The Bottom Line
Yesterday, the CBO released its latest estimate of the subsidy cost of the Troubled Asset Relief Program (TARP). The estimate serves as a demonstration of how little of TARP is still operating in a major fashion, as most of the cost has not changed since the last score in October 2012. The overall cost of TARP dropped from $24 billion (the previous estimate in October 2012).
The main movement comes from the auto industry assistance, which dropped from an estimated cost of $20 billion to $17 billion. This movement is not particularly surprising since GM's share price has risen significantly -- about 40 percent -- since October 2012. Thus, the federal government's gains on its remaining holdings in GM will be greater than previously expected.
|Subsidy Cost Estimate (billions)|
|Area||March 2012||October 2012||May 2013||Maximum Amount Disbursed|
|Capital Purchase Program||-$17||-$18||-$17||$205|
|Citigroup and Bank of America||-$8||-$8||-$8||$40|
|Community Development Capital Initiative||$0||$0||$0||$1|
|Assistance to AIG||$22||$14||$15||$68|
|Subtotal, Financial Institutions||-$3||-$11||-$10||$313|
|Auto Company Assistance||$19||$20||$17||$80|
Most of the rest of TARP has largely stayed the same. The net gain from financial institutions -- the net of the Capital Purchase Program (the original centerpiece of TARP), support for Citigroup and Bank of America, and the cost of supporting AIG -- fell by $1 billion while the gain from investment partnerships went up by $1 billion.
Estimates for TARP continue to fall from the original score and it looks as if the loss to the federal government will be small, an unexpected but welcomed development.
Today, the House Ways and Means Subcommittee on Social Security held a hearing on bipartisan proposals to reform Social Security. Members of the subcommittee and the witnesses all agreed that now is the time to reform Social Security, which is currently projected to be unable to pay full benefits by 2033. Testifying once again before the subcommittee was CRFB Senior Advisor and Executive Director of the Moment of Truth Project Ed Lorenzen. In his testimony, Lorenzen provided an overview of the original Simpson-Bowles plan's recommendations to reform Social Security.
Lorenzen explained that the Commission's plan relied on a mix of changes in benefits and revenues, with the net reduction in costs from benefit changes accounting for about 54 percent of the savings over 75 years and a net increase in revenues responsible for roughly 46 percent of the savings. As a result, the Trustees projected at the time that the Commission’s plan would fully close the shortfall over 75 years and in the 75th year. The shortfall projection has increased in recent years, so the plan may have to be tweaked some to achieve the same result.
His testimony highlighted the Commission’s recommendation for progressive changes in the benefit formula to slow benefit growth for higher earners and enhanced benefits for low-wage workers, such as creating a new special minimum benefit to provide stronger poverty protections. Lorenzen also explained that some tweaks to the benefit enhancements outlined in the Commission’s 2010 report will be necessary in order to fully achieve the intent of Commission members who supported the final recommendations regarding protecting benefits for workers in the bottom quintile of earnings. These include making the formula change even more progressive by increasing the 90 percent bottom replacement factor and phasing up the minimum benefit more rapidly for retirees with less work history.
The other major element of the Commission’s proposal which Lorenzen underlined was indexing the normal retirement and early retirement eligibility ages to increases in longevity to account for increasing life expectancy. This would result in increasing the retirement ages by one month every two years after the retirement age reaches age 67 under current law, and would include certain hardship exemptions. He also discussed the distributional and economic impacts of raising the age:
Indexing the retirement age to longevity as opposed to setting a fixed schedule for increasing the retirement age provides additional robustness to ensure that the program remains on a fiscally sustainable course even if actual outcomes differ from projections...the actual effects of an increase in the retirement ages are slightly progressive because it is a benefit cut that exempts those who first collect through the disability system – who tend to be lower income.
By making the program sustainably solvent, the Simpson-Bowles framework would prevent a 25 percent across-the-board benefit reduction in 2033 under current law. Additionally, the SSA’s Chief Actuary found that for some low-income beneficiaries, the Commission’s plan would be more beneficial than scheduled benefits (ignoring trust fund solvency), and in some cases much better.
Distribution of Simpson-Bowles Plan for Social Security by Illustrative Earner (Percent of Scheduled Benefits)
Source: Social Security Administration
The hearing included additional testimonies by Bill Hoagland, Senior Vice President, Bipartisan Policy Center; Dr. Jason Fichtner, Senior Research Fellow, Mercatus Center; Leticia Miranda, Senior Policy Advisor, National Council of La Raza; Donald Fuerst, Senior Pension Fellow, American Academy of Actuaries; and CRFB board member Gene Steuerle, Institute Fellow, Urban Institute.
Gene Steuerle’s testimony echoed the potential benefits that raising the normal retirement age would have for the Social Security program. He described reforms that would ensure that Social Security meets its primary purpose of "providing greater protections for those truly old or with limited resources" while helping to improve the program's long-term solvency. Specifically, he recommended that policymakers:
Further adjust minimum benefits and the rate schedule and indexing of that schedule over time to achieve final cost and distributional goals. For instance, for those with higher incomes, cap benefits or use limited wage indexing; for middle-income workers, add another rate or extend the length of a rate bracket. The extent of these adjustments will also depend upon the tax rate and base structure agreed upon.
Overall, today’s hearing was a reminder of the various proposals which are available to policymakers to address the solvency issues with Social Security. Beyond the Simpson-Bowles plan, there are also many other plans which would improve the finances of the program. When asked by the Chairman when Social Security reform needs to happen, all six witnesses responded with very soon, and that we've already waited too long. Lorenzen noted that he had been working on Social Security reform for over fifteen years and that choices had only become more difficult over time.
There is no reason for delay; numerous options are available for policymakers to fix the program. In fact, the Committee for a Responsible Federal Budget will soon release an interactive tool called "The Reformer" to enable policymakers and the public to estimate the effects of a range of Social Security reforms on the finances of the program. It will be released at an event with a discussion about the challenges facing Social Security. While much of the recent budget debate in Washington has often evaded the issue of reforming Social Security, it's time for a bipartisan solution to put the program on a more sustainable path to ensure its promise for future generations.
As we have written before, the CBO recently released updated projections that show an improvement in the fiscal climate. Based on CRFB’s realistic baseline, the new data suggests that the debt will rise to 76 percent of GDP in 2023 as opposed to 79 percent. Some commentators have held up this rosier outlook as proof that the deficit reduction battle is over, at least for the next decade or so. This is a misreading of the CBO’s report, since as we pointed out the projections reflect largely short-term improvements that impact the debt level as opposed to its trajectory (although there were also encouraging downward revisions to health care and Social Security spending).
A recent blog by the Committee for Economic Development underscores the fact that the better numbers from CBO do not mean that our debt problem is solved. As we did, they point out that most of the improvement is transitory in nature:
Of the $203 billion improvement in the 2013 deficit, $95 billion comes from a unexpected payment to the Treasury from Fannie Mae and Freddie Mac. CBO reports that those payments will occur because of “accounting changes,” and assigns a probability of zero to any further payments at anything like that magnitude over the next 10 years. Another $105 billion (that is, essentially the remainder) of the improvement comes from higher revenues. Those revenues apparently arose because upper-income households shifted an unexpectedly large portion of their income from calendar year 2013 to calendar year 2012 to head off the increase in upper-bracket tax rates, and because corporate tax payments snapped back to normal from their depressed recession percentage of profits somewhat faster than CBO had anticipated in February.
CED’s blog notes that "CBO now expects the deficit to improve through only 2015, and then to begin to rise again. And by 2019, the deficit is again large enough that the public debt grows faster than the economy – that is, the debt-to-GDP ratio begins to rise again." Instead of declaring victory, policymakers should be focused on putting the debt on a sustainable downward path over the long term as a percentage of GDP.
The blog also points out that while projections are uncertain, there is not necessarily a strong reason to believe that they will improve on their own.
Still, admitting uncertainty, it is hard to see a lot of upside in these numbers. Might there be still more revenues? Sure – but CBO already has raised its projection of revenues as a percent of GDP above their long-term average. And that is after the income tax rate cuts for the vast majority of the population were made permanent at the beginning of this year, making further revenue improvement less likely. And outlays could be lower, too; but CBO (as noted above) already has reduced its estimates for Medicare, Medicaid and Social Security.
While this honest assessment of the CBO’s projections may seem bleak, it is by no means a riddle without a solution. Our analysis has estimated that under the new projections, $2.2 trillion in additional deficit reduction would put our debt on a sustainable downward trajectory by 2023. There are numerous ways to get there -- for instance, Erskine Bowles and Alan Simpson’s new plan would save $2.5 trillion -- but the political will to do it will be needed.
Tune in as the House Committee on Ways and Means Subcommittee on Social Security will hold a hearing on bipartisan proposals to reform Social Security benefits and their impact on beneficiaries, the budget, and the economy. CRFB's Senior Advisor and Moment of Truth Director Ed Lorenzen will testify on possible reforms to entitlement programs. CRFB board members William Hoagland and Eugene Steuerle will also be testifying tomorrow. The hearing is scheduled to begin at 9:30 am.
This morning, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee regarding the current economic climate. He noted that the economy has begun to show signs of life, attributing the accelerating pace of GDP growth to gradual improvements in credit conditions and the housing market. He also argued that the Fed should continue its quantitative easing at its current pace until the labor market improves sufficiently.
At the same time, Chairman Bernanke warned of more bumps on the road to recovery, particularly short-term fiscal consolidation, mainly from the sequester. He cautioned against using the short-term improvement in CBO’s latest fiscal projections as evidence that we are out of the woods in terms of our debt problems and argued that the best way for policymakers to sustain economic growth over the long term is to enact comprehensive deficit reduction legislation. In short, he concluded that under sequestration, lawmakers are doing perhaps too much in the short term while leaving the long-term deficit issue inadequately addressed.
Although near-term fiscal restraint has increased, much less has been done to address the federal government's longer-term fiscal imbalances. Indeed, the CBO projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter, in large part reflecting the aging of our society and projected increases in health-care costs, along with mounting debt service payments.
To promote economic growth and stability in the longer term, it will be essential for fiscal policymakers to put the federal budget on a sustainable long-run path. Importantly, the objectives of effectively addressing longer-term fiscal imbalances and of minimizing the near-term fiscal headwinds facing the economic recovery are not incompatible. To achieve both goals simultaneously, the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
Congress should heed Chairman Bernanke’s advice and pass comprehensive legislation to put the debt on a sustained downward path that will foster future economic growth. Importantly, enacting a deficit reduction plan today is not the same thing as implementing deficit reduction today. As Chairman Bernanke recommends and we have noted before, deficit reduction can and should be phased in gradually to protect the fragile economic recovery. But that is no excuse for Congress to ignore the budget indefinitely.
In light of the recent controversy over the findings from economists Carmen Reinhart and Ken Rogoff on the relationship between debt and growth, there has been much speculation about what the critiques of those findings mean for what we know about that correlation. Former Council of Economic Advisors chair Michael Boskin writes in Project Syndicate that the economic context of debt accumulation matters, but the longer-term risks of not paying attention to the debt are clear:
We should adopt policies that benefit the economy in the short run at reasonable long-run cost, and reject those that do not. That sounds simple, but it is a much higher hurdle than politicians in Europe and the US have set for themselves in recent years.
I estimated the impact on GDP of America’s recent and projected debt increase (in which the explosive growth of public spending on pensions and health care looms largest), using four alternative estimates of the effect of debt on growth: a smaller Reinhart/Rogoff estimate from a more recent paper; a widely used International Monetary Fund study, which finds a larger impact (and which deals with the potential reverse-causality problem); a related CBO study; and a simple production function with government debt crowding out tangible capital. The results were quite similar: unless entitlement costs are brought under control, the resulting rise in debt will cut US living standards by roughly 20% in a generation.
Corroborating statistical evidence shows that high deficits and debt increase long-run interest rates. The effect is greater when modest deficit and debt levels are exceeded and current-account deficits are large. The increased interest rates are likely to retard private investment, which lowers future growth in employment and wages.
Numerous studies show that government spending “multipliers,” even when large at the ZLB, shrink rapidly, then turn negative – and may even be negative during economic expansions and when households expect higher taxes beyond the ZLB period. Permanent tax cuts and those on marginal rates have proved more likely to increase growth than spending increases or temporary, infra-marginal tax rebates; successful fiscal consolidations have emphasized spending cuts over tax hikes by a ratio of five or six to one; and spending cuts have been less likely than tax increases to cause recessions in OECD countries.
It is true that the design and timing of a comprehensive deficit reduction plan will matter a great deal in its economic benefit. But that is why working toward an agreement is so important. Putting debt on a sustainable path will be difficult, and it will take both parties to achieve a deal that will be better in both the short and long run for the economy than the sequester. Boskin agrees that we can't put the budget on the back-burner:
Nonetheless, the evidence clearly suggests that high debt/GDP ratios eventually impede long-term growth; fiscal consolidation should be phased in gradually as economies recover; and the consolidation needs to be primarily on the spending side of the budget. Finally, the notion that we can wait 10-15 years to start dealing with deficits and debt, as economist Paul Krugman has suggested, is beyond irresponsible.
Click here to read to full op-ed.
Taking It to the Limit – The statutory debt ceiling is back. The temporary suspension of the debt limit enacted earlier this year was lifted on May 19. The Treasury Department has begun extraordinary measures to hold off a default. Treasury Secretary Jacob Lew says the measures should last until after Labor Day, though he urged quick action. The Hill notes these so-called "extraordinary measures" have become commonplace in recent years as the debt limit has become a political hot potato. The latest deadline sparked little action from policymakers as budget talks remain stalled. Waiting until another debt ceiling crisis is directly in front of us is not a good idea. Standard & Poor’s, the credit rating agency that downgraded the U.S. credit rating after the last debt limit fight, warns that another such episode could result in another downgrade. Our leaders should be working now on a comprehensive plan that would make raising the debt limit more palatable. Keep track of debt limit developments here and get familiarized with the debt ceiling with our primer.
Sequester Replacement Bill Introduced – House Democrats on Monday introduced legislation to replace sequestration for two years with a package of roughly equal spending cuts and revenue increases. This is a positive step towards replacing the sequester, although we would prefer a comprehensive plan that addresses the long-term drivers of the debt. Learn more about sequestration with our Sequestration Resource Page.
Appropriations Process Moves Forward – Even without a concurrent budget resolution Congress is moving forward with spending bills for the fiscal year beginning October 1. Predictably, the House and Senate are far apart. The Senate is using topline spending numbers $91 billion higher than the House because the Senate does not include the sequestration cuts. The House assumes the sequester is maintained but includes defense and security spending beyond the caps, making up for the increase with further cuts to domestic spending such as education. The House Appropriations Committee approved of the Military Construction and Veterans Affairs spending bill on Tuesday.
CBO Scores President’s Budget – On Friday the Congressional Budget Office (CBO) released its score of the President’s fiscal year 2014 budget. CBO says the budget will reduce deficits by $1.1 trillion over ten years relative to its baseline. The score confirms that the budget is a step in the right direction in putting the debt on a downward path as a share of the economy. But CRFB noted in a statement that more would be needed to be done to ensure adequate long-term debt reduction. Read our full analysis here.
Confirmation Hearing for OMB Deputy – The Senate Budget Committee held a confirmation hearing on Tuesday for the designee to be Deputy Director of the Office of Management and Budget (OMB), Brian Deese. In his testimony, Deese mentioned his commitment to crafting a sound fiscal policy. “Much of my professional work has focused on the role that fiscal policy can play in promoting stronger and more durable economic growth. I believe that sound fiscal policy requires all of us to not shy away from our long-term fiscal challenges and to work diligently to reduce our deficits to strengthen the economy for both current and future generations. If confirmed, I will work closely with Director Burwell to build on the progress we have made and to help find common ground on the kind of comprehensive deficit reduction plan that will achieve these vital objectives.”
Hearings Expose Need for Tax Reform – High-profile congressional hearings on the IRS scandal over tax-exempt 501(c)4 organizations and efforts by Apple Inc. to lower its tax burden have spotlighted the need for tax reform. Bipartisan, bicameral efforts to fundamentally reform the tax code continue. Try your hand at corporate tax reform with our interactive calculator.
Key Upcoming Dates (all times are ET)
- Joint Economic Committee hearing on "The Economic Outlook" with Federal Reserve Chair Ben Bernanke at 10 am.
- Senate Budget Committee hearing on "Supporting Broad-Based Economic Growth and Fiscal Responsibility through Tax Reform at 2:30 pm.
- House Committee on Ways and Means Social Security Subcommittee hearing on the President's and other bipartisan entitlement reform proposals at 9:30 am.
- Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.
- Bureau of Labor Statistics releases May 2013 employment data.
- Deadline for estimated quarterly individual and corporate tax payments.
- Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.
- The date Treasury Department expects a nearly $60 billion payment from Fannie Mae, which will help delay the time by which lawmakers will need to raise the debt ceiling.
- Bureau of Labor Statistics releases June 2013 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases June 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases advance estimate of 2013 2nd quarter GDP.
Although efforts to replace the sequester have been on hold for a while, the House Democrats, led by House Budget Committee ranking member Chris Van Hollen (D-MD), have come out with a bill to replace the remaining 2013 and part of the 2014 sequester with $181 billion of savings over ten years. The bill is similar to one Rep. Van Hollen produced last year and one that Senate Democrats introduced this year.
The bill includes a roughly equal mix of tax increases and spending cuts, according to The Hill. The bill contains elements of both the House effort last year and the Senate effort this year. It includes the Buffett Rule ("Fair Share Tax") as its main revenue-raiser along with disallowing the domestic production deduction, expensing for intangible drilling costs, and the use of last-in first-out (LIFO) accounting for major oil companies.
As with last year's bill, the spending cuts include the elimination of direct commodity payments for farmers, a provision that has been included in the competing Congressional farm bills. It also reduces the defense spending caps in years 2017-2021, a similar provision to one included in the companion Senate sequester replacement bill.
Ideally, lawmakers would replace the sequester on a permanent basis with a comprehensive deficit reduction plan that makes much more gradual and smarter cuts and has savings in many different areas of the budget. However, the House Democrats' plan is positive in that it responsibly pays for a two-year repeal of the sequester.
The CBO has now spoken on how the President's budget would affect the fiscal outlook. Debt would fall to 70 percent of GDP by 2023, compared to 73 percent under current law and 76 percent under our latest iteration of the CRFB Realistic baseline (though we are still working on the precise number as we get new information). But what about the Bipartisan Path Forward proposed last month by Fiscal Commission co-chairs Erskine Bowles and Al Simpson?
The plan's "Step 3," included $2.5 trillion of ten years relative to the February CRFB Realistic Baseline, was originally estimated to get debt down to 69 percent of GDP by 2023. Assuming the savings remain the same*, save a small adjustment in our new baseline, the debt would be on even lower than previously estimated, and on a slightly sharper downward path. Specifically, debt would fall from 76.5 percent of GDP in 2014 to about 66 percent by 2023.
Source: CBO, CRFB calculations
Over the 2014-2023 period, spending would total 21.3 percent of GDP and revenue would total 19.2 percent, resulting in average deficits of 2.1 percent. This compares to the 2.4 percent ten-year deficit in the President's budget and the 3.0 percent and 3.2 percent deficits in current law and CRFB Realistic, respectively. In 2023, the final year of the projection window, spending would be 21.3 percent of GDP and revenue would be 19.7 percent, resulting in a 1.6 percent deficit.
|Bipartisan Path Forward Budget Metrics (Percent of GDP)
|Bipartisan Path Forward|
|President's Budget (CBO Estimate)|
Source: CRFB calculations
The Bipartisan Path Forward shows that policymakers can indeed put together a package which puts the debt on a clear downward path. That's true even before accounting for the plans "Step 4" reforms to Social Security and federal health spending. Clearly, a comprehensive fiscal package can be done if lawmakers are willing to put all parts of the budget on the table.
*A number of policies may save different amounts due to changes in CBO's baseline. In particular, the health savings may be less due to downward revisions in health spending, although other policies may save more. The document does include additional savings options to meet the targets if necessary.
In order to avoid bumping up against the statutory debt ceiling, the Department of the Treasury has begun undertaking a number of so-called "extraordinary measures". The current debt limit is $16.394 trillion.
|Debt ( Gross / Subject to Limit)|
|5/20/2013||Debt Issuance Suspension Period for CSRDF
The Treasury Department will enter into a "debt issuance suspension period" from 5/20/2013 through 8/2/2013. The Treasury Department will suspend additional investments to the Civil Service Retirement and Disability Fund (CSRDF). Additionally, the Treasury will suspend and redeem investments to the Postal Service Retiree Health Benefits Fund (PSFHBF).
Measures like this have been used in 1996, 2002, 2003, 2004, 2006, 2011, and 2012. Read more here.
Debt Ceiling Reinstated
Today, President Obama signed the bill originally proposed by House Republicans which temporarily exempts all debt issued from now until May 19th from the Debt Ceiling. By signing this bill, the debt ceiling is expected to be hit next in August because of extraordinary measures. The bill also requires that both Houses of Congress pass a budget resolution by April 16th or their pay will be withheld until they do, or the Congressional term ends in 2014. Read more here.
House Republicans unveiled a temporary debt ceiling fix which would extend Treasury's borrowing authority through May 19th. This measure would exempt debt issued between the date of passage and May 19th from the debt ceiling, but would not raise the actual dollar amount of the debt ceiling. Tied to this measure would be a provision which would temporarily withhold pay from members if no budget is passed. Read more here.
The Treasury Department has suspended investments of the Government Securities Investment Fund (G-Fund) of the Federal Employee's Retirement System in interest-bearing securities.
Measures like this have been used in 1996, 2002, 2003, 2004, 2006, 2011, and 2012. Read more here.
|$156 billion||$16,432,632/ $16,393,975|
Secretary Geithner has sent a letter to Speaker of the House John Boehner detailing the risks of a debt ceiling breach as well as calling on Congress to raise the debt ceiling as soon as possible due to the uncertainty of revenues during tax-filing season. In the letter, Geithner says that Treasury currently has enough borrowing authority, through the use of extraordinary measures, to last between mid-February and early March. Read more here.
The Treasury Department will enter into a "debt issuance suspension period" from 12/31/2012 through 2/28/2013. The Treasury Department will suspend additional investments to the Civil Service Retirement and Disability Fund (CSRDF). Additionally, the Treasury will suspend and redeem investments to the Postal Service Retiree Health Benefits Fund (PSFHBF).
Measures like this have been used in 1996, 2002, 2003, 2004, 2006 and 2011. Read more here.
|$29 billion||$16,432,730/ $16,393,975|
The Treasury Department has said that without taking extraordinary measures, it will exceed the debt ceiling imminently. The debt is now within $25 million of the statutory debt limit.
|12/28/2012||Final Business Day Before Extraordinary Measures Begin||$16,336,462/ $16,298,022|
In a letter to Congress, Secretary Geithner informed its members that the current debt ceiling of $16.394 trillion will be reached on December 31st, 2012 and that the Treasury Department would "begin taking certain extraordinary measures" afterwards. Using these measures will create about $200 billion in headroom, but because of the fiscal cliff, it is not known for how long these would last. Under normal circumstances, this would allow for about two additional months of time. Read more here.
As a follow up to our initial reaction to CBO's estimates of the President's budget, CRFB has released a full report that breaks down the analysis from CBO. Under the President's budget, public debt as a percent of GDP would fall from a high of 77 percent in 2014 to 70 percent by 2023. The budget gets there by proposing an estimated $1.7 trillion in savings relative to the CRFB Realistic Baseline, or $1.1 trillion relative to CBO's current law baseline.
The table below shows the ten-year deficit impact of the budget's policies relative to both baselines under CBO's and OMB's estimates. Relative to the CRFB Realistic Baseline, the budget would increase revenues by $560 billion over ten years, reduce primary spending by $910 billion, and reduce net interest costs by $210 billion.
Encouragingly, CBO’s latest projections show lower debt levels under the President’s budget than what OMB estimated. On the other hand, debt would be falling a slower rate leaving little room for error should projections turn out to be overly optimistic. In any case, more work will be necessary to sure up our entitlement programs and keep debt on a clear downward path relative to the economy; but the President’s budget represents a welcome start.
Click here to read the full report.
Today, the Congressional Budget Office (CBO) released its analysis of President Obama’s FY 2014 budget request. CRFB has released a reaction to the score of the budget, praising the President for putting forward a deficit reduction offer that addresses the country's debt path, but warning that there would still need to be more done, particularly on entitlement spending.
As we wrote in our analysis on the OMB's estimates, the President’s budget does put debt on a downward path as a share of the economy, a key goal for fiscal responsibility. The CBO analyzed the whole budget and predicted that if his proposal were enacted, the debt would rise 75.2 percent of GDP to a peak of 77 percent of GDP in 2014 to before falling gradually to 69.8 percent by 2023. These debt levels are actually slightly lower than the White House’s initial projections from April due to the lower baseline projections for debt, as OMB's scored savings are close to CBO's estimates.
The President had proposed his budget in two parts, the savings from his final deficit reduction offer in the fiscal cliff negotiations comprising the first part and other priorities comprising the second part. CBO examines the budget as a whole and finds that compared to current law, the President's budget would reduce deficits by $1.1 trillion, or $1.6 trillion compared to CRFB's Realistic baseline.
|CBO Estimates of the President's Budget (percent of GDP)|
|OMB Estimates (percent of GDP)|
Source: CBO, OMB
Under the President's budget, spending would be 21.8 percent of GDP by 2023 while revenues would rise to 19.7 percent of GDP. As a result, deficits under the President's budget would fall from 4.2 percent of GDP in 2013 to 2.1 percent by 2023.
The budget is an encouraging effort to get serious about deficit reduction, but it also underscores how much work is left to be done. With the compromises of the past two years, Congress has made some solid progress, but more remains to be done. Our analysis of the CBO’s recent budget projections found that $2.2 trillion in additional savings are needed to put the debt on a clear downward path as a percentage of the economy.
Lawmakers should use the budget negotiations as an impetus to have an honest discussion about our nation’s fiscal future and come to compromise that will rein in debt over the long term and encourage future economic growth. As CRFB President Maya MacGuineas said in our reaction to the CBO analysis:
It is encouraging to see that the President’s proposals would indeed begin to reduce the debt – and to lower levels than originally thought. However, the debt would just barely be falling, meaning that any small change in projections could bump it back up. Regardless, additional reforms will be needed over the long-term, especially to slow the growth of health care programs and shore up Social Security.
Click here to read our release on the CBO analysis.
We've talked before on The Bottom Line about why lawmakers should not wait to deal with our unsustainable debt. Among the most important reasons for dealing with deficits now is the chance to improve confidence in our nation's finances and avoid a fiscal crisis. A recent National Journal interview with Nikola Swann, S&P's top credit analyst, reveals that the credit agencies are anything but reassured by our fiscal outlook after the experience of the past few years.
We have not seen any strong evidence that the political system as a whole is more effective, more stable, or more predictable than we thought it was in 2011. There does seem to be, especially in recent years, an overall trend in the U.S. to effectively make major policy decisions at the last moment in a crisis setting. We don’t see that as credit-positive.
The negative outlook primarily is about the risks we see that U.S. policymakers may not reach an agreement on how to consolidate fiscally. At the very least, we need an agreement that looks out five years. Also, we would need for that agreement to be large enough to make a difference—something that would keep the debt-to-GDP ratios from continuing to rise as they have been for most of the past 10 years. And, thirdly, we would have to view this plan as credible, meaning we would have to see a reasonable basis for believing that this plan would actually be implemented. The best proof would be if you had, at very least, a substantial share of the lawmakers from both parties agree on this plan, because then you have some reason to think that even after an election, this plan would could keep going.
Swann says that the House's Full Faith and Credit Act, which would allow the Treasury Department to prioritize payments if we were to reach the debt ceiling, would not be able to prevent a credit rating downgrade. But the real focus of credit agencies is on the long-term problem, which as we have shown remains far from solved.
If you are using the legislation, you are necessarily right at the razor edge. You could very well be having significant turbulence in the economy and in financial markets. This does not sound like a very comfortable scenario. So the point is, in a mechanical sense, yes, such legislation could potentially help avoid default, but that doesn’t mean this overall scenario would not get so rocky that we wouldn’t downgrade from AA-plus anyway.
Our primary focus is on the longer-term dynamic. Of course, the debt-ceiling debate of late has provided some incremental information about how the longer-term dynamics are going. I don’t think we would view it as helpful for us to inject an additional deadline into the debate. But it is certainly true that the further the U.S. can get away from making important decisions—especially about public finances—at the last minute, in a crisis, the more that would help the credit rating.
All three credit agencies have the U.S. on a negative outlook, a sign that future downgrades could occur if lawmakers are not able to deliver a deal or continue to rely on brinkmanship and last-minute fixes. With the many benefits of deficit reduction done right, hopefully the positives of a comprehensive agreement will be enough to encourage action rather than waiting until the downsides of doing nothing set in.
Although it may be difficult to get an updated comprehensive score of the Affordable Care Act from CBO, CBO has updated its estimate of the coverage provisions of the Affordable Care Act with each new baseline. This baseline is no exception.
The gross cost of the coverage expansions from Medicaid, the new health insurance exchange subsidies, and tax credits for small business coverage stands at $1.8 trillion over ten years. The net cost of the coverage provisions -- which includes the related mandate penalties, excise tax on high-cost health plans, and related effects on spending and (mostly) revenue -- stands at $1.36 trillion. Compared to the previous estimate in February 2013, the net cost of the coverage provisions is about $35 billion higher despite the gross cost of coverage expansion being $80 billion lower.
|Cost of Coverage Provisions (2014-2023 in billions)|
|May 2013||February 2013|
|Medicaid and CHIP Expansion||$710||$638|
|Small Business Tax Credits||$14||$26|
|Individual Mandate Penalties||-$45||-$52|
|Employer Mandate Penalties||-$145||-$150|
|High-Cost Insurance Excise Tax||-$80||-$137|
|Secondary Effects of Coverage Provisions||-$171||-$211|
An accompanying CBO blog post details the reasons why these projections have changed since February. Medicaid outlays are up and exchange subsidies are down because CBO projects that more people will be in states that expand Medicaid, taking people with incomes between 100 and 133 percent of the poverty line out of the exchanges. The net effect reduces the cost of these two expansions by $70 billion. The cost of small business credits for offering insurance coverage is $10 billion lower due to businesses being slower than anticipated in using those credits.
The reduction in the gross cost of coverage, though, is exceeded by the reductions in the savings from related provisions. Individual mandate penalties are down due to recently proposed regulations that expand exemptions from the mandate. Employer mandate penalties are down due to an increased number of people projected to receive coverage through their employer. Relatedly, secondary budgetary effects -- which mainly reflect new revenue from people shifting their compensation from non-taxable health insurance to taxable income due to their health insurance plan not having as much value or their not receiving employer coverage -- also produce fewer savings because of the increase in employment-based health coverage. Finally, the revenue from the excise tax is down because of slower-than-anticipated premium growth, which results in fewer health plans being subject to the tax.
Earlier this week, CBO also responded to a request from House Budget Committee Chairman Paul Ryan CBO for an updated score of legislation to repeal the Affordable Care Act, which the House is expected to pass today. CBO said it was unable to do a cost estimate at the moment given the other things they are currently working on. However, they explain the estimate would likely be similar to the one released last July, which found that repeal would increase the deficit by $109 billion from 2013-2022. They noted that the net cost of coverage provisions were $30 billion higher in the 2014-2022 period than they were estimated to be last July and said that the other parts of the legislation (net savings) had likely increased by a similar amount, thus keeping the overall budget impact at a similar magnitude.
In February, we wrote the paper "Our Debt Problems Are Far From Solved," laying out the case for putting debt on a clear downward path as a percent of GDP with $2.4 trillion of additional savings. CBO's improved budget projections have prompted a new round of discussion of what should be the right direction for the budget. With that in mind, we have updated our estimates and written a new paper "Our Debt Problems Are Still Far From Solved." In light of the latest projections, we now find that $2.2 trillion of deficit reduction is necessary to put the debt on a clear downward path. That number declines to $1.6 trillion if the sequester stays in place through 2021 as scheduled.
Some might wonder why the minimum savings path, which was previously $2.4 trillion, only fell a little bit given the $900+ billion improvement in our budget projections through 2023. Essentially, this apparent disparity has to do with the nature of our goal to put debt on a clear downward path. In other words, our primary concern is the trajectory of the debt, whereas recent improvements, a main part of which are short-term improvements, have reduced the level.
Debt under February and May CRFB Realistic and Minimum Savings Path (Percent of GDP)
As the above graph shows clearly, while both debt projections and our minimum path are lower now than in February, their slope and therefore trajectory is quite similar. As a result, the total amount of deficit reduction to ensure a clear downward path would be $2.2 trillion. In Appendix III of our paper, we show that the full $2.2 trillion of deficit reduction is necessary to ensure debt is declining under a most likely scenario, and stands up to certain robustness tests assuming growth is slower, deficit reduction phases in faster, or additional deficit-increasing measures are passed.
By contrast, enacting the $1.5 trillion necessary to hit the old minimum path's 2023 debt level would result in slightly rising debt levels under our base case, and more quickly rising debt levels under the robustness tests. A faster phase-in results in a slightly upward path while the slower growth and fiscal irresponsibility scenarios result in clear upward paths.
Robustness Test of $1.5 Trillion of Savings (Debt as Percent of GDP)
The improvement in the budget projections is a welcome one, but it does not fundamentally change the long-term picture of the budget. Lawmakers cannot rest on their laurels because waiting to make changes may result in more abrupt and less targeted policies in the future. Instead, they should enact changes now that take effect gradually to bring our debt down as a share of the economy in a more intelligent and economically beneficial manner.
Click here to read the new paper.
Side-Stepping Sequestration – It was as predictable as the Washington Capitals blowing a playoff series lead. Lawmakers are looking to carve out exemptions to sequestration, including areas such as Head Start and medical research. The piecemeal approach to dealing with the sequester is not the way to go. Former Pennsylvania governor and Fix the Debt co-chair Ed Rendell, has a better idea -- replace sequestration with a comprehensive debt plan. Meanwhile, the Pentagon announced Tuesday it will furlough around 650,000 civilian employees for 11 days. It was able to reduce the number of furlough days by finding additional savings elsewhere in it budget.
Debt Ceiling Rising Back Up As Issue – The current suspension of the statutory debt ceiling will be lifted on May 18. Though it will no longer be suspended, it’s still up in the air as to when it will need to be increased. Additional revenue from economic growth and the fiscal cliff deal along with spending cuts and payments from Fannie Mae and Freddie Mac are slowing the growth of the debt. Coupled with the “extraordinary measures” Treasury can employ to put off the debt limit, it will be at least until Labor Day and possibly as late as November before policymakers have to seriously wrestle with increasing the debt limit. Last week, the House passed legislation prioritizing payments on the debt and Social Security of the debt limit is reached. The White House has promised to veto the bill, which isn’t expected to pass the Senate. House Republicans will meet Wednesday to discuss their strategy on the issue going forward. We argue that we cannot put off work towards a comprehensive fiscal plan until another debt limit crisis is right in front of us. Doing so would likely result in solutions that are suboptimal or are gimmicks that don’t adequately address the issue. Keep track of debt ceiling developments here.
Support Grows for Budget Conference – The budget process could be the vehicle for negotiating a fiscal deal well ahead of the debt ceiling fight. Both the House and Senate have passed budgets for next year, but lawmakers have not taken the next step in forming a conference committee to work out the differences in the two budgets. But more Republicans in the Senate are joining Democrats in calling for a conference committee to get to work now.
Appropriations Process Gets Under Way – Under law Congress can begin considering spending bills even without a concurrent budget resolution on May 15 and lawmakers don’t seem to be wasting any time getting the process started. House Appropriations subcommittees will begin marking up spending bills Wednesday. Congress will likely need all the time it can get to agree on spending bills ahead of the new fiscal year beginning October 1 since the House and Senate begin far apart on the topline spending numbers. The House set the spending level at $967 billion, figuring that sequestration will remain in effect. The Senate assumes the sequester will be repealed, putting spending at $1.059 trillion.
CBO Sheds Light on Budget and Economic Situation – The Congressional Budget Office (CBO) on Tuesday updated its ten-year projections of the budget and economic outlook. It estimates that the federal budget deficit for fiscal year 2013 will be $642 billion and that deficits will fall in the near term, only to begin rising again by the end of the decade “because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.” As we note, our debt problems are far from solved and the improved short-term numbers are no excuse to stop working towards a comprehensive fiscal plan that addresses the long-term debt. On Friday, CBO will release its analysis on President Obama’s fiscal year 2014 budget request. Stay tuned for analysis from CRFB on both reports.
Your Chance to Shape Tax Reform – Senate Finance Committee chair Max Baucus (D-MT) and House Ways and Means Committee chair Dave Camp (R-MI) continue their bicameral, bipartisan tax reform effort and they are now looking for public input. Last week, they launched a website at taxreform.gov that allows people to share their stories and ideas for reform. They also have a Twitter account @simplertaxes. Interested in corporate tax reform? Try out our simulator for ideas.
The Case for Chained CPI – Switching to a more accurate measure of inflation received support from two chairs of the White house Council of Economic Advisors. Martin Neil Baily, who served in the Clinton Administration and Glenn Hubbard, who served under George W. Bush wrote in an op-ed in The Hill, "As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy — and policymakers should not delay any further in making this improvement." CRFB’s Marc Goldwein and Ed Lorenzen made a similar case recently in an op-ed of their own.
Farm Bill Moves In Senate – The Senate Agriculture Committee Tuesday approved a new farm bill that would reduce deficits by about $18 billion over ten years. The House is considering a version that would save more, but the primary difference is cuts in nutrition programs such as food stamps.
Immigration Reform and the Budget – Immigration reform has risen to the top of the congressional agenda. The Senate Judiciary Committee is in the process of marking up a bipartisan comprehensive overhaul of the immigration system. The increased focus has brought attention on how immigration reform would affect the budget. CBO says it will utilize some dynamic scoring to estimate the budgetary impact of reform because it will have such a broad effect on the labor market. Also, the chief actuary of the Social security Administration estimates that reform would improve Social Security’s finances because it would result in more workers contributing to the program.
Budget Reform Ideas Emerge – Once again problems in moving a budget through Congress underscore how broken the process has become. Likewise, ideas for fixing the process are reemerging, such as biennial budgeting. See more ideas here.
Key Upcoming Dates (all times are ET)
- Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.
- The CBO releases its analysis of the President's FY 2014 budget.
- The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.
- Hose Ways and Means subcommittee hearing on Medicare reform at 10 am.
- Senate Budget Committee hearing on the nomination of Brian Deese to be deputy director of the Office of Management and Budget at 10:30 am.
- Joint Economic Committee hearing on "The Economic Outlook" with Federal Reserve Chair Ben Bernanke at 10 am.
- Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.
- Bureau of Labor Statistics releases May 2013 employment data.
- Deadline for estimated quarterly individual and corporate tax payments.
- Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.
Today, the Congressional Budget Office has released an update to its budget outlook from February. With little legislative changes since February, the budget outlook after a few technical revisions shows slightly lower debt levels compared to the previous baseline. However, debt remains on a clear, upward trajectory near the end of the decade, similar to the path in February's baseline. While the short-term improvement is a welcomed sign, the new outlook still shows that more work needs to be done to put the budget on a sustainable path. Even assuming sequestration remains in place, more deficit reduction will be required to put debt on a downward path as a share of the economy - the necessary goal for lawmakers.
In all, ten-year deficits are $618 billion less, totaling $6.34 trillion compared to $6.96 trillion in the February estimate. Debt would fall from 71.5 percent of GDP in 2013 to 70.8 percent in 2018 before rising on an upward path to 73.6 percent under current law, while rising to 83 percent under CBO's alternative fiscal scenario (AFS), which represents the continuation of many current policies. The AFS baseline assumes the scheduled sequester for 2014-2021 is repealed, refundable tax credit expansions extended for five years in American Taxpayer Relief Act (ATRA) are extended permanently, a "doc fix" prevents a 25 percent cut to Medicare providers, and other expiring tax extenders are continued permanently without being offset. February's Budget and Economic Outlook projected debt to rise to 77 percent in 2023 under current law and 87 percent under AFS.
With no major budgetary legislation passed by Congress since February, the changes to the baseline are primarily due to technical revisions. CBO's new estimates have increased projected revenues by $95 billion from 2014 to 2023, attributed to larger than expected receipts for 2013 for individual and corporate taxpayers, as well as lower estimated tax subsidies for the health insurance exchanges and other smaller technical changes. CBO has decreased projected spending by $522 billion over ten years, largely due to new data that could suggest a slowdown of spending on Medicare and Medicaid, fewer individuals enrolled in the Social Security Disability Insurance Program, and increased payments from Fannie Mae and Freddie Mac. Overall projected deficits are $618 billion lower over ten years than what was projected in February.
Spending is projected to fall from 21.5 percent of GDP in 2013 to 21.3 percent by 2017 before rising to 22.6 percent by 2023. Revenue will continue to increase, largely due to the economic recovery and tax increases taking effect, from 17.5 percent of GDP in 2013 to 19.3 percent by 2015 and roughly stabilizing around 19 percent of GDP through 2023.
|CBO's May Current Law Projections (Percent of GDP)|
The short-term improvement is a good sign, but no reason to put the budget on the back burner. The longer we wait to solve our budget problem, the more savings will be needed to put debt on a clear downward path as a share of the economy. Waiting longer will leave beneficiaries and taxpayers will less time to adjust to policy changes, give lawmakers little fiscal flexibility to respond to a crisis, and slow economic growth. Projections are also subject to change -- if economic growth is slower or interest rates are higher than expected, debt as a share of the economy could be much higher than CBO expects. Much of the deficit reduction can be phased in to occur when the economy has had more time to recover, but delaying a comprehensive agreement that would include tax and entitlement reform would be a missed opportunity.
CBO will release its estimates of the President's budget this Friday, which CRFB will cover in a full analysis and an update of our CRFB Realistic Baseline here on The Bottom Line. But the story told by this new budget outlook is largely the same: lawmakers still have further to go to solve our budget problem.
Click here to read the full report from the Congressional Budget Office.
Update: This blog has been updated to include numbers from the CBO score of the House farm bill.
As we have written previously, the American Taxpayer Relief Act extended the provisions of the 2008 farm bill for one year, despite both chambers producing farm bills and the Senate passing its one. Lawmakers have until January 1 to come to a compromise and avoid reverting to the 1949 permanent farm bill, which would have major negative implications for deficit reduction and agriculture policy.
In an effort to work toward a bipartisan agreement, leaders in both the House and Senate have committed to moving farm bills in the coming weeks. The Senate Agriculture, Nutrition, and Forestry Committee will mark up S. 10 tomorrow, and the House Agriculture Committee will take up its bill on Wednesday. The major difference between the two bills is how they deal with nutrition programs -- the House version would cut $21 billion from nutrition programs, compared with $4.1 billion in cuts in the Senate bill -- as well as the design of crop insurance programs and the replacement for direct commodity payments.
|2014-2023 Savings/Costs (-) in the Farm Bills (billions)|
|New Senate Estimate||New Senate Estimate w/ Sequester Repeal||New House Estimate||New House Estimate w/ Sequester Repeal|
|Crop Insurance Programs||-$5||-$5||-$9||-$9|
|Subtotal, Farm Programs||$14||$20||$13||$19|
The Congressional Budget Office has revised its cost estimates of the Senate bill, finding that the legislation would reduce spending by $18 billion over the 2014-2023 period compared to curent law. An earlier estimate of the Senate bill this year showed the legislation would save $13 billion. CBO estimates the new House bill will save $33 billion over ten years relative to current law and $40 billion assuming that the sequester is repealed.
The CBO also included a savings estimate if Congress passed legislation repealing the sequester. Eliminating this portion of the sequester and subsequently enacting the Senate farm bill would produce $24.4 billion in savings under the revised baseline, increasing the bill's deficit reduction by one-third.
Leaders in both chambers seem hopeful about moving a farm bill under regular order well before the January 1 deadline, and the Agriculture Committees have produced serious draft legislation that could both reduce the deficit and modernize our outdated agriculture programs. We hope that they are aggressive in achieving savings, as agriculture reforms are an area of consensus in terms of deficit reduction.
Last week, the House Budget Committee released a package of budget process reforms consisting of seven different pieces of legislation. Four of these pieces of legislation -- on dynamic scoring, credit program accounting, the budget resolution, and how CBO constructs its baseline -- we blogged on last year, which you can see here.
The other three pieces of legislation were also proposed last session. One of them, the Expedited Line-Item Veto and Rescissions Act, is a bipartisan bill co-sponsored by the Committee chair Paul Ryan (R-WI) and Ranking Member Chris Van Hollen (D-MD) which would give the President "expedited rescission authority," a variant of the line-item veto.
Another bill is from Rep. Reid Ribble (R-WI), the Biennial Budgeting and Enhanced Oversight Act, which would (as its name suggests) put the federal budget process on a biennial cycle. The budget resolution would be done during the first session of Congress, while authorizations would be made in the second session, theoretically giving legislators more time for oversight of appropriated spending.
The final bill, the Review Every Dollar Act sponsored by Rep. Jason Chaffetz (R-UT), make a number of different changes to spending rules. It would require periodic reauthorizations or sunsets of all federal programs, require new rules or regulations to be explicitly funded by Congress, require transfers from general revenue to the Highway Trust Fund to be either offset or counted as new spending, and provide mechanisms for legislators to devote savings from a bill to deficit reduction.
The Peterson-Pew Commission's report "Getting Back in the Black" recommended some of these measures. Their recommendations included fully accounting for the cost of government-sponsored enterprises, using fair-value accounting for credit programs, and having expedited rescission authority. While they did not specifically endorse biennial budgeting, they did call for lawmakers to set goals for programs and ramp up oversight to make sure those goals were being met.
Budget process reforms are not a silver bullet for our budget issues, but to the extent that they make the budget process more transparent and results-oriented, they can be helpful.
With previously enacted deficit reduction and the economic recovery helping our short-term fiscal outlook, it may be tempting for lawmakers to put the budget on the back burner and turn to other issues. But this would be a clear mistake.
Fix the Debt co-chair and former Governer Ed Rendell (D-PA) writes in today's Politico that the current approach is doing unnessary harm, leaving our long-term fiscal problem still unsolved, and forfeiting the benefits that could come with a comprehensive approach.
It seems the debt deniers are back.
If recent news reports are any indication, there is a growing sentiment that after enacting the nearly across-the-board “sequestration” spending cuts, Washington has already done enough to reduce the deficit and should avoid further deficit reduction that could disrupt the fragile recovery.
However, this rhetoric is based on the false notion that deficit reduction and economic growth are mutually exclusive. While we definitely should avoid immediate austerity, starting by reversing the austerity now in effect via the sequester, we must replace these less-than-intelligent, across-the-board cuts with a long-term fiscal plan — one that protects the recovery and promotes economic growth.
The austerity we currently face is precisely the result of our inability to deal with long-term deficits. Instead of reforming our Tax Code and entitlement programs, we’ve slashed important investments in the worst possible way.
Lawmakers have made some progress on debt and deficits, but the savings they have acheived are largely from the low hanging fruit in the budget, with the tough choices still to be made. Comprehensive plans can both achieve the needed additional savings while making the budget more effective in achieving its goals, protecting vulnerable populations, and promoting economic growth.
Our current situation is the worst of both worlds. Excessive, mindless deficit reduction in the short term when it will harm the economy, and rapidly growing debt over the long term when that debt will start slowing down economic growth. What’s more, the recent political maneuvering in which Congress acted swiftly to eliminate the sequester’s furloughs of air traffic controllers — while efforts to cancel the sequester as a whole went nowhere — underscores the political reality that the mindless cuts may be here to stay. Unless Congress replaces the sequester with a comprehensive deficit-reduction plan, 4 million meals for seniors will be eliminated, 70,000 children will be kicked out of of Head Start, and 125,000 American families will be at immediate risk of losing rental assistance and, along with it, their homes. The only way to avoid allowing a few powerful interest groups to get their own carve-outs from the budget cuts while leaving everyone else in the cold is to come to an agreement on a responsible deficit-reduction plan to replace the sequester.
Fortunately, there is a better way forward. The recent deficit-reduction plan put forward by Erskine Bowles and Alan Simpson, for example, would replace immediate austerity with a comprehensive plan that is smarter, larger and more gradual. Such a plan would help restore this country’s economic credibility. The markets must be reassured that the government is willing to control its debt over the long term. Enacting a plan now allows us to gradually phase in changes , allowing Americans time to adjust. Moreover, gradual changes would help the economy avoid the kind disruptions that are sure to occur if our elected leaders wait until market forces leave them with no choice other than through dramatic, sudden policy changes.
Only by reducing our overly heavy debt burden can we be sure we’re putting our economy in an environment most conducive to sustained growth. Designed properly, a comprehensive deficit-reduction framework can promote short- and long-term economic growth. Such a deal would avoid the effects of the sequestration and reduce uncertainty; improve confidence in future economic growth; promote work, savings and investment over the long term; and reduce the likelihood of a debt-fueled fiscal crisis in the future. Only a comprehensive approach, one that reverses today’s austerity but enacts intelligent deficit reduction over time, will truly fix our debt.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.