The Bottom Line

June 25, 2015

In their recently released long-term outlook, the Congressional Budget Office (CBO) laid out multiple scenarios for addressing our unsustainable long-term debt path. They show that it would take a long-term deficit reduction path that would include about $2.6 trillion of deficit reduction over the first 10 years to stabilize the debt at current levels, or about 1.1 percent of GDP per year. However, waiting even 5 years to start would necessitate a reduction of 1.4 percent per year. In other words, stabilizing our debt over 25 years will cost another $850 billion if we wait 5 years instead of acting today.

CBO explains why costs increase with delay:

The sooner significant deficit reduction was implemented, the smaller the government’s accumulated debt would be, the smaller the policy changes would need to be to achieve a particular long-term outcome, and the less uncertainty there would be about what policies would be adopted.

Delaying the start of deficit reduction makes the goals of stabilizing the debt and putting it on a downward path much more difficult.

Quantifying the cost of waiting can be done by estimating the fiscal gap, or the amount of non-interest spending and revenue changes necessary to keep debt stable (or reduce it to some other level) over a period of time. Focusing on the 25-year fiscal gap, CBO shows that keeping the debt stable would require a reduction in non-interest spending and/or an increase in revenues of 1.1 percent of GDP (as indicated above), while reducing the debt to its 50-year historical average share of 38 percent of GDP would require revenue increases and/or spending cuts equal to 2.6 percent of GDP (a path of deficit reduction nearly $6 trillion over the first ten years alone). These figures assume that changes are implemented today and grow considerably larger if policymakers wait five or ten years to take action.


June 25, 2015

In recent years, lawmakers have frequently used budget gimmicks to get around rules designed to maintain budgetary discipline -- if they pay attention to them at all. Whether through sleights-of-hand to comply with rules on paper only or simply ignoring rules all together, lawmakers have undermined the integrity of budget enforcement regimes. Today the Better Budget Process Initiative released a paper entitled "Strengthening Statutory Budget Enforcement" that recommends several ways to close loopholes in budget rules and make it harder for lawmakers to ignore them.

The report has 8 specific recommendations:

Strengthening enforcement of existing rules

1. Establish a separate point of order against provisions to exclude costs from PAYGO
2. Prohibit legislation blocking any sequester enforcing statutory PAYGO or discretionary caps

Restrict the use of phony offsets

3. Prohibit the use of spending cuts with no real savings
4. Restrict the use of timing gimmicks to claim savings within the budget window
5. Prevent the use of artificially inflated baselines to claim savings
6. Prohibit double-counting of increased revenues and spending cuts involving trust funds

Ensure all costs are subject to budget discipline

7. Limit the use of Overseas Contingency Operations as a slush fund
8. Expand the deficit-neutrality requirement in PAYGO to apply to debt service

June 24, 2015

Last week, CBO Director Keith Hall testified before the Senate Budget Committee on the release of CBO’s Long-Term Budget Outlook. Senators questioned Hall on the implications of debt and deficit projections for issues like economic growth, income inequality, and climate change.

In his testimony Hall confirmed the negative effects and risks associated with our current and projected debt levels, noting that high debt can lead to lower standards of living and crowd out private investment, which is bad for growth. Asked by Senator Bob Corker (R-TN) whether the federal government was ready for another crisis, Hall answered that another one would be “problematic” and that the government is not, in fact, fiscally prepared.

Hall also confirmed that the projected growth of deficits is largely attributable to an aging population and rising health care costs, which will place stress on mandatory spending. He agreed with a statement by Senator Tim Kaine (D-VA) that reforms to federal benefit programs, coupled with tax reform, are the answer to the country's fiscal challenges.

June 23, 2015

Much of the focus on the Congressional Budget Office's (CBO) score for repealing the Affordable Care Act (ACA) naturally has focused on the ten-year budgetary and economic feedback effects, which showed that repeal would increase deficits by $353 billion on a static basis, or by $137 billion if macroeconomic effects were incorporated. As we pointed out in our write-up, though, CBO also provides an estimate of the second-decade effects, finding that repeal would increase deficits over the second decade in the broad range of one percent of GDP (which implies around a $3.5 trillion deficit increase).

CBO doesn't provide a detailed year-by-year score beyond the first ten years because those estimates, as it explains, "would not be meaningful because the uncertainties involved are simply too great." However, the report does provide enough information for a reasonable estimate to be made based on the growth rates of the broad categories of policies, which show the savings generally rising much faster than the costs.

To estimate the long-term impact of the legislation, CBO divides the bill into parts and assigns simplifying growth rates to each part. Specifically, CBO assumes the following:

  • Savings from repealing coverage provisions – including new spending as well as revenue from the mandates and Cadillac tax – will grow by about 2 percent per year
  • Costs of repealing Medicare and Medicaid savings – including reduced growth rates for provider payments -- will grow by about 15 percent per year
  • Costs of repealing non-coverage tax increases – the biggest being the Medicare investment income tax  – will grow by about 6 percent per year
June 23, 2015

The main focus of CBO's long-term budget outlook is rightly on the unified budget numbers regarding spending, revenue, deficits, and debt. But it is also important to look at trust funds, both in what CBO estimates for their insolvency date and how CBO's assumptions about trust funds can affect debt.

CBO's ten-year projections also project insolvency dates for three trust funds: the Highway Trust Fund (later this summer), the Social Security Disability Insurance (SSDI) trust fund (FY 2017), and the Pension Benefit Guaranty Corporation's (PBGC) multiemployer pension fund (FY 2024). The PBGC's trust fund exhaustion is reflected in the budget numbers, meaning that spending is automatically limited to incoming revenue, but the other two much larger trust funds are assumed to continue spending at scheduled levels despite not having the resources to do so.

The same goes for the two trust funds whose exhaustion dates will come after ten years and thus are only discussed in the long-term outlook: the Medicare Hospital Insurance (HI) trust fund and the Social Security Old Age and Survivors' Insurance (OASI) trust fund. CBO does not specifically project an insolvency date for HI, which finances Part A of Medicare, because it doesn't do long-term projections for each part of Medicare. It does say that exhaustion would likely come shortly after ten years, and by the looks of the ten-year projections, that date would likely be around 2027.

As for OASI, CBO projects the trust fund to run out in 2031, the same as it projected last year. But on a combined basis, the Social Security trust funds would be depleted in 2029, one year earlier than CBO projected last year.

June 19, 2015

For the first time in nearly three years, the Congressional Budget Office (CBO) released a new estimate of the budgetary effect of repealing the entire Affordable Care Act (ACA). Just like in its previous estimates, CBO finds that repealing the ACA would increase ten-year deficits – and this time, they come to that same conclusion even with the economic effects included.

CBO's static estimate of repeal, which excludes macroeconomic effects, shows a ten-year deficit increase of $353 billion, the net effect of $1.174 trillion of tax cuts and $821 billion of spending cuts. Repeal would save money in the first three years of the budget window by $40 billion, but then increase deficits in subsequent years and by $118 billion in 2025 alone. Using this static score, debt would be about 1.4 percentage points higher in 2025 as a result of repeal.

Incorporating the dynamic macroeconomic effects into the budget score reduces the resulting ten-year deficit increase by $216 billion, making the total deficit increase with dynamic scoring $137 billion. The macroeconomic effects peak at $29 billion in 2019 and fall slightly to $20 billion by 2025. The main economic effects include: the decrease in labor supply due to a greater availability of insurance outside employment and from the implicit marginal tax rate increases from the insurance subsidies, as they diminish with income; the decrease in the capital stock from increased tax rates on investment income; and the decrease in aggregate demand from repeal of the insurance subsidies. CBO estimates that ACA repeal would boost GDP by an average of 0.7 percent in 2021-2025.

June 18, 2015

What do earmarks and dinosaurs have in common?

Both are extinct, but their skeletons still remain.

Last week, Senator Jeff Flake (R-AZ) joined the ranks of Rep. Steve Russell (R-OK), Sen. John McCain (R-AZ), and former Sen. Tom Coburn (R-OK) in calling attention to wasteful public spending. This time Flake draws attention to authorized in legacy earmarks through his own report titled “Jurassic Pork.” The report highlights nearly two dozen examples of projects once funded by earmarks that now receive federal funds through other means.

June 17, 2015

Isn’t it ironic, mere days after the Congressional Budget Office (CBO) warns about our nation’s long-term fiscal challenges in its annual report, the House of Representatives is set to vote on repealing a key mechanism put in place to constrain the core driver of our growing debt?

The Independent Payment Advisory Board (IPAB), scheduled for a repeal vote tomorrow, is a 15-member board of Senate-confirmed experts created by the Affordable Care Act (ACA) for the purpose of controlling Medicare costs. If Medicare per-beneficiary cost growth is projected to exceed GDP per capita growth plus one percentage point (GDP+1%), IPAB (or the Secretary of Health and Human Services if no Board members have been appointed) must make targeted recommendations to provider payments – which cannot affect Medicare benefits, eligibility, or cost-sharing – to bring per-beneficiary spending back in line. These recommendations then automatically take effect unless a majority in Congress votes to replace them with equivalent savings or a three-fifths majority of Congress overrides them entirely.

This last protection is valuable given how difficult it is for lawmakers to enact fiscally-responsible reforms otherwise. That repealing IPAB now has broad support in Congress just reinforces its importance.

June 17, 2015

CBO's Long-Term Budget Outlook, released yesterday, is a detailed 130-page document, filled with budget projections for the next 25 years, along with a supplemental spreadsheet with projections for the next 75 years. We've boiled down the document into a concise 6-page analysis with key facts and findings. CBO's debt projections have changed only slightly since last year – slightly higher debt in the next few years and a very modest decline in the still unsustainable upward track thereafter.

As we explain in our paper, CBO projects deficit and debt levels to remain fairly stable over the next few years, but then rise dramatically. Under CBO's "Extended Baseline Scenario," which generally reflects current law, deficits will rise from 2.7 percent of GDP over the next several years, to 3.8 percent by 2025, 5.9 percent by 2040, and 9.5 percent by 2090. As we explain, this will have major implications for debt:

The combination of deficit reduction legislation earlier this decade, low interest rates, and a slowdown in health care cost growth have certainly improved the long-term fiscal outlook, yet debt remains at record-high levels and is set to continue growing unsustainably with no end in sight. If policymakers continue to act irresponsibly – as they did with the “doc fix” legislation earlier this year – the situation will be far worse."

June 16, 2015

The Congressional Budget Office (CBO) today released its 2015 Long-Term Budget Outlook, showing a clearly unsustainable long-term path for debt. The featured projections go out 25 years, building off of their more frequently released 10-year projections, and the further they go out, the worse the fiscal picture gets.

CBO projects that debt will remain relatively stable at about 74 percent of Gross Domestic Product (GDP) through 2020, but then rise continuously, reaching 78 percent of GDP by 2025 and 103 percent by 2040. Beyond 2040, debt would continue to grow continuously to 181 percent of GDP by 2090. Under CBO's Alternative Fiscal Scenario, debt would reach about 175 percent of GDP by 2040. These numbers are very similar to last year, when CBO also showed an unsustainable path.

June 12, 2015

The House is considering trade legislation (H.R. 1314, H.R. 1295, and H.R. 644) this week that would fast-track authority for a few major trade deals that are currently being negotiated, change some trade enforcement rules, and extend various other trade-related provisions. Just as the House's previous bills and the Senate's bills (S. 995, S. 1267, S. 1268, and S. 1269) did, the costs contained in the legislation are paid for over ten years with savings from across the budget.

June 11, 2015

At the end of last month, lawmakers passed a two-month extension of the highway authorization bill with very little fuss. There was no discussion of offsets, and there didn't need to be because the Highway Trust Fund (HTF) is comfortably funded through the end of July, later than policymakers expected the last time they had to fill the HTF last summer. Here's the story on what happened in the last year with highway funding.

Last July, policymakers temporarily plugged the trust fund shortfall with a $10.9 billion general revenue transfer, financed mostly with "revenue" from the pension smoothing gimmick. This transfer intended to extend highway funding through the end of May, when the highway authorization was also set to expire. CBO projected in its August 2014 baseline that the law would leave a $2 billion shortfall in FY 2015 in addition to the $5 billion cushion the Department of Transportation says it needs to be able to reimburse transportation projects in a timely fashion.

Since then, two developments improved the near-term highway funding picture. The FY 2015 CROmnibus passed last December held highway spending to its FY 2014 level rather than having it grow with inflation as assumed in CBO's projections. This change resulted in FY 2015 spending which was lower by about $1 billion.

More importantly, gas prices fell significantly in late 2014 and early 2015, leading to higher fuel consumption and thus more revenue for the trust fund. Now CBO projects that the trust fund will take in $2.2 billion of more revenue in 2015 than they thought last August.

June 9, 2015

Over the past few years, we have seen many attempts by lawmakers to wriggle out of budgetary discipline by resorting to budget gimmicks. A new CRFB chartbook and one-pager highlight many of these gimmicks, including when they have been used and just how they work.

The one-pager, in particular, focuses on four of the most-frequently used gimmicks in recent years.

June 9, 2015

Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.

The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.

The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.

June 4, 2015

Former Arkansas Governor and Republican presidential candidate Mike Huckabee has criticized other candidates who are calling for entitlement reform, but the promises he makes simply don’t add up. Yesterday at a campaign event in Florida, Governor Huckabee suggested that Social Security and Medicare should not change for anyone currently paying into the program, after he has already pledged to oppose any increase in taxes.

When it comes to Social Security, the Huckabee plan is mathematically impossible if he intends to keep the program as self-financing. The program is scheduled to run out of funds on a combined basis by 2033, which is more than 20 years before those newly entering the workforce begin to retire. Even eliminating all benefits for new workers would have no impact on the date of insolvency. That means the Huckabee plan for Social Security would effectively call for cutting benefits across-the-board by 23 percent in the early 2030s.

June 4, 2015
Another Look at That IMF Paper on Debt–and What It Means for the U.S.

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

I draw a slightly different conclusion from the International Monetary Fund’s new discussion note, “When Should Public Debt Be Reduced?“ than does my fellow Think Tank contributor David Wessel. The paper argues that while debt is bad for economic growth, under many circumstances paying down a country’s national debt is not desirable. As long as a country isn’t bumping against the upper limit, or exceedingly high debt levels (and, by global standards, the U.S. is not) the policies to pay down the debt–raising taxes or cutting productive government spending–do more damage to economic growth than the good that comes from debt reduction.

But the paper also argues that countries should reduce their debt-to-GDP ratio to ensure that debt isn’t growing faster than their economy.

June 2, 2015

Update: This blog was updated on June 30 to reflect a CBO estimate published on June 23. Our original estimate was $13 billion, based on staff calculations and information published in The Hill.

The House Energy and Commerce Committee recently advanced a bill (H.R. 6) unanimously intended to facilitate research into and the development of medical cures. The bill finds savings from elsewhere in the budget to pay for its $12 billion cost, abiding by pay-as-you-go (PAYGO) rules.

The 21st Century Cures Act intends to promote biomedical research, streamline drug and device development, and make the development of cures more efficient. Among other things, it reauthorizes the National Institutes of Health (NIH) through FY 2018, creates a $2 billion per year NIH Innovation Fund through 2020, makes several changes to facilitate drug development and Food and Drug Administration (FDA) approval, utilizes health IT and telehealth to increase access to new developments, and creates a flexible $110 million per year Cures Innovation Fund through 2020.

June 2, 2015

Update (6/12/15): A new CBO score estimates that repealing IPAB will cost $7.1 billion over ten years, with all of the cost recorded after 2021. The text has been updated to reflect this score.

The House Ways and Means Committee today will markup several bills, including repeal of the Independent Payment Advisory Board (IPAB) and the medical device tax. You can find out more about the markup on the Ways and Means Committee website.

Unlike full ACA repeal, these policies stand a chance of overcoming a Presidential veto due to the bipartisan support already exhibited for each: as of this writing, the medical device tax repeal bill in the House (HR 160) has 281 cosponsors while the IPAB repeal bill (HR 1190) has 233 cosponsors. However, repealing these policies without offsetting savings from health care or revenue would be a mistake. IPAB, in particular, should not be abolished without a replacement that can similarly restrain long-term Medicare cost growth.

The Joint Committee on Taxation (JCT) has estimated that repealing the 2.3 percent medical device tax would cost $26.5 billion over ten years. However, JCT estimates that the amendment in the nature of a substitute that is expected to replace the bill in markup will reduce revenues by $24.4 billion over the same period.

Although the original co-sponsors of the bill, Reps. Erik Paulsen (R-MN) and Ron Kind (D-WI), said they expect the bill to be offset, no cost-savers have been produced yet. We suggested bundling payments for inpatient care as one option, which not only would produce enough savings to fully offset repeal but also achieve much of its savings from providers cutting their medical device costs. Thus, the medical device industry would still be asked to contribute to deficit reduction, but in a more efficient manner. There are many other options available as well, as we showed at the time and in our latest health care options.

Potential Offsets for Medical Device Tax Repeal
Policy Ten-Year Savings
Memo: Repeal Medical Device Tax -$24 billion
Health Options
Expand bundled payments for inpatient care $25 billion
Reduce state Medicaid provider taxes to 4.5 percent of patient revenues $35 billion
Reduce Medicare coverage of hospital "bad debts" $30 billion
Encourage use of generic drugs by low-income Part D beneficiaries $20 billion
Equalize payments for similar services performed in different settings $20 billion
Increase Medicare Advantage coding intensity adjustment $20 billion
Increase Medicaid drug rebates $10 billion
Revenue Options
Move up "Cadillac tax" by one year to 2017 $35 billion
Eliminate tax breaks for oil and gas companies $40 billion
Increase cigarette tax by 50 cents $35 billion
Close "John Edwards/Newt Gingrich" loophole $35 billion
Limit tax benefit of retirement accounts $30 billion
Eliminate tax exclusion for private activity bonds $30 billion
Require Social Security numbers for refundable portion of child tax credit $25 billion
Eliminate the mortgage interest deduction for second homes and yachts $15 billion

Source: CBO, JCT

June 1, 2015

The President signed a two-month extension of the highway bill on Friday evening, postponing decisions about spending and the financing of the Highway Trust Fund until July 31. This gives lawmakers time to find a long-term solution to highway funding.

Highway revenues, such as the gas tax, have remained relatively stagnant since 2008 while spending has grown, resulting in a shortfall of approximately $13 billion this year, or $175 billion over the next ten years. Because of the shortfall, Congress has often needed to provide extra funding when extending the highway bill. This time, however, the two-month extension was possible without any additional funding because gas tax revenues exceeded previous projections. Last summer's transfer intended to provide enough funding to continue highway spending at current levels until May 31, but since that time oil prices have dropped quickly, causing an increase in gasoline consumption and tax revenue. As a result, highway programs now have enough money to last through July, but the law authorizing money to be spent still expires at the end of May. Last week's bill aligns the deadlines, so the authorization and the money will now both expire at the end of July.

May 29, 2015

Lawmakers have many potential options to address the shortfall in the Highway Trust Fund. With the President expected to sign a two-month extension of the highway authorization bill soon, lawmakers have bought themselves time to work on a solution to the Highway Trust Fund's $175 billion ten-year shortfall. Over the past several years, Congress has only enacted short-term solutions that have papered over the shortfall, but they should use this opportunity to provide a real and lasting solution to bring revenues and spending in line.

Our plan The Road to Sustainable Highway Spending provides one approach. It would fully pay for a $25 billion upfront transfer to the trust fund to pay for previously-authorized spending, and then bring dedicated revenue and highway spending in line by raising the gas tax by 9 cents and limiting spending to prior year's income. That policy is the default option, and lawmakers could instead use a fast-track process for tax reform that the plan provides to either raise the gas tax further or use another financing source if they wanted higher spending or a lower gas tax increase.

The report also provided four appendix tables with numerous options to increase revenue from current sources, use new transportation-related revenue sources for the trust fund, cut highway spending, or finance a general revenue transfer. The tables are shown below, and you can also download an Excel version of all four here.

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