Savers reduce federal health expenditures and include proposals such as reducing provider rates, expanding drug rebates to Medicare Part D, and raising the Medicare age.
- Curve benders attempt to slow health spending growth, for example, by reforming cost-sharing rules, encouraging wellness, and changing the tax treatment of health insurance.
- Fundamental reforms change the way health care is administered and financed through ideas such as transforming Medicare into premium support, establishing a single payer system, or creating a federal budget for health care.
As we say:
In all likelihood, health reform will be a continued process where policymakers must constantly work to find new efficiencies and changes over time. Given the country’s current and projected fiscal state, policymakers must begin now to enact as much savings as reasonably possible to begin to slow the growth of federal health spending and put the country on a stronger fiscal path.
Click here to read the full report on health care savings options.
Today in The Hill, they have put together a six article package on the looming automatic cuts to the defense budget found in the sequester. These cuts, about $500 billion in total, represent half of the sequester, with the other half coming mainly from domestic discretionary cuts, but also certain mandatory cuts (most entitlements are partially or fully example).
The six articles include pieces from:
- Winslow Wheeler, from the Center for Defense Information, who writes about the politics of the defense sequester.
- Sen. James Inhofe (R-OK) who writes about the job loss implications of the defense sequester and its national security effects, which he argues would make "[T]he United States will no longer be able to maintain the leadership position that has maintained our national security force for the past 70 years."
- Rep. Loretta Sanchez (D-CA) who writes that the defense sequester is bad policy because it is not targeted, but that defense cuts are possible, even more than the sequester creates. She also points out that the sequester hits non-defense programs as well, although it is not commonly discussed.
- Rep. Martha Roby (R-AL) who writes about how the defense sequester would severely harm our military and Congress should address the sequester now.
- Gordon Adams of American University who writes that there is currently overhyped "hysteria" surrounding the defense sequester and that drawdowns from previous wars had been much larger than what would happen even with the sequester.
- Jeremy Herb, defense reporter for The Hill, who writes about the election year politics of the sequester.
Regardless of your view on defense cuts, there is no question that we are better off strategizing and planning for them than letting them happen across-the-board and all at once. The abrupt fiscal cliff at year's end should be replaced with a more targeted approach which achieves sufficient deficit reduction to put the debt on a downward path but in a thoughtful and gradual way.
Allowing the country to fall off the fiscal cliff would be quite dangerous, but continuing on our current fiscal path would be downright disastrous.
For more information about the sequester, here and here are two reports on the jobs implications, here is our paper on the Fiscal Cliff and here is our blog detailing how the House Republican Budget would deal with the sequester.
Decisions, Decisions – Washington waits with bated breath for the Supreme Court to rule Thursday on the constitutionality of the Affordable Care Act, the 2010 health care reform law. Not only will the decision have repercussions for politics and health care, it will also impact the federal budget significantly. In a blog last week, we laid out how the federal budget will be affected in different scenarios. In another blog post, we also noted that no matter what the Supreme Court says, policymakers will have a lot of work ahead in bending the health care cost growth curve down, since rising health care costs will be one of the biggest drivers of our national debt going forward. Also on Thursday, the House is expected to vote on a resolution on holding Attorney General Eric Holder in contempt of Congress involving the "Fast and Furious" investigation. There is a lot of contempt to go around in Washington. Partisan disdain is getting in the way of dealing with issues such as the national debt. Meanwhile, the contempt for politicians among voters grows as they cannot even accomplish relatively simple tasks like adopting a budget. Whether lawmakers can rise above the mutual contempt will be on display this week as they seek to renew highway funding and lower student loan interest rates ahead of deadlines.
Senate Puts Farm Bill in House Court – Last week, the Senate passed legislation setting federal agriculture policy. Several amendments were attached to the bill, including one sponsored by Sen. Tom Coburn (R-OK) to end conservation payments to millionaires and an amendment from Sens. Patty Murray (D-WA) and John McCain (R-AZ) requiring a report from the Department of Defense by August 15 on the effect of the Defense sequester on national security as well as a report on how the entire sequester will be implemented. The nearly $1 trillion dollar bill now goes to the House, where significant changes are likely.
Supreme (Un)Allied Command – The House and Senate are both making progress towards passing fiscal year 2013 spending bills, but they are moving in divergent directions with their spending levels. This week the House will vote on the FY 2013 Transportation, Housing and Urban Development appropriations bill.
Don’t Jump Off the Fiscal Cliff, Don’t Put it Off Either – While it is good news that lawmakers increasingly are recognizing that something needs to be done about the fiscal cliff at the end of the year, the bad news is that many seem content to kick the can down the road. As we have said repeatedly (see here, here and here), instead of moving the goalposts, lawmakers should be laying the foundation for a comprehensive plan that can replace the cliff.
Make the Most Out of the Campaign – Tuesday’s Utah contest marks the final presidential primary. With the general election already in full swing, it is critical that the campaign promotes a substantive discussion of the issues and solutions instead of accusations and sound bites. Our Debate the Debt initiative seeks to improve the process by calling for one of the three presidential debates scheduled for this fall to be devoted to the national debt and the specific budget plans of the candidates to address it. To learn more and sign the petition, go to http://debatethedebt.org.
Key Upcoming Dates (all times ET)
- Presidential primary in Utah
- US Dept. of Commerce's Bureau of Economic Analysis releases its third estimate of 2012 first quarter GDP growth.
- House Ways and Means Committee and Senate Finance Committee joint hearing on “Tax Reform and the Tax Treatment of Capital Gains” at 10:00 a.m.
- Supreme Court likely to rule on PPACA's constitutionality.
- Dept. of Labor's Bureau of Labor Statistics releases June 2012 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases June 2012 Consumer Price Index (CPI) data.
- US Dept. of Commerce's Bureau of Economic Analysis releases its advance estimate of 2012 second quarter GDP growth and revised estimates of 2009 through 2012 first quarter GDP growth.
- Dept. of Labor's Bureau of Labor Statistics releases July 2012 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases July 2012 Consumer Price Index (CPI) data.
- Republican National Convention is held in Tampa, Florida
- US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2012 second quarter GDP growth.
A new story is suggesting that members of Congress from both parties are trying to delay the sequester until March. This is not the first time we have heard rumors about Congress trying to move the fiscal cliff, but it still is disappointing. According to Bloomberg:
Leaders in both chambers are discussing whether to propose a catch-all bill that would delay the automatic cuts, fund the government through March or later and temporarily extend the George W. Bush-era tax cuts and other tax laws, said the House aide and industry officials, who asked to speak on condition of anonymity.
The measure would follow a short-term stopgap spending bill to keep the government operating after Oct. 1, the people said.
These stopgaps are only worth it--in addition to being paid for--if they allow time for a permanent deficit reduction deal to be struck. Simply delaying the cliff with no plan moving forward will create enormous uncertainty for the economy through the rest of 2012 and through 2013, and it will encourage deficit-financing or gimmicks.
Some might say that averting the cliff without offsets would avoid uncertainty, but it would not address our debt situation and would ultimately do more harm than good. In short, kicking the can or climbing the mountain of debt won't get the job done. Only a permanent fiscal plan will.
The full story from Bloomberg can be found here.
Politicos, policy wonks, and citizens will all be eagerly waiting Monday for a possible Supreme Court’s ruling on the ACA. Speculation in particular is focus on whether the individual mandate provision will survive, and what that would require from lawmakers as a response. But lost in all of the coverage is the unsustainable growth in our nation’s health care costs.
Last week's Wonkblog featured a piece with Mark Bertolini, Chief Executive of Aetna, one of the nation’s largest health insurance providers. On the Supreme Court ruling, Bertolini believed that the decision would not change his company's strategy or the needs of our health care system, arguing:
“The Supreme Court ruling does not matter for our business strategy. It’s a political event. Whether or not the Supreme Court impacts the Affordable Care Act in some way, we still have to keep moving forward to impact the cost of care in America.”
“We’re really working right now on the underlying cost of health care. These investments we’re making are about finding a different way to make models work. We’re committed to fixing that, and feel like we need to fix that.
Bertolini makes a good point; in the short term the ACA will have a large impact on health care spending, but any policy response to the decision will pale in comparison to the demands of population aging and the long-term trend of rising health care costs. We are pleased to hear that Aetna has not stopped innovating in the run-up to the decision. Congress should do the same, as it will take both good ideas and some tough decisions if we are going to be able to seriously address the health care issue.
The full story can be found here, and check back to the Bottom Line for our reaction to the Supreme Court’s ruling.
An article today in POLITICO games out four possible scenarios for how the fiscal cliff could be resolved (or not). They discuss the benefits and drawbacks of each scenario for the budget and the economy. These scenarios are:
- Congress acts before the election.
- Congress acts in the lame duck session.
- Congress delays a solution until 2013 or enacts a partial fix
- Congress does not act
Clearly, acting sooner rather than later is better, all else equal. Acting sooner will provide certainty and allow people to plan for future changes in government policy. Of course, the speed at which lawmakers is only one dimension of how they deal with the cliff. Much more important is how they change the course of fiscal policy in the short- and longer-term.
As CBO has shown, acting quickly to put off the cliff without any offsets might work to avoid economic pain in the short term, but it will do no good for the longer-term economy. Congress should get started on a plan to get around the cliff, but most importantly they should get a deal that leaves our debt on a sustainable path.