Today a new bipartisan caucus was announced to support passage of H.J. Res.1, a balanced budget constitutional amendment. The co-chairs are Representatives Mike Coffman (R-CO) and Jim Marshall (D-GA) and founding members are Representatives Bob Goodlatte (R-VA) and Mike McIntyre (D-NC).

H.J. Res. 1 directs the President to submit a balanced budget to Congress annually. It also prohibits annual outlays (except for repayment of debt principal) from exceeding receipts (except those derived from borrowing); a three-fifths vote of each chamber would be required to waive the requirement for a specific expenditure. A three-fifths vote would also be required to increase the public debt limit. Any bill increasing revenue would require a majority roll call vote in each chamber for approval. Waivers would be allowed in times of war or other circumstances involving military conflict. The bill currently has 175 co-sponsors in the House.

If ratified, the amendment would take effect the later of the second fiscal year beginning after its ratification or fiscal year 2016. The preliminary CBO analysis of the President’s FY 2011 budget estimates an $894 billion deficit that year, which is the gap that would have to be erased in order to balance the budget. That would force the kind of difficult decisions that Washington has been unwilling to make.

At a press conference launching the caucus its leaders stressed the need to address rising budget deficits in a bipartisan manner. Goodlatte stated that the “public is focused on this issue above all others” and that it is the top issue expressed by his constituents. The members displayed a chart with recent figures from the CBO on the rising debt-to-GDP ratio in the President’s FY 2011 budget to make their case for addressing the debt.

Coffman said that the amendment would “force us to make the tough decisions” regarding budget priorities, such debate over priorities is currently lacking in Congress according to the Congressman. Marshall used the example of the current health care bill, arguing that if lawmakers were compelled to focus on the cost issue in health care, they would be more motivated to find solutions.

There was also much talk of how running up debt will adversely affect future generations. Goodlatte said that inaction on tackling the debt is “kicking the can down the road – kicking it towards our grandchildren.” Marshall added that this generation has a moral obligation to future generations to act.

All expressed optimism that the significant hurdles to enacting a constitutional amendment could be overcome. They noted that similar amendments received the required 2/3 majority in the House in 1995 and 1997 while falling just one vote short of that threshold both times in the Senate. Marshall expressed optimism that the required 3/4 of states would ratify it “within a year.” All but one state has a balanced budget requirement for state budgets.

The Blue Dog coalition also recently unveiled a balanced budget amendment. CRFB welcomes the focus on the need for budget discipline and addressing mounting deficits and debt. These proposals move the debate towards getting specific about stabilizing the debt and developing a credible fiscal plan, which needs to happen now. As Coffman said today, we risk a financial meltdown if we don’t act.

Ireland, like other European Union nations including Spain, Portugal, and Greece, risked losing the confidence of its creditors when it did not have a strategy to get its fiscal house in order after taking on massive debt to rescue its economy and financial system over the past few years. 

Last year, Ireland faced the same fiscal problems that Greece faces now (with the exception that Ireland was hurt by the formerly high flying housing market and “bad” banks).  Investors demanded a high risk premia and credit ratings agencies downgraded Ireland’s sovereign debt, based on rising fears that Ireland could not manage its fiscal accounts.  Investors worried that the country would have to turn to inflation to finance its debts.  Some thought in the worst case that Ireland might default on its debt and the cost of insuring against that default rose significantly.  But the Irish government acted. It developed tough budgets that included significant cuts to government spending and raising additional revenue.   

This wise action has not been without pain.  Government cuts have hurt public services and public servants and the government has faced high disapproval ratings (see Wall Street Journal, March 10, 2010).  But as the Wall Street Journal reported, there has also been an upside.   Despite still facing high deficits and debt, the cost of insuring against an Irish default has shrank and is much lower than the similar cost for Greek debt (Greece fails similar problems but has been slow to implement budgetary changes). 

The United States should follow the Irish example (and those of other countries who have undertaken fiscal turnarounds (see CRFB paper on fiscal turnaround success stories) Developing a credible plan to address a nation’s debt can assuage investors’ fears about default and fiscal policy.   The United States has the luxury and flexibility of avoiding the harsh and quick cuts that Ireland had to make and can wait until the economic recovery has firmly taken hold.  But to buy some breathing room that Ireland did not have (and that Greece may have lost), the United States must show its creditors that it is serious about stabilizing the federal debt over a reasonable timeframe. 

Legislation from Senators Jeff Sessions (R-AL) and Claire McCaskill (D-MO) to establish discretionary spending caps may get a third vote this week in the Senate after falling one vote short of the needed 60 votes last week. The bipartisan proposal seems to be gaining momentum after getting 56 votes in January during the debt ceiling increase debate.

The sponsors have made some slight changes in order to attract more support. The bill will institute caps for fiscal years 2011 through 2013 and allows exemptions for emergency spending with a 3/5 vote. It is now being offered as an amendment to the FAA Reauthorization bill.

CRFB supports spending caps, which in addition to PAYGO can introduce much-needed fiscal discipline in Congress. Even though discretionary spending is less of a budgetary threat than mandatory spending, it has grown faster than entitlements over the past decade. Controlling discretionary spending will be essential to reducing the federal debt.

Let’s hope the perseverance of Sessions and McCaskill pays off with one more vote for fiscal responsibility.

A month and a half ago, Representative Paul Ryan (R-WI) released his "Roadmap for America's Future," a detailed plan to reform taxes and spending, and ultimately address our long-term debt problems in full. The CBO score of the proposal found that it would significantly improve our current debt path, and eliminate the debt in its entirety by 2080. As CRFB and others praised the plan, however, some have argued its assumptions may be unrealistic -- particularly on the tax side.

On February 4th, the Tax Policy Center's (TPC's) Howard Gleckman pointed out that CBO did not in fact truly score the revenue effects of the Roadmap. As he explained (emphasis added):

As specified by [Congressman Ryan's] staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy) until they reach 19 percent of gross domestic product (GDP) in 2030, and to remain at that share of GDP thereafter.

[we] asked CBO to analyze the Roadmap’s long-term revenue impact and CBO declined to do so because revenue estimates are in the jurisdiction of the Joint Tax Committee (JCT).  JCT does not currently produce revenue estimates beyond the traditional 10-year scoring horizon.  Based on consultations with the Treasury Department and other tax experts, the Roadmap’s tax rates were formulated to produce revenues equivalent to the current tax code.

Source: Tax Policy Center

The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts.  If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth.

Regardless of where you fall in this debate, Rep. Ryan deserves a lot of praise for putting out a detailed plan to deal with the exploding long-term debt.  Very few lawmakers have proposed specific ways to deal with our debt, and Ryan has a plan to significantly curb the cost of entitlement programs and eventually bring the debt under control.  But there is one lesson from this exercise -- large tax cuts (at least compared to current policy) are probably off the table for good, if we are serious about getting our fiscal house in order.

Though Ryan did not intend to do so, TPC and CBPP show that cutting taxes by about 2 percent of GDP (relative to current policy) would drive the debt to astronomical levels -- even assuming the extremely large (and extremely brave) spending cuts proposed by the Congressman.

Congressman Ryan is certainly right that "we simply cannot chase our unsustainable growth in spending with ever-higher levels of taxes," but there is a corollary. We don't appear to be able to chase our continued appetite for tax cuts with the necessary cuts in spending -- and we can't continue to finance them through borrowing.

To get our debt under control, both taxes and spending will have to be on the table. Representative Ryan deserves all the praise in the world by taking the first step, and putting forward a real and honest plan to move forward. If others want to criticize his plan for raising insufficient revenue or cutting spending too traumatically, that is fine. But it is time for them to put forward sustainable alternatives.

We look forward to seeing them.

This week, the New York Federal Reserve announced the beginning of a new Reverse Repurchase Agreement Program to reduce some of the liquidity in financial markets. Under the program, the Fed will sell securities from it's portfolio -- but with an obligation to repurchase them at a later date. This is an additional sign of tightening from the Fed, in light of last month's increase in the discount rate from 0.5 to 0.75 percent.

The New York Fed originally announced this program back in October in an operating policy statement, stating that they had been working internally on the operational details of repurchases and reverse repurchases to make it a viable option if the FOMC decided such a program should be used. In the statement, the Fed also announced that reverse repos are nothing new and have even "been in the Federal Reserve's toolkit for years, and the Federal Reserve has conducted them both as recently as December 2008."

The New York Fed said that the reverse repurchase agreements will initally focus on firms that provide the largest amounts of short-term funding -- namely, primary dealers and domestic money market mutual funds -- but intends to eventually broaden the pool to more participants.

Even though this can be interpreted as a method of tightening, the Fed's statement yesterday maintained that the announcement of this program should not affect expectations on any other monetary policy moves. The program will indeed reduce some liquidity in markets, but is unlikely to have any significant impact.

CRFB has incorporated this program into the list of Fed programs, created to address the economic crisis, on Stimulus.org.

In a blog post yesterday, Donald Marron discussed an additional way for governments to ease budget pressures along with traditional spending cuts and tax increases. Dr. Marron noted that governments can also sell some of their assets (a proposition that is getting increasing international attention -- the focus of a Washington Post Op-Ed this morning -- in light of several German lawmakers' suggestion last week that Greece sell some of its assets).

Dr. Marron highlights that the government owns almost three trillion in assets; but while many of these -- such as government buildings and Navy ships -- are not sellable, the government owns hundreds of billions worth of financial assets.

Let's see how much the government could earn by selling some of these more notable assets...

The Financial Report of the U.S. Government shows us that the U.S. government owns $2.7 trillion in assets, up from just $2 trillion last year. These assets can be broken down into cash, international monetary assets, loans, mortgage-backed securities, and stocks. The CBO also reports the potential 10-year savings from selling portions of several agencies.

^{Sources: Financial Report of the U.S. Government, CBO Budget Options: August 2009, author's calculations.
1 Ten-year cost savings for selected sales taken from CBO Budget Options, and reflect savings between 2010 and 2019.
^ The Financial Report show the government's holdings of gold equaling $11.1 billion as of September 9, 2009. However, as Donald Marron pointed out, this number assumes that the 261,498,900 ounces of gold is valued at the statutory price of $42.2/ounce. On March 9, 2010, the value of gold was over 26 times greater at $1,118/ounce, bringing the current value of these holdings to over $292 billion.
# Includes savings of $60 million a year in related costs and projects between 2013 - 2019.}

The table above shows that the U.S. could earn over $600 billion by selling some of its many assets. Asset sales would not necessarily change the "net liabilities" of government (as we discuss here), but would reduce the debt. Yet, sales of this type would be one-time fixes to our country's annual deficits and would not change the unsustainable fiscal trends we now face. 

We aren't advocating for such asset sales -- we're just trying to show how much the government could save by doing so. Marron notes that many U.S. government assets, such as stewardship and heritage sites, haven't been given dollar values, nor should they. But in the immense pile of assets the government owns - we agree with Marron that there have got to be some sellable assets in there somewhere.

See our list of previous Deficit Challenges:

• Contestant #1 in Our Spending Challenge
• TPC Takes Tax Challenge with Income Rates
• Deficit Challenge by Cancelling Stimulus Spending
• What About Education Cuts?

On Friday, the Congressional Budget Office released its Preliminary Analysis of the President’s Budget. (Last week we offered a few graphs and a short analysis in this blog post). 

The Preliminary Analysis offers a taste of what will come later this month when CBO releases their full analysis of the President's Budget. This version includes significantly less details, does not provide comprehensive estimates of all the President's proposals (in some cases, they simply take OMB's estimates as "placeholders"), and relies on CBO's January economic assumptions (which they will update soon).

The analysis does, however, attempt to estimate the effects of the President's proposals -- and the results aren't pretty.

According to CBO's projections, under the President's budget, debt held by the public will grow to 90 percent of GDP by 2020. That is a whole 13 percent higher than what OMB estimates and 22 percent higher than under CBO's baseline. And it is a level identified as dangerous by economists Carmen Reinhart and Kenneth Rogoff (see this blog post for more detail).

CBO's estimates are far more pessimistic than OMB's for at least three reasons. First, OMB's GDP estimates are more generous -- and this higher denominator in the debt-to-GDP ratio accounts for roughly half the difference. Second, CBO's baseline assumes roughly $500 billion more in deficits, over the next decade, than does OMB's current law baseline (these differences also stem mainly from economic assumptions). And finally, CBO estimates the President's policies will cost about $700 billion more, on net, than OMB does.

See a break down of the policies here:

^{a In some cases, due to insufficient detail, CBO relied on OMB's cost/savings estimates.
b Includes refundable portion of all proposed tax credits, especially from the renewal of the 2001/2003 tax cuts.
c Excludes $177 billion increase in mandatory spending resulting from moving Pell grants from a discretionary program to a mandatory program.
d Most program integrity savings cannot be scored by CBO, since they first require the appropriation of discretionary funds. Additionally, scorekeeping conventions prohibit the scoring of mandatory savings unless the authorizing language is modified or appropriations language substantively changes the program.
e Although CBO and OMB project similar discretionary spending levels, OMB projects higher discretionary spending in its baseline, resulting in greater savings under its budget.} 

While the ten year path for outlays is roughly the same between estimates, OMB expects about $2 trillion more in revenue to come in over ten years. The CBO deficit path remains consistently higher than OMB's over the next decade, never falling below $724 billion (in 2014). The deficit path over the next decade, according to CBO, differs from OMB's in that it is consistently higher, sometimes by as much as alomst 1.5 percent of GDP. The deficit as a percent of GDP hits a low of 4.1 percent in 2014 before climbing steadily to 5.6 percent by 2020. This is important not only because of the unsustainable fiscal path it illustrates, but also because it diverges notably from the President's stated goals. In his budget, the President proposed a specific budgetary goal: stabilizing the debt-to-GDP ratio by 2015, or dropping that number down to around 3 percent. The President's budget, according to OMB, would bring the deficit down to 3.9 percent by 2015, and they assumed additional deficit-slashing would occur with the help of a newly created fiscal commission. CBO's estimate of a 4.3 percent deficit in 2015 is significantly greater than OMB's estimate, and it is unlikely the work a commission could affect deficits at such a level.

The CBO will release a more in-depth analysis of the President's budget in the coming weeks. If this preliminary analysis is any indication of what we may see, the numbers are not pretty. The time is now for the Administration to get serious about the fiscal picture over the next decade.

UPDATE: The Coburn amendment was agreed to on a 100-0 vote.

The Senate today will consider a proposal from Senator Tom Coburn (R-OK) to post information on spending approved by the chamber. Amendment # 3358 to the tax extenders bill (H.R. 4213) will require the Secretary of the Senate to post on the Senate website information on:

• the total amount of discretionary and direct spending passed by the Senate that has not been paid for, including emergency designated spending or spending otherwise exempted from PAYGO requirements;
• the total amount of net spending authorized in legislation passed by the Senate, as scored by CBO;
• the number of new government programs created in legislation passed by the Senate.

The list would be updated weekly. The Senate will also consider a substitute proposal from Senator Max Baucus (D-MT) that will only require a web page with links to CBO data on the budgetary effects of legislation being considered by the Senate. The Secretary of the Senate would only be required to update that page every three months under the Baucus proposal. The Baucus amendment would not provide new or timely information. The Coburn amendment would add more transparency to deficit spending and, perhaps, would hold Senators more accountable for adding to the debt.

Maybe more transparency will prevent the Senate from continuing to bypass PAYGO and approve of more spending that is not offset.

Along with their analysis of the President's Budget, on Friday, CBO updated its Social Security projections. And as it turns out, the surpluses are now a thing of the past.

For the last two decades, the Social Security system has brought in significantly more revenue (mainly through the payroll tax) than it has spent on benefits. These resulting surpluses have been used to subsidize other parts of the budget, and then credited to the Social Security trust fund.

And as recently as 2008, these surpluses were projected to continue for a decade, before turning to deficits. At that time, CBO estimated surpluses of $700 billion between 2009 and 2018. A year later, CBO projected these supluses to be only $80 billion. And in its latest projections, CBO estimates cumulative deficits of $100 billion between 2009 and 2018 (and another $130 billion in the next two years, alone).

The economic crisis is the key cause of these downward revisions, since lower wages and employment have reduced payroll tax revenue, and have forced more seniors into taking retirement.

As shown in the chart above, CBO projects a Social Security deficit of $29 billion in 2010, which will decline through 2014, before rising to $77 billion by 2020. Technically, CBO projects small surpluses in 2014 and 2015. However, it is bound by the "current law" assumption that all the 2001/2003 tax will expire. Should the majority of them be renewed (which is highly likely), less revenue will be brought in through taxation of Social Security benefits; and although this only makes up a small portion of the system's funding, the difference will likely be enough to keep the system in deficits.

When the system runs deficits, the difference is financed through general revenue, which essentially "pays back" the money lent to it from previous surplusses, and accounted for through the Social Security trust fund. The trust fund is projected to stand at about $3.6 trillion in 2018 (two years ago, it was projected to stand at $4.5 trillion).

As deficits continue to grow -- and they will continue to grow -- the trust fund will eventually run dry. At that point, full benefits will not be payable -- and seniors would likely see an immediate 25-30% cut in their benefits.

Policy makers should therefore be debating ways to avert this -- through benefit reductions, tax increases, changes to the retirement age, or other means. Instead, they are trying to find ways to give seniors additional benefits to make up for there being no Cost of Living Adjustment (COLA) this year -- even though there was no actual increase in prices (in other words, cost of living did not increase!).

With Social Security deficits as far as the eye can see, and a broader (and larger) government debt crisis just around the corner, it is time for policymakers to start enacting some real reforms. We just hope Washington is up to the task.