The Bottom Line

October 17, 2014

With FY 2014 officially in the book, it’s time to look back at how spending and revenues have changed since the FY 2009’s highest nominal deficit of all time (and 5th highest as a percentage of GDP since 1930).  

The FY2014 budget deficit totaled $483 billion with $3.02 trillion of revenue and $3.50 trillion of spending. This deficit was nearly 30 percent below the FY2013 deficit and 66 percent below its 2009 peak. In FY 2009, the budget deficit was $1.41 trillion with $2.11 trillion in revenue and $3.52 trillion of spending.

Annual deficits have fallen substantially over the past five years, largely due to rapid increases in revenue (mostly from the economic recovery), the reversal of one-time spending during the financial crisis, small decreases in defense spending, and slow growth in other areas. This temporary improvement in our nation's short-term finances, while likely too quick for the struggling economy, comes as nominal spending is only about $15 billion lower (though it has declined sizably as a percent of GDP).

Between that time, health care and Social Security spending have grown significantly due to natural upward pressure, aging of the population, and to a lesser extent, the coverage expansions in the Affordable Care Act. Interest spending is also higher as a result of the huge increase in debt since 2009. Meanwhile, discretionary and other mandatory spending are down from fading stimulus, the economic recovery, and legislated deficit reduction like the sequester.

 

October 17, 2014

In response to the release of final FY 2014 deficit numbers, Tax Policy Center's Howard Gleckman writes that this year's outcome just returns the budget to "fiscal normalcy" -- and only temporarily. Although the deficit has fallen significantly in recent years, this year's budget is largely in line with the averages of recent decades.

In 2014, federal tax receipts reached 17.5 percent of GDP, a level unseen since 2007, just before the economy cratered. That’s only slightly higher than the 40-year average of about 17.4 percent of GDP.

....

The story is similar on the spending side. In 2009, federal outlays topped out at 24.4 percent of GDP. By the fiscal year just ended, they had declined to 20.3 percent, a shade below the 40-year spending average of 20.5 percent.

October 16, 2014

We noted in our discussion of the final Monthly Treasury Statement for 2014 that the deficit has fallen by two-thirds since 2009 after rising by nearly nine-fold between 2007 and 2009. However, much of this decline was already expected as a result of a recovering economy and unwinding stimulus, so another way to look at what's happened with the budget in the last five years is how the projected 2014 deficit has changed since 2009.

For this analysis, we use the August 2009 Congressional Budget Office (CBO) baseline as a starting point, since it was the first CBO update after the passage of the 2009 stimulus and when CBO and other economic forecasters were getting a better grasp at how deep the recession actually was. That baseline showed a projected 2014 deficit of $558 billion, $75 billion higher than the actual deficit of $483 billion. Notably, however, the projected deficit excluded the effects of the 2001/2003 tax cuts set to expire after 2010, even though it was widely expected that most or all of them would eventually be extended permanently. Also notable is that debt-to-GDP was only projected to be 66 percent of GDP in 2014 compared to the actual 74 percent; debt ended up being higher due to worse-than-expected economic performance, the aforementioned tax cut extensions, and further short-term stimulus.

 

If you incorporate the presumption that all of the 2001/2003/2010 tax cuts would be extended into CBO's 2009 projections, then this year's official deficit was $375 billion lower than projected. $220 billion of that decline stems from changing economic and technical assumptions (including the $25 billion drop in the deficit since CBO's August 2014 update), and legislation prompted the remaining $155 billion reduction in 2014's deficit (primarily through discretionary spending cuts, the fiscal cliff deal, and the Affordable Care Act). Perhaps surprising at first blush is that changes to economic projections actually contributed $70 billion to the declining 2014 deficit, even though in 2009 CBO expected GDP to have reached its potential by now and unemployment to average 5 percent for the year. A slower than expected recovery, however, has also led to interest rates remaining extremely low, saving the government significantly on debt service costs.

October 16, 2014

Medicare Part D costs have leveled off in recent years as pharmaceutical innovation has slowed and a number of blockbuster drugs lost patent protection, but a new wave of expensive specialty drugs threatens to revitalize cost growth. To help control the high prices of unique drugs paid for by Part D, Richard Frank and Joseph Newhouse recommend an innovative approach to apply binding arbitration as a fallback to price-setting negotiations.

The authors argue that policymakers overestimated the negotiating power that prescription drug plans (PDPs) would hold in setting prices when they created Part D through the Medicare Modernization Act (MMA) of 2003. Price negotiation in Part D proves most difficult for unique drugs, or those without any direct substitute. Setting prices too low for important, clinically unique drugs could harm future research and development as pharmaceutical companies could lose vital capital to continue incentivizing such research and development.

Frank and Newhouse offer a solution that incorporates binding arbitration into price setting for unique drugs. In their proposal, binding arbitration would take effect only after the government and manufacturer cannot come to an agreement, thereby encouraging the two parties to reach a negotiated settlement.

October 15, 2014

With the Treasury Department's year-end Monthly Treasury Statement having been released, we have revised last week's report today showing what the 2014 totals mean for the budget. The FY 2014 budget deficit totaled $483 billion, according to Treasury's statement. Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.


Source: CBO

Last week the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion.  While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary. Treasury's statement, which is considered final, shows revenues and outlays in FY 2014 that were $8 billion and $5 billion higher, respectively, than CBO's estimates. The result is a FY 2014 deficit of $483 billion, which is $3 billion lower than last week's CBO projection.

October 15, 2014

Republicans and Democrats do not agree on much, but both parties are talking about business tax reform that is "revenue-neutral," raising the same amount of money as the current tax code. But "revenue-neutral" can mean drastically different things, depending on which baseline policymakers choose to use. Discussing budget baselines might put most people to sleep, but the choice could mean an extra trillion dollars added to the debt over the next ten years.

Playing Baseline Games

Much of the disagreement over which baseline to use focuses on tax extenders, a set of mostly business tax breaks that expired in 2013. These breaks expire every year or two, and Congress routinely extends almost all of them. The Senate Finance Committee has a bill that would extend nearly all of them for two years, at a cost of $85 billion. Yet if all those provisions are extended year after year, the total ten-year cost would be almost $700 billion. Although Congress will likely deal with the extenders before the end of the year, their fate could set the parameters for future tax reform efforts.

Unfortunately, House Budget Chairman Paul Ryan (R-WI) is proposing to lower the bar for revenue-neutrality. He recently suggested policymakers should make some of the tax extenders permanent during the lame duck session, arguing that they do not need to be paid for and should add to the debt (which makes their costs disappear from the budget process and from needing to be offset in a revenue-neutral tax reform). If these were made a permanent part of the tax code, a future "revenue-neutral tax reform" would raise $700 billion less than before. Essentially, he is suggesting that this Congress lock in lower revenue levels – and higher debt – to make it easier for the next Congress to pass tax reform that they can claim is revenue-neutral.

October 14, 2014

The 340B Drug Pricing Program, enacted in 1992, gives hospitals and other providers serving disproportionately low-income populations the ability to buy outpatient prescription drugs at large discounts. It has come under increased scrutiny lately, though, as more and more people have questioned whether the program is actually fulfilling its purpose.

Criticism of the program has ramped up recently with charges that some hospitals are raking in large profits by taking the discounts from manufacturers and instead selling the drugs through hospital-affiliated clinics to higher-income/insured patients at the price the insurer pays. With eligibility for the 340B program determined based on a hospital's inpatient population, critics charge that this creates an incentive to serve more people in off-site outpatient settings located in wealthier areas. Hospitals deny this claim, saying that the program has served its intended purpose -- either the drugs are provided to vulnerable patients or the money is spent on expanding low-income access to care.

A new study published in Health Affairs by Rena Conti and Peter Bach examined characteristics of hospitals that participate in 340B and sided with the critics. They looked at those hospitals that also received Disproportionate Share Hospital (DSH) payments and saw how their communities changed over time. The number of 340B DSH hospitals has increased steadily since 340B's inception; however, the authors note a sizeable uptick in the growth rate of not only those hospitals but also of hospital-affiliated clinics starting in 2003. The number of clinics increased even more dramatically after 2010 when the Affordable Care Act expanded the types of providers that could qualify for 340B.

October 10, 2014

With the FY 2014 deficit continuing a trend of falling deficits over the past few years, some commentators have argued that budget hawks are inconsistent in not breaking out the champagne when they were so concerned with the high deficits of 2009-2012. In reality, we have consistently expressed our concern about the long-term budget outlook while acknowledging that the large deficits of that time were both a product of and necessary to respond to the Great Recession. In fact, one of our reports from July 2009 that is used as an example of panic about short-term deficits actually said quite the opposite (in bold italics no less):

The answer is to continue with stimulus policies as necessary, but, in order to regain the country’s fiscal credibility, to promptly develop and announce a plan to reduce the deficit and close the long-term fiscal gap. This plan would be implemented as soon as the economy is strong enough to absorb it.

We talked about developing a plan in the short term but not implementing it until economic conditions improved enough to warrant doing so. We did not recommend implementing the deficit reduction in the short term.

Nor did we focus on short-term deficits in releases or analyses of CBO ten-year baselines. We always called attention to the long-term path of deficits and debt and called for deficit reduction to focus on the structural imbalance that existed in the absence of economic weakness.

Examples are abound.

October 10, 2014

During the recent slowdown in Medicare spending, the prescription drug portion of the program, Part D, has been the lead actor in the story. The unexpectedly slow growth of prescription drug costs has made Part D cost much less than anticipated. But a new CBO working paper by Andrew Stocking, James Baumgardner, Melinda Buntin, and Anna Cook shows how Part D costs could be further controlled by improving the design of Medicare Part D's Low-Income Subsidy (LIS).

For background, the LIS helps people below 150 percent of the federal poverty line (FPL) afford the costs associated with Part D prescription drug plans. For those with income below 135 percent of the FPL, the LIS covers all premiums as long as the beneficiary chooses a plan that costs below the region's benchmark (ranging between about $20 and $40 per month in 2014), pays the entire deductible, and leaves minimal co-pays for drugs (for those between 135 and 150 percent of the FPL, the LIS covers a portion of each of these items). If LIS beneficiaries choose a plan with a premium above the benchmark, they pay the difference. If a plan that costs below the benchmark in one year moves above the benchmark in the next, Medicare automatically re-assigns beneficiaries to a plan below the benchmark unless they actively choose to stay with the plan or had proactively chosen their Part D plan originally.

The working paper looks at the difference in responses to competitive pressures from LIS and non-LIS beneficiaries and plans. Not surprisingly, LIS beneficiaries tend to be in less expensive plans because of the automatic assignment to plans at or below the benchmark; 87 percent of LIS beneficiaries are in a plan that is within 50 percent of the least expensive plan in the region, compared to two-thirds of non-LIS beneficiaries. But the authors note that plans catering to LIS beneficiaries tend to increase their premiums in the next year if they fall below the benchmark, since they have little incentive to have lower premiums once they are below; plans are estimated to raise monthly premiums by between $6.90 and $9.70 if they fell $10 below the benchmark in the previous year. Furthermore, the addition of a new plan sponsor into a region is estimated to lower plan bids by 0.5-0.8% for non-LIS plans, but only 0-0.2% for LIS plans.

October 9, 2014

While explaining why deficits have fallen from their historically large peak in 2009, we noted the main source of this tumble is a 43 percent rise in revenue. This increase came largely from the recovering economy, but also from legislated tax increases and the expiration of some temporary tax provisions. However, those provisions may be coming back soon and lead to a significantly greater increase in the deficit next year than projected under current law.

As CBO pointed out, the expiration of bonus depreciation played a large part in revenue increase:

Taxable profits were boosted in large part by the expiration at the end of December 2013 of various tax provisions, most significantly the rules that allowed firms with large amounts of investment to expense—that is, immediately deduct from taxable income—50 percent of their investment in equipment.

In our paper analyzing the Fiscal Year 2014 budget results, we pointed out that the decrease in the deficit was a temporary phenomenon and deficits would start increasing again after next year. If Congress were to extend expired tax breaks, it would both magnify the decline in the deficit in 2014 and prevent the deficit from declining in 2015.

Since the 2014 fiscal year is over and these tax extenders have not been extended yet, the 2014 deficit would not change even if the provisions are made retroactive to the beginning of the year as planned. The revenue loss from the 2014 tax cuts will show up in 2015 when companies and individuals file their taxes for 2014 and have lower tax payments or receive refunds as a result of the retroactively extended tax breaks. The same thing happened with bonus depreciation in FY 2010, when it registered very little cost because it was not extended until near the end of the fiscal year. In either case, the federal government loses the full amount of revenue from the tax break, but in the following year.

October 8, 2014

With the Congressional Budget Office's (CBO) year-end Monthly Budget Review having been released, we published a report today showing what the 2014 totals mean for the budget.  The FY 2014 budget deficit totaled $486 billion, according to CBO’s estimates (official numbers will come from the Treasury Department on Friday). Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

October 8, 2014

With today's release of the Congressional Budget Office's (CBO) final Monthly Budget Review for Fiscal Year (FY) 2014, many will be focused on the final 2014 deficit, but it also shows that Medicare clocked its fourth-lowest annual growth rate in history, at just 2.7 percent.

We have been closely following the unusually slow growth of Medicare throughout this year, and also documenting the program's "underlying" growth rate, or what growth would be with temporary or phased-in legislative cuts removed from the calculation*. Dechipering this underlying growth rate should provide a truer picture of the magnitude of Medicare's cost slowdown.

Interestingly (though not surprisingly), the three years with slower growth than this year -- 1998, 1999, and 2013 -- coincided with similar temporary or phased-in cuts.

For 2014, Medicare's underlying growth rate ended up at 4.9 percent, roughly one percentage point faster than both economic and beneficiary growth. Therefore, even removing these temporary effects, Medicare still grew slower than general inflation on a per beneficiary basis.

October 7, 2014

It is no secret that the 113th Congress has had little success reaching agreement on major policy changes, so its lackluster results on a report card from The National Coalition on Health Care (NCHC), grading lawmakers in the health care arena, should come as little surprise.

NCHC even graded on a curve by looking only at three areas where it initially saw promising prospects for bipartisan cooperation: modernizing physician payments/repealing the Sustainable Growth Rate (SGR) formula, increasing price and quality transparency, and strengthening Medicare by making it more efficient. NCHC handed out a D+ for strengthening Medicare, failed Congress on transparency, and gave it an incomplete on SGR repeal and physician payment reform, subject to revision based on what happens in the lame duck session after the November elections.

SGR Repeal/Physician Payment Reform

Arguably the area with the most immediate prospects for action is permanent SGR repeal and replacement. As we discussed a few weeks ago, some lawmakers are targeting the lame duck session to repeal the SGR in order to capitalize on the progress they've made during this congressional session, even though the current "doc fix" does not expire until April. There is a bipartisan framework to replace the SGR with a system to encourage physicians to participate in alternative payment models, moving Medicare away from fee-for-service reimbursement. However, lawmakers have not agreed on offsets for the bill, which could cost between $150 billion and $200 billion over ten years. The partisan bills that saw the light of day were not encouraging.

NCHC gave lawmakers an incomplete on this category but said it would give them an F if there was no further action. We also will give them an F if they pass a permanent doc fix without legitimate offsets.

Quality and Price Transparency

October 7, 2014

The national debt is currently twice the historical average, and will grow unsustainably until Congress makes responsible changes. Voters should be able to know how their candidates would take on this challenge. The Concord Coalition has published a list of helpful questions to help voters engage with candidates and learn their stances on these important issues.

As Concord explains:

Voters should expect candidates for federal office this fall to explain how they intend to deal with the huge challenges ahead. These include some problems that must be addressed in the very near future.

This is no time for vague rhetoric and petty partisan jabs; voters should insist on credible solutions -- the more specific, the better. Some of those solutions won’t be easy because the problems go far beyond the “waste, fraud and abuse” we hear about so frequently in campaign speeches.

October 6, 2014

In an op-ed in the Washington Post yesterday, editor Fred Hiatt pushed back on assertions by the Obama Administration that they have won over the deficit. Hiatt highlights a tweet by adviser John Podesta comparing fiscal metrics now and five years ago with the comment "a funny thing happened on the way to entitlement explosion" and a speech by President Obama at Northwestern University where he said "deficits have come down at almost a record pace, and they’re now manageable."

It is true that deficits have come down quickly, though context is needed. Without further legislative action, deficits are far from manageable, at least beyond the next few years. Although deficits have fallen significantly from post-World War II highs (as percent of GDP) and will remain below 3 percent of GDP through 2018, they will rise after that reaching 3.8 percent by 2022. Deficits will continue to increase beyond that as spending on interest and the major entitlement programs outpaces revenue. That, of course, leads to a run-up in debt.

Federal debt has reached 74 percent of the economy’s annual output (GDP), “a higher percentage than at any point in U.S. history except a brief period around World War II,” the CBO says, “and almost twice the percentage at the end of 2008.” With no change in policy, that percentage will hold steady or decline a bit for a couple of years and then start rising again, to a dangerous 78 percent by 2024 and an insupportable 106 percent by 2039.

October 6, 2014
A Social Security ‘Fix’ That Falls Short

Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

It’s election season, which means the time to demagogue Social Security is again upon us. Those trying to avoid difficult trade-offs in Social Security reform often say that all we have to do to is “tweak” the system by lifting the $117,000 payroll tax cap so all wages are subject to the tax.

Taxing all income above $117,000 at 12.4% would raise more than $100 billion a year–far from a tweak. And never mind that the government has many other priorities that might be a better use for new funds, such as covering growing health-care costs, making overdue investments in infrastructure and R&D, or controlling the national debt.

Even if we eliminate the cap–and there is a good case for at least raising it–that wouldn’t make Social Security even close to solvent.

According to the Social Security Administration (SSA), eliminating the cap would close about 70% of the system’s 75-year imbalance. According to Congressional Budget Office accounting, it would close only 45% of the gap.

The SSA found that eliminating the cap on payroll taxes would close only one-third of the shortfall in the 75th year. This is important because it shows whether the reform would help make the system structurally sound or whether it would generate largely short-term savings. Eliminating the cap would generate only 10 years of surpluses before the benefits Social Security pays out again begin to exceed the revenue it takes in.

Part of the reason the change would not be more effective is that while Social Security might begin taking in more revenue, it would also be on the hook for paying out larger benefits down the road. One smart way to address this would be a form of means-testing, where there would be no additional benefits associated with the additional contributions from those making more than $117,000. This would generate more revenue for Social Security while better targeting its benefits. But this change is often opposed by progressives who fear it would break the traditional link between contributions and benefits. Those critics need to decide whether providing new benefits to people who don’t need them is really worth giving away a significant portion of the gains that would be achieved by lifting the cap.

October 3, 2014

The Federal Reserve's efforts to help the economy recover through quantitative easing (QE), twisting, and tapering have made front page news without fail. Although it has gotten less attention, the Treasury Department has also been changing the way it finances the national debt to take advantage of lower interest rates, inadvertently counteracting some of the intended effect of the Fed's policies on the economy. That's exactly what a new Brookings working paper by Robin Greenwood, Samuel Hanson, Joshua Rudolph, and Lawrence Summers argues: during the past 5 years, the Fed and the Treasury have been "rowing in opposite directions."

In 2008, the Fed reduced interest rates to near zero in an attempt to help the economy grow. But nominal interest rates cannot go below zero, so conventional monetary tools stopped working. To further stimulate the economy, the Fed took extraordinary measures and began purchasing long-term government bonds and government guaranteed debt (like Mortgage Backed Securities, or MBS). These measures reduced the amount of long-term debt available for public investors and lowered long-term rates.

But while the Fed was engaging in these unconventional transactions, the Treasury was selling more long-term debt to lengthen the average maturity of the national debt, thereby locking in today's low rates and mitigating the risks of higher interest rates in the future, essentially providing a partial counterbalance to the Fed’s policies.

October 3, 2014
Republicans look to change budget rules in 2015

If Republicans win a majority in the U.S. Senate this November, they may push to have the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) use dynamic estimates in official scoring of legislation, according to press reports. Dynamic estimates, which include the economic effects of proposed legislation, would provide useful information to lawmakers. Trying to determine these effects, however, is an uncertain science.

Analysis of the potential dynamic effects of legislation could provide policymakers with useful information in evaluating legislation. However, incorporating dynamic analysis into official budgetary scores of legislation could be problematic for a variety of reasons and could lead to Congress enacting legislation that increases the deficit. While such analysis could be beneficial to understanding the full implications of legislation, it should only be provided as supplementary information and not part of the official score.

In brief, dynamic estimates incorporate the effect that legislation would have on macroeconomic variables such as Gross Domestic Product, employment, and inflation. Current scoring conventions only include microeconomic changes. To learn more about dynamic scoring, read our report: Understanding Dynamic Scoring.

October 2, 2014

A new paper by Donald Marron of the Urban Institute brings a new idea to the table in the debate over accounting methods for federal lending programs. The paper proposes an approach Marron argues corrects the downsides he describes in both current Federal Credit Reform Act (FCRA) budget accounting standards and fair-value accounting. His approach is called "expected returns," and it is a third way that maintains some of the benefits of both approaches.

Simply put, expected returns accounting calculates a yearly expected value on a loan by comparing the government's returns net of defaults to its borrowing costs (interest on the new federal debt that funds the loan). This method, the paper argues, is a more accurate picture of the actual fiscal effects of the loan over many years in contrast to showing the lifetime effect of a loan in one year as FCRA and fair-value do. This presentation allows for the accounting of any taxpayer subsidies over market rates, an important point made by fair-value. Expected returns accounting departs from both approaches by spreading the score over time when net returns or losses are expected.

Below is an example of a $1,000 dollar loan at below market interest rates from the paper. The government loses $35 in the first year because the loan is below market rates, but it gains money in later years as its returns exceed borrowing costs.

October 2, 2014

Two weeks ago, we discussed results from two different Accountable Care Organization (ACO) programs in Medicare, which showed an improvement in quality but only modest savings so far. But ACOs are still in their early stages, giving policymakers plenty of opportunities to learn lessons on how to fine-tune them to better serve Medicare beneficiaries and taxpayers. Last week, Reps. Diane Black (R-TN) and Peter Welch (D-VT) released a bill (H.R. 5558) to do just that, establishing greater incentives for high-quality, low-cost care from providers and more engagement with patients. Many of these goals are consistent with policy options that were discussed at the Dartmouth Medicare conference, co-sponsored by Fix the Debt, where experts emphasized ways to achieve more coordinated care and better patient engagement.

The bill would make a number of changes to give ACOs greater flexibility to accomplish their goals, specifically:

    • Providing regulatory relief for ACOs that use two-sided risk models and that make greater use of telehealth and remote patient monitoring;
    • Authorizing reduced cost-sharing for primary care services; and
    • Allowing ACOs to establish other incentive programs for patients to ensure their own wellness.

In addition, beneficiaries would be prospectively assigned an in-network primary care physician, who would be required to give beneficiaries information about the ACO at initial check-ups.

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