The Bottom Line

January 28, 2015

In addition to updating budget projections, CBO's baseline also looks at the state of various government trust funds over the next ten years. Two of the trust funds – the Highway Trust Fund (HTF) and Social Security Disability Insurance (DI) will have to be dealt with this year or next. The other two with later exhaustion dates – Social Security Old Age and Survivors' Insurance (OASI) and Medicare Hospital Insurance (HI) – have both seen a drop in the size of reserves. Here's a rundown of each of these four trust funds.

Highway Trust Fund

The last time lawmakers dealt with highway financing, they intended that the expiration of the highway bill and the exhaustion of the HTF both happen at the end of May. Now, it looks like there may be a little time between the two as the general revenue transfer to the HTF may last longer.

Previously, CBO expected there to be a $2 billion shortfall in FY 2015, but that gap has been wiped out in the newest projections by two developments: slightly higher gas tax revenue (from lower gas prices increasing demand) and slightly lower spending from lawmakers freezing spending in 2015 rather than letting it grow with inflation. These developments mean that lawmakers may be able to wait until the summer to deal with the HTF, thus theoretically allowing them to write a new highway bill without dealing with the financing gap for a little bit. These two developments also make a long-term solution slightly easier, reducing the trust fund shortfall by about $10 billion.

 

Disability Insurance Trust Fund

January 28, 2015

CBO's budget outlook, little changed since its last update, shows the same story it has for a few years: the debt picture will stabilize through about the end of the decade, but then will grow by nearly 5 percentage points of GDP between 2020 and 2025 from 74 to 79 percent of GDP.

Simply stabilizing the debt at current levels would require $1.3 trillion of deficit reduction over a decade, while putting debt on a downward path as a share of GDP -- a minimum standard of sustainability  -- would require $2.4 trillion of savings.

In previous iterations of CBO's baseline, we showed an illustrative savings path that would leave debt clearly declining as a percent of GDP. For example, in May 2013, we showed that it would take $2.2 trillion of savings over ten years compared to our realistic baseline to put debt on a downward path to 67 percent by 2023. We used this level because the downward path proved robust to having more frontloaded savings, worsening economic projections, and lawmakers enacting deficit-increasing policies.

However, two years have now passed and CBO's projections worsened in the meantime, so the target could be somewhat more lax but require higher savings. Getting debt to 70 percent of GDP by 2025 would take $2.4 trillion of savings compared to CBO's baseline. We estimate that a reasonably backloaded plan of this magnitude would put the trajectory of debt on a clear downward path, and leave deficits in a consistent decline to about 2 percent of GDP by 2025 (instead of deficits increasing as a percent of GDP after 2016 under current law). Of course, actual plans may vary and the extent to which they would ensure long-term sustainability depends greatly on the types of policies included.

January 27, 2015

Yesterday, CRFB published an analysis of CBO’s latest Budget and Economic Outlook. The six-page document summarizes the forecasts and emphasizes the return of trillion-dollar deficits over the next ten years. Although CBO projects slightly decreasing deficits over the next two years, there will be a jump from a 2016 low of $467 billion to a $1.09 trillion by 2025.

January 26, 2015

Trillion-dollar deficits are coming back in 2025. That's one of the many stories told by the new budget update released today by the Congressional Budget Office. The deficit, which had fallen to a post-recession low of $483 billion (2.8 percent of GDP) last year, is projected to fall slightly more this year to $468 billion (2.6 percent of GDP), but increase to reach $1.09 trillion (4.0 percent of GDP) by 2025.

Debt will also grow substantially in nominal dollars, from $13 trillion today to $21.6 trillion by 2025. As a percent of GDP, debt will remain stable near its current post-war record of around 74 percent of GDP through 2020, but then it too will start rising quickly, reaching nearly 79 percent of GDP by 2025 and continuing to grow thereafter. As CBO explains, this continuing long-term growth would not be sustainable:

Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.


 

January 23, 2015

Today CRFB released a new paper as part of our Better Budget Process Initiative titled "Improving Focus on the Long Term."

The budget process focuses on the short term, often at the expense of longer-term considerations (like how our long-term debt problem is far from being solved). This distortion allows policies to be crafted in ways that mask their true costs and contributes to results that downplay looming fiscal challenges.

The short-term focus contributes to many poor outcomes, such as emphasis on short-term deficit reduction (with little improvement in the long-term fiscal outlook), the use of “timing gimmicks” designed to obscure the budgetary impact of policy choices, and the reliance on one-time savings to ensure “deficit-neutrality” within the budget window but deficit increases beyond it. It also often causes policymakers to undervalue policies which achieve modest savings over the ten-year window but much greater savings after that to help "bend the debt curve" over the long term. (For more on looking beyond the ten-year window, see our prior paper on the subject)

In addition, the short-term focus has made it conducive for many in Washington to brag that the fiscal situation is under control based on a short-term improvement in the deficit, despite the fact that the debt is projected to grow faster than the economy for the medium and long term.

January 23, 2015
Brookings Event Discusses Effect of the Sequester

The biggest piece of deficit reduction that lawmakers have accomplished so far is the series of caps on annually appropriated discretionary spending through 2021. The Budget Control Act specified spending caps that would reduce spending by more than $750 billion over ten years. It also put in place a sequester which would further reduce those caps by roughly $90 billion per year if the Super Committee did not agree on $1.2 trillion of deficit reduction. The Super Committee did indeed fail, and the sequester went into effect in March 2013. After partial sequester relief in 2014 and 2015, the discretionary cuts will return in full force in fiscal year (FY) 2016. As a result, discretionary spending will fall to a record low share of GDP in ten years.

With the sequester hanging over the appropriations process, the Brookings Institution held an event last week discussing the sustainability of these caps. The event brought together a panel of four experts with different perspectives on the caps, including:

    • Robert Hale, Former Under Secretary for Defense (Comptroller) and Senior Fellow at Booz Allen Hamilton
    • Ron Haskins, Senior Fellow of Economic Studies at Brookings
    • Michael O' Hanlon, Foreign Policy Director of Research at Brookings
    • Alice Rivlin, former Congressional Budget Office (CBO) and Office of Management and Budget (OMB) director and Senior Fellow of Economic Studies at Brookings
January 22, 2015

The House Energy and Commerce (E&C) Health Subcommittee yesterday held the first of two hearings on the Sustainable Growth Rate (SGR) formula for Medicare physician payments. Set to cut those payments by 21 percent in April 2015 when the latest "doc fix" runs out, the SGR will be one of the first "Fiscal Speed Bumps" the new Congress will confront this year. Fixing it permanently could cost at least $140 billion through 2025.

Yesterday's hearing focused on replacing the formula as well as whether and how to pay for the cost, featuring health care policy experts and policymakers. The session today featured representatives from various provider groups.

The witnesses at yesterday's hearing were:

    • Former Senator Joe Lieberman (D/I-CT)
    • Former OMB and CBO Director and current director of Brookings's Engelberg Center for Health Reform Alice Rivlin
    • American Institutes of Research Institute Fellow Marilyn Moon

In their opening statements, both E&C Chairman Fred Upton (R-MI) and Health Subcommittee Chairman Joe Pitts (R-PA) encouragingly stated that repealing the SGR must be paid for, with Pitts citing CRFB's finding that doc fixes have been paid for 98 percent of the time since 2004.

Both noted that there exist numerous options with bipartisan support to pay for a replacement. Upton went further, calling on lawmakers to not just fix the SGR but make Medicare sustainable.

January 22, 2015
CRFB Releases Budget Resolution Principles

Yesterday, the Committee for a Responsible Federal Budget released a one-page list of principles to help guide policymakers in crafting a budget resolution this spring. CRFB called on Congress to follow regular order by agreeing to a budget resolution conference report that lays out a framework for pursuing priorities and addressing issues in a fiscally responsible manner before making major decisions on spending or revenues. The principles include four primary criteria for a responsible budget resolution:

  • Put the debt on a downward path - The budget should include realistic, gimmick-free tax and spending levels sufficient to reduce the debt as a share of the economy in the medium and long term. You can learn about the unsustainable path of federal debt by reading our Report: Deficit Falls to $483 Billion, but Debt Continues to Rise.
  • Responsibly address upcoming "Fiscal Speed Bumps" - These are the upcoming budget-related deadlines -- such as the impending cuts required by the Medicare Sustainable Growth Rate, depletion of the Highway Trust Fund, and reinstatement of the debt limit -- that present lawmakers with an opportunity to add up to $3 trillion to the debt, or take the more fiscally responsible route. You can read more about them in our paper Fiscal Speed Bumps: Challenges, Risks, and Opportunities.
January 22, 2015
Fix the Debt and Concord Coalition Launch First Budget Initiative

Today, Fix the Debt and the Concord Coalition launched First Budget – an effort to engage voters and candidates in a discussion about the nation’s unsustainable budget during the 2016 presidential campaign.

First Budget's mission is to ensure that “the first budget that the next president submits to Congress must chart a more sustainable course that strengthens the nation, encourages growth and protects coming generations from excessive government debt.” Read the full press release here.

With a long history of advocating for fiscal responsibility, these two organizations hope to raise public awareness about the growing national debt and encourage candidates to make fiscal responsibility a top priority and put forward plans to deal with our long-term fiscal imbalance. With these goals in mind, First Budget will engage voters and mobilize volunteers, starting with the early primary states of Iowa and New Hampshire, to ask candidates directly about the debt and start a public discussion on the campaign trail.

January 21, 2015
President Obama’s Middle-Class Tax Message in the State of the Union

Dr. Eugene (Gene) Steuerle is the Richard B. Fisher chair and Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget.  He wrote a column today on his blog - The Government We Deserve. It is reposted below. 

President Obama’s tax proposals for the middle class were a key element of his State of the Union address. But they represent only relatively modest efforts to create subsidies through the tax code rather than through other departments of government. Looked at broadly, many only tinker around the edges of tax policy and count on an overloaded and troubled agency, the IRS, to administer them.

January 20, 2015

Tonight at 9:00 PM, President Obama will address Congress and the nation in the State of the Union address. As he lays out his agenda for this year, CRFB will be following along and providing analysis of the budget-related policies he mentions. We hope the President will address our long-term debt problem in his remarks and set the stage for a bipartisan deficit reduction effort.

January 20, 2015

President Obama's State of the Union address is tonight at 9 p.m. In preparation of his speech, we've brought back our great State of the Union fiscal bingo game - DEBT-O!

Play with your friends and keep track of budget-related words and terms used by the President. Although the speech will cover many issues, President Obama should still address the nation's fiscal issues in his speech, and perhaps talk about how to handle the upcoming Fiscal Speed Bumps. Click here for a printable PDF of eight different boards.

January 20, 2015
A Big Bang on Tax Reform?

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

There is a growing consensus that one of the more fertile fields for possible bipartisan action between President Obama and this new Congress is tax reform.

This is logical.  

January 15, 2015

With tax reform heating up, House Ways and Means member Rep. Devin Nunes (R-CA) has gotten the ball rolling with a business tax reform plan called the American Business Competitiveness Act. The draft would dramatically overhaul and simplify the corporate tax code, broadening the tax base in many areas while lowering tax rates on businesses.

Nunes's draft would change business taxation to be a cash-flow tax, making it more closely related to businesses' actual inflows and outflows. Nunes has said that the plan would be deficit-neutral over ten years using conventional scoring, although he has not made the estimate publicly available. The main elements of the plan include:

  • Reducing the top tax rate to 25 percent for both corporate and non-corporate businesses, phased in over ten years
  • Allowing businesses to write off the full cost of investments immediately (known as expensing) rather than writing them off over the life of the investment (see here for background on depreciation rules)
  • Repealing deductions for interest expenses while reducing taxes on interest income to the dividend rate (20 percent)
  • Eliminating other business deductions and credits
  • Changing the international tax system to a territorial system, where U.S. companies' income earned outside the country is not taxed by the federal government
  • Repealing the corporate Alternative Minimum Tax (AMT)

One of the most unique aspects of the proposal is the move to full expensing and the repeal of interest deductions.

January 14, 2015

Stronger economic growth is one possible way to reduce deficits, but it is often difficult to identify which policies produce the strongest growth because advocates for any policy will contend that their approach is best. However, one way to encourage economic growth is by supporting policies that encourage the formation of startup companies. The University of Virginia's Miller Center released a report today with ideas to do just that, entitled Can Startups Save the American Dream?. The report was the product of the Milstein Commission on Entrepreneurship and Middle-Class Jobs, a part of the five-year Milstein Symposium initiative to advance innovative, nonpartisan, action-oriented ideas to help rebuild the American Dream. CRFB President Maya MacGuineas is a member of the Commission.

January 14, 2015

At an event at the Center for American Progress, House Budget Committee Ranking Member Chris Van Hollen (D-MD) unveiled an "Action Plan" to broadly cut taxes for the middle class. The reported $1.2 trillion cost of the plan would be offset with revenue from high earners and the financial sector. The details of the plan have not been completely spelled out yet, but it is encouraging that Van Hollen is committed to paying for the full costs. However, using increased revenues to pay for a middle class tax cut will make future deficit reduction more difficult.

Here are the major elements of Van Hollen's plan, including four parts that would cost money and three proposals to raise money.

Paycheck Bonus Tax Credit

The plan's centerpiece is a Paycheck Bonus Tax Credit, which would provide a $1,000 credit for single earners and $2,000 for couples. The credit would phase out at incomes of $100,000 and $200,000 indexed for inflation. Van Hollen indicated that the credit was not refundable, meaning that people with no income tax liability would not benefit, but that he intends to consider changes to make it at least partially refundable, which would be more expensive and provide more benefit to lower-income households. This credit is the plan's most expensive, potentially making up four-fifths of the plan's cost, depending on the exact details.

If taxpayers put at least half of their tax credit into a tax-preferred savings plan, they would qualify for an additional $250 Savers' Bonus credit.

January 14, 2015

The brand new 114th Congress is at it again. Only weeks into the term, a second fiscally irresponsible change to the Affordable Care Act (ACA) has been introduced -- a repeal of the law's 2.3 percent tax on medical devices sold in the U.S. that is expected to add roughly $25 billion to the debt over ten years.

The medical device tax was included in the ACA in order to help pay for the law's new health coverage subsidies and in part to compensate for the financial gains device companies could expect as a result of increased coverage.

Repeal of the tax, though, is one of the few ACA-related changes with bipartisan support -- an amendment to the FY 2014 Senate budget creating a deficit-neutral reserve fund for repeal passed by a 79-20 vote, with more than 30 Democrats joining every Republican in favor. Notably, this vote was different than outright repeal since the action was both non-binding and stipulated deficit-neutrality, but it indicated the support that repeal has in both parties. Yesterday, a bipartisan group of Senators introduced a repeal bill. If repeal is to happen, though, lawmakers need to make up the lost revenue.

Criticism of the tax generally focuses on the potential negative effects on the medical device industry, but there are also concerns about the economic inefficiency of selectively taxing one type of product and the Treasury's difficulty in administering the tax.

January 9, 2015

Interest in increasing the gas tax appears to be heating up as policymakers realize the Highway Trust Fund is running on fumes, and an upcoming Fiscal Speed Bump offers the opportunity to change that. At the end of May, the latest highway bill will expire, and lawmakers will have to find a way to plug the $15 billion annual gap between highway spending and revenue.

Over the next ten years, that gap will total $180 billion, and the practice of filling the difference with general revenue and budget gimmicks is becoming increasingly difficult. Highway spending has exceeded dedicated revenues for most of the past 15 years, and since 2008, lawmakers have transferred $65 billion from the general fund to the trust fund to cover its shortfalls rather than adjust highway spending or revenue.

In the past, some policymakers have proposed raising the gas tax to close the gap structurally, but a major development may have made this possibility more likely: oil and gas prices plunging by more than half and two-fifths, respectively, leading to the lowest prices drivers have faced in six years. This plunge has led to speculation that the first gas tax increase in more than 20 years could now pass Congress (assuming the trend doesn't reverse in the next few months). For context, the 15 cent gas tax increase necessary to fully close the HTF shortfall is only one-tenth the size of the roughly $1.50 per gallon drop in gas prices.

January 9, 2015

Although the 114th Congress is just getting settled, it will have to move quickly to address a series of deadlines with serious policy and fiscal consequences. These "Fiscal Speed Bumps" present serious challenges and risks but also opportunities for policymakers, as we explain in a new paper.

The paper lays out the seven speed bumps -- six this year and one in 2016 -- that policymakers will have to (or should) address this year, what policymakers have usually done in the past, and the consequences of inaction for each. These speed bumps are:

January 9, 2015

The recently adopted House rules for the 114th Congress are getting attention in the budget world mostly for their requirement that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) take into account macroeconomic effects when scoring budget legislation, a process known as dynamic scoring. But that requirement isn't the only new rule with fiscal implications.

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