Standard and Poor's Ratings Services confirmed today its AA+ long-term sovereign credit rating on US debt, where it has been since the August 2011 downgrade from AAA. In addition, in a move that has drawn more attention, the outlook on the long-term credit rating was upgraded from negative to stable. The rating agency cited near-term deficit projection improvements and legislative developments like the fiscal cliff deal and the implementation of the sequester.

However, the improvement in the rating does not mean that the federal government is out of the woods. Judging by its statement, S&P has not gotten more confident in the political system's functionality since it cited that as the main reason for its downgrade nearly two years ago. S&P specifically said the following about why it declined to return the US to a AAA rating:

We believe that our current ’AA+’ rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public-finance pressures over the longer term in comparison with officials of some more highly rated sovereigns, and we expect repeated divisive debates over raising the debt ceiling.

Below is an updated table of various rating agencies and their credit rating and outlooks for US debt.

^{Source: Agency Outlooks}

Other agencies will be watching. Bloomberg News quoted Moody's analyst Steven Hess as saying that the "rating outlook will likely be either moved back to stable or the rating downgraded during the course of this year." Presumably, how the debt ceiling plays out and whether lawmakers take steps to improve the long-term fiscal outlook will be the determinant of how they, and other rating agencies, react.

Dive In – The pools have opened to provide relief from the summer heat and an opportunity to work on those tans. Congress is back in session this week, but they are only dipping their toes into the fiscal waters. Will lawmakers dive into work to address the budget and related issues or will they stay on the deck and get burned?

Budget Still Wading – No progress has been made on the fiscal year 2014 budget as a conference committee still has yet to be formed. Some Republicans in the Senate are concerned that a debt ceiling increase would be included in budget negotiations, though the second-ranking Republican on the House Budget Committee, Rep. Tom Price (R-GA), says he has no qualms with that. And House Speaker John Boehner (R-OH) says he won’t take a debt limit increase off the table in budget negotiations. In addition, House Appropriations Committee chair Hal Rogers (R-KY) has made it clear he wants a budget conference in hopes that an agreement can be reached to replace or mitigate the sequester. However, House Majority Leader Eric Cantor (R-VA) on Thursday said that budget talks won’t be allowed until Democrats agree to take tax increases off the table. Politico notes the role reversal as Democrats are now the ones pushing for the normal budget process to proceed after years of Republicans faulting Democrats for not producing a budget.  

Going Through the Strokes on Appropriations – The appropriations process for the next fiscal year has begun, but how it will end is unclear. On Tuesday the House voted to “deem” the $967 billion spending level in the budget resolution the House approved earlier this year so that the process of approving spending bills can proceed in lieu of a joint budget resolution approved by both chambers. The House quickly passed spending bills for Military Construction-Veterans Affairs and Homeland Security. However, President Obama threatened to veto any spending bills without a broader budget agreement, which drew a rebuke from Speaker Boehner in a letter. The veto threats and the fact that the House and Senate are over $90 billion apart on total spending levels makes it quite likely that appropriations bills will not be enacted by the time the fiscal year ends on September 30, meaning that the federal government will shut down unless a stopgap measure is agreed upon.

Going Off the Deep End on Debt Ceiling? – In addition to the September 30 deadline for a budget/spending plan, Washington faces another deadline sometime in the fall regarding the statutory debt limit. President Obama wants a clean debt ceiling increase to avoid a national default while Republicans want something in exchange, though there is no agreement yet within the caucus on what exactly to demand. Many leaders want entitlement reforms, though House Ways and Means Committee chair Dave Camp (R-MI) floated tax reform as a possibility. While it would be difficult to get a fundamental overhaul of the tax code completed by the fall, a process could be created with broad parameters outlined and triggers if the parameters aren’t met in a timely fashion. Read what we would like to see from the upcoming fiscal discussions. See our updated infographic of the fiscal speed bumps ahead. And keep track of debt ceiling developments here.  

Social Security Reform Gets Time in the Sun – In light of last week’s report from the Social Security Trustees saying that the program’s Disability Insurance Trust Fund will be exhausted in 2016 and that the overall Social Security Trust Fund will run out in 2033, there has been discussion about what to do to ensure that the vital program will be financially secure for future generations. On Tuesday, CRFB hosted a forum to discuss the findings of the report and options for meeting the challenges ahead. See a recap of the event along with video and presentations here. The event also featured the launch of our new “Social Security Reformer” online tool that allows you choose how you would fix Social Security. Dylan Matthews of The Washington Post called it "the only game you need to understand Social Security." CRFB’s Marc Goldwein also penned an op-ed in the The Hill urging action now to strengthen Social Security’s finances. Read our analysis of the Social Security Trustees report.

Taking the Plunge on Farm Bill Rewrite – The Senate plans to vote Monday on a reauthorization of the farm bill that would cut projected spending by $24 billion over ten years. The House is considering legislation that would cut even more, with most of the difference coming from bigger cuts to food stamps. Costly farm subsidies that have survived for years even though they were meant to be temporary may finally be on their way out.

Belly Flop on Student Loans – Student loan interest rates are set to double on July 1 and Washington cannot agree on how to avoid the abrupt increase. The Senate on Thursday failed to muster enough support for either the Senate Democrats' or House Republicans' approach. The House earlier passed a bill on a party-line vote that is similar in concept to the White House's approach, but differs on the specific rates used. See a summary of the different plans.

Key Upcoming Dates (all times are ET)

June 7

• Bureau of Labor Statistics releases May 2013 employment data.

June 12

• House Budget Committee hearing on the  FY 2014 budget and the Department of Defense at 1 pm.

June 15

• Deadline for estimated quarterly individual and corporate tax payments.

June 18

• Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.

June 26

• Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.

June 28

• The date Treasury Department expects a nearly $60 billion payment from Fannie Mae, which will help delay the time by which lawmakers will need to raise the debt ceiling.

July 5

• Bureau of Labor Statistics releases June 2013 employment data.

July 16

• Dept. of Labor's Bureau of Labor Statistics releases June 2013 Consumer Price Index data.

July 31

• Bureau of Economic Analysis releases advance estimate of 2013 2nd quarter GDP.

In a new paper, the Center for American Progress's Michael Linden makes the case for resetting the fiscal debate. His main point is that given improving deficit projections, the recent experience of developed countries, and developments in academic research, it is wise to shift the focus away from a large deficit reduction agreement. While the long-term deficit is not solved, he says, the urgency with which lawmakers have pursued deficit reduction has been counterproductive and needs to be done away with. Instead, he proposes repealing three years of the sequester and partially offsetting the costs. As he says:

No more pretending that the sky is falling. No more rash actions to cut the deficit without regard for real-world impacts. No more calls for an ever-elusive grand bargain. No more super special committees or draconian automatic punishments intended to force action. Improving our national finances is still an important goal—that has not changed. But so much else has, and the debate must change too.

Linden has three main arguments. The first is that improvements in CBO's deficit projections have bought the federal government more time in dealing with the debt. Linden's second main argument is that the case for deficit reduction has been weakened by the Reinhart and Rogoff controversy as well as the experience of austerity in Europe. Finally, Linden argues that the drive to enact deficit reduction has led to some poor policy outcomes like sequestration. We will evaluate these three arguments in turn.

CBO's Projections Have Bought Us More Time

CBO's projections have greatly improved since 2010, a welcomed sign, but as we've shown before on The Bottom Line, our debt problems remain far from solved, and the progress we've made should not be used as an excuse to put the issue on the back burner. Linden notes that a great deal of deficit reduction has happened already, especially through cuts to discretionary spending. We've previously estimated that lawmakers have enacted $2.7 trillion over ten years since the beginning of FY 2011, when our debt problems entered center stage. Linden finds a similar figure.

We noted this as well in our recent analysis of the progress made by policymakers. The savings we've enacted so far really represent the lowest-hanging fruit in the budget while the truly tough and more sweeping reforms to entitlement programs and the tax code have not been made yet. Going forward, the growth of health care spending and the failure of revenue to keep up will drive deficits and debt higher.

^{Source: CRFB}

Our Realistic Baseline projects that debt will fall from a high of 77 percent to 72 percent by 2019, but it will then quickly rise to 76 percent by 2023 and to over 130 percent of GDP by 2050. We have estimated that it would take an additional $2.2 trillion over ten years to put debt on a clear downward path ($1.6 trillion if the sequester remained in effect). We need to address entitlements and revenue to make our long-term debt picture sustainable, but unlike cuts to appropriations, these reforms will take more time and will need to be phased-in to allow people time to adjust to the changes.

^{Source: CRFB}

Linden also notes that health care projections have fallen as CBO incorporates a recent slowdown of health care cost growth. While an encouraging sign, it is best to exercise caution, as much of this slowdown is likely temporary and related to the recession. Many studies have found cyclical factors to be the main reason for the slowdown, so it is best to be conservative and take advantage of health care savings policies that have been proven to reduce both public and overall health care spending. However, even if health care costs do slow on a more permanent basis, there is still the issue of population aging, which is the predominant factor in pushing up spending in both Social Security and health care programs over the next 25 years.

The Argument for Deficit Reduction Has "Crumbled"

Linden argues that the evidence for the need for deficit reduction has been greatly weakened due to the Reinhart and Rogoff controversy and the experience of austerity. Linden focuses his attention on the 90 percent threshold, which does become less apparent after revisions to the R&R methodology. However, even after the authors corrected their errors, the paper still shows a negative relationship between debt an growth. This is consistent with other supporting literature that has shown a negative relationship between debt and growth, including studies from the Congressional Budget Office, International Monetary Fund, Bank of International Settlements, OECD, and others. The R&R controversy has weakened evidence for a specific threshold, but this certainly should not be interpreted as evidence that the link between economic growth and debt has weakened overall.

Deficit Reduction Efforts Have Led to Some Poor Policy Outcomes

The road to putting the budget on a sustainable path has been a difficult one. There is no question, and Linden points out, that the 2011 debt ceiling debacle came with considerable cost to the economy and even to the budget. And the mindless sequestration we have allowed to abruptly cut spending across the board is no way to budget.

Yet it is important to remember that these policy outcomes are at least in part the result of the failure to enact a comprehensive deficit reduction plan. The standoff that lead to the last-minute Budget Control Act deal in August of 2011 came after Speaker Boehner and President Obama were unable to agree to a larger deficit reduction package. And the Super Committee’s failure to do the same is what ultimately lead to the sequester.

Indeed, serious movement on tax and entitlement reforms may represent the best or perhaps even the only way to reverse the sequester currently in place; and may help more easily facilitate an agreement to raise the debt ceiling. As we wrote in our recent report, "What We Expect from the Upcoming Fiscal Discussions," these fiscal speed bumps are likely to be coupled with a discussion of our long-term debt burden, and it may be difficult to move forward without a debt deal:

At present, there is substantial disagreement between the House, Senate, and the Administration over how to deal with the sequestration. As a result, House and Senate appropriators are a full $91 billion apart on next year’s funding levels and will need to resolve this difference by October 1st. Meanwhile, the Treasury Department will likely run out of extraordinary measures to avoid hitting the nation’s debt ceiling sometime this fall, and the necessary step of raising the debt ceiling may prove difficult without a broader agreement to address the debt.

Turning the conversation away from fiscal sustainability will only increase the temptation put aside the budget until a last minute fix is needed, which rarely leads to good policy.

*****

Linden's paper is a reminder of the progress we have made so far but also of the costs of waiting and failing to take up politically difficult reforms. As we turn our attention to replacing the ongoing sequestration as well as dealing with the debt limit and FY 2014 appropriations this fall, it is time to hit the fiscal reset button, but not to put fiscal sustainability aside as Linden suggests. Rather, lawmakers need to turn their attention to the hard choices of entitlement and tax reform, which we will need to do if we are going to be able to put debt on a sustainable long-term path.

CRFB's latest interactive tool "The Reformer" is a handy game that allows users to design their own Social Security plan. Users can select from a wide variety of benefit and revenue changes to make the system sustainably solvent. The tool then shows the effect on the program's finances and benefit and tax levels.

To demonstrate this, we took The Reformer for a test drive by trying out various Social Security plans that have already been proposed. Importantly, policies in the simulator are not exactly the same as those we estimated, particularly for phase-ins. In addition, The Reformer can't pick up every interaction between policies, so the results should be viewed as rough but in the neighborhood.

First up is the Simpson-Bowles plan. That plan slows initial benefit growth for the top half of earners, indexes the retirement age to longevity, switches to the chained CPI, creates a minimum benefit and old-age bump up, raises the payroll tax to cover 90 percent of wages, and includes state and local workers in the system. The plan also included a "hardship exemption" for the retirement age which we approximated in size with a 1 percent benefit increase. Plugging those policies into the simulator closes 102 percent of the 75-year shortfall and 97 percent of the shortfall in the 75th year. It reduces scheduled benefits by 9 percent, increases payable benefits (benefits taking into account trust fund solvency) by 16 percent, and increases taxes by 11 percent in 2050. Note that the plan now falls modestly short of sustainable solvency under the latest projections, which is part of the reason Erskine Bowles and Al Simpson called for additional reforms in the Bipartisan Path Forward.

Second is the Domenici-Rivlin plan. That plan slows growth of initial benefits for the top 20 percent of beneficiaries, switches to the chained CPI, adjusts the benefit formula for life expectancy (proxied by ndexing the retirement age for life expectancy), includes state and local workers in the system, creates a minimum benefit, raises the payroll tax cap to cover 90 percent of earnings, and apply the payroll tax to employer-paid health insurance premiums. The last policy is not part of the calculator but is simulated by taxing cafeteria plans and completely eliminating the taxable maximum. Our calculator shows that this approximation of Domenici-Rivlin would more than close the 75-year shortfall and reduce the 75th-year deficit by 82 percent. In 2050, the plan would reduce scheduled benefits by 1 percent, increase payable benefits by 26 percent, and increase taxes by 20 percent.

Next up is a plan mentioned by Virginia Reno of the National Academy on Social Insurance (NASI) at our event yesterday. It is a plan based on a survey of average Americans where they were given 12 different options for reforming Social Security. They chose the following: eliminate the payroll tax cap, raise the payroll tax rate by two percentage points, switch to the CPI-E for cost-of-living adjustments, and enact a minimum benefit. This plan more than closes the 75-year shortfall while increasing scheduled benfits in 2050 by 7 percent, payable benefits by 37 percent, and revenue by one-third. However, the plan closes only about 60 percent of the 75th year deficit.

Next, we'll look at a proposal by Rep. Jason Chaffetz (R-UT) that was evaluated by the Social Security Administration in November 2011. The proposal raises the normal retirement age to 69 and indexes it for life expetancy, reduces initial benefit growth for the top half of earners, switches to the chained CPI, means-tests benefits for high earners, creates a minimum benefit and old-age bump up, increases the computation period for calculating benefits, and has add-on accounts. His plan would close the 75-year and 75th year shortfall, meaning it would achieve sustainable solvency except that in our model the trust fund briefly turns negative in 2048. However, because the means-testing proposed by Rep. Chaffetz is more ambitious that what is in our model, it likely would avoid insolvency altogether. In 2050, the Chaffetz plan would reduce scheduled benefits by 23 percent, payable benefits by 2 percent, and revenue by 2 percent. Some of the loss in benefits would likely be made up for by additional retirement income from add-on accounts.

Finally, there is a proposal from Rep. Gwen Moore (D-WI), evaluated by the SSA in March of this year. The plan increases the payroll tax rate by 0.6 percentage points, eliminates the payroll tax cap, and enacts the three benefit enhancements in the calculator (minimum benefit, old-age bump up, and college benefit). Those policies would extend the life of the trust fund for about 40 years to 2074, closing 87 percent of the 75-year shortfall and 37 percent of the 75th year deficit. It would increase scheduled benefits by 6 percent, payable benefits by 35 percent, and taxes by 23 percent in 2050.

So how does the reformer compare to the modeling of the Chief Actuary? It's hard to know for sure, since the policies we modeled were often slightly different than what was in the plans and the solvency gap now is larger than when some of the plans were originally scored (this is especially true for Simpson-Bowles and Domenici-Rivlin). But it looks like it stacks up well.

^{Source: SSA, CRFB}

These are a just few examples of Social Security reform plans evaluated through The Reformer. As you can see, there are many ways to achieve solvency, or at least come close, with plans relying heavily on the benefit side, revenue side, or a combination of the two. Feel free to create your own plan to shore up Social Security's finances for future generations!

The new Social Security Trustees Report leaves us another year closer to the trust fund's insolvency and the takeaway remains the same - we do not have much time to waste.

CRFB's Senior Policy Director Marc Goldwein puts these new projections into perspective in an Op-Ed in today's The Hill. Goldwein writes that while projections may not have worsened, the exhaustion of the Social Security trust fund in 2033 remains a great concern.

The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.

Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.

There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.

There is no shortage of possible policy solutions, easily demonstrated by The Reformer, our new interactive tool that allows users to fix Social Security. Whether one relies on spending reforms, revenue reforms, or a combination of both, there are many policy options that together could provide Social Security 75-year solvency. Making Social Security sustainable in the long-run is by no means easy, but from a policy perspective, it is not unreachable.

However, time is of the essence. The reforms needed to secure Social Security's future will become much more difficult the longer we wait. As Goldwein argues:

While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.

At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.

In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.

Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.

Click here to read the full article.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Along with their report on the financial status of the Social Security trust fund, the Social Security and Medicare Trustees on Friday released a separate analysis on the Medicare program. With federal health spending growth being the primary driver of the debt in the upcoming decades, the analysis is an important reminder of the need to reform Medicare and put it on a more sustainable path.

The Hospital Insurance (HI) trust fund, which funds Part A of Medicare mostly through the 2.9 percent payroll tax (3.8 percent for income over $250,000), has been running cash-flow deficits for years. The Medicare Trustees now project it will become insolvent in 2026, two years later than last year’s projection. At that point, benefits would be cut by 13 percent. The 75-year actuarial imbalance of the HI trust fund has decreased slightly to 1.11 percent of payroll, about 0.25 percentage points lower than last year. Cash flow deficits will improve from a 0.5 percent of payroll deficit in 2012 to a tiny 0.02 percent surplus in 2017 before the program goes back into deficits for the foreseeable future.

The slight improvement in the projected shortfall can be attributed to: (1) lower than expected spending in 2012, which lowers the base spending off of which projections are based; (2) lower Medicare Advantage (MA) costs due to certain changes made under the Affordable Care Act reducing MA spending by more than expected; and (3) methodological refinements. Meanwhile, lower than expected levels of tax revenue partially offset some of these improvements on spending.

^{Source: Medicare Trustees Report}

While the solvency of Part A remains a concern and is important in the policy debate on reforming Medicare, a more useful metric is total Medicare spending. This includes other spending on patient care and prescription drugs funded by beneficiary premiums and general revenue. Even under rosier current law projections, which assume various cost control measures stay in effect longer than some other sets of projections, total Medicare spending is on course to rise from about 3.6 percent of GDP in 2012 to about 5.8 percent by 2040. Thereafter, it would rise more slowly to 6.5 percent by 2086.

Under their illustrative alternative projections, the Trustees adjust for a few current law assumptions that are unlikely to occur. The alternate assumptions include (1) assuming Congress will continue to enact legislative fixes for the 25 percent physician payment cut under the Sustainable Growth Rate (SGR) formula; (2) accounting for potential changes to productivity adjustments enacted under the ACA which policymakers might feel pressured to override; and (3) the mandate that the Independent Payment Advisory Board (IPAB) enact other Medicare savings if spending growth exceeds a certain target. IPAB may not be much of a factor under current law, but it could have a substantial effect if the other two scheduled payment reductions do not happen. Under these assumptions, the 75-year actuarial deficit for Part A would be 2.17 percent of taxable payroll (compared to 2.43 percent last year) and Medicare spending would rise to 9.8 percent of GDP by 2087.

^{Source: Medicare Trustees Report}

Health care spending is projected to rise in the coming decades, although much of that increase can be avoided if various cost-control measures in current law are allowed to work. However, given the recent history of doc fixes and concerns the Trustees have raised over the sustainability of other mandated provider cuts, this may be a difficult task for lawmakers. A better approach would be to look at some of the many health care savings options available that would be easier to sustain, including those designed to "bend" the health care cost curve and improve quality of care.

Health care projections are particularly uncertain, as it remains to be seen how much of the recent slowdown is due to a poor economy or efficiency gains from the Affordable Care Act and other structural changes to the health care system. But under what one would think are realistic assumptions, projections look unsustainable. Instead of waiting to see if the best case or worst case scenario comes true, lawmakers should take a prudent approach and undertake entitlement reform to make sure health care spending remains on a sustainable path and beneficiaries will be able to rely on the security these programs provide.

Grilling Time – It’s that time of year when the grills get fired up. There’s been grilling on Capitol Hill as well, with government officials being roasted by lawmakers over the IRS scandal. Congress is home again this week, where legislators can be grilled by constituents on what they are doing about the economy and the budget. Will the recent scandals distract from efforts to agree on a budget and a larger deficit reduction package or will policymakers seek bipartisan deals in order to put the scandals behind them? It will take some time for the smoke to clear.

Adding Lighter Fluid to Tax Reform – As the fallout of the scandal involving targeting of nonprofit groups by the Internal Revenue Service (IRS) continues, some lawmakers are making the case that the scandal demonstrates the need for tax reform. The argument is that reducing the complexity of the tax code could prevent such a situation. Meanwhile, the Congressional Budget Office (CBO) added fuel to the fire on Wednesday with a new report examining the costs of the major tax expenditures and who benefits the most from them. The report finds that the top ten tax breaks cost about $900 billion in lost revenue this year and will cost $12 trillion over the next decade. It also found that the top income earners benefited the most from the tax expenditures, although when measured as a share of after-tax income low-income taxpayers benefit the most. As we point out, the findings show the need for tax reform that simplifies the tax code and reduces the deficit.  

Smoke Signals on Entitlements – On Friday the trustees overseeing Social Security and Medicare issued their annual reports on the state of the finances of the two vital programs. The numbers show that the programs face shortfalls down the road if action is not taken to strengthen their finances. The Social Security Trust Fund is projected to be exhausted in 2033, which will result in a reduction of benefits of 23 percent for all recipients. Social Security's Disability Insurance program faces a more immediate challenge as it is forecast to be depleted in 2016. Medicare's Hospital Insurance Trust Fund will become insolvent in 2026. The Economist recently featured an informative discussion on entitlement reform. In recent weeks the House Ways and Means Committee Health Subcommittee held a hearing on Medicare reform proposals and the Social Security Subcommittee held its own hearing on Social Security reform proposals where there was general agreement among the witnesses that Social Security reform should happen now so that the changes can be phased in over time, which will eliminate the need for abrupt changes to beneficiaries and give them more time to prepare. CRFB’s Ed Lorenzen testified how the Simpson-Bowles plan would strengthen Social Security while protecting the most vulnerable beneficiaries. CRFB is co-hosting a forum on Tuesday, June 4 in Washington, DC to discuss the challenges facing Social security. The event will feature a discussion of the new trustees report and an advance look at our new, interactive Social Security reform tool that will allow users to choose how they will improve Social Security’s finances.   

Still Not Trimming the Fat – Policymakers have had a mean recipe for eliminating duplicative federal spending since 2011, but it has been mostly ignored. Last week the Government Accountability Office (GAO) released a report saying that just 12 percent of more than 300 recommendations it issued since 2011 for addressing duplicative government programs have been carried out.

Preparing the (Doc) Fixings – Efforts to find a permanent solution to the Sustainable Growth Rate (SGR) – otherwise known as the “doc fix” – have picked up steam as of late with news that a fix would cost substantially less than previously estimated. The SGR is a scheduled sharp decrease in payments to physicians treating Medicare patients that has consistently been deferred due to oppositions from doctors and concerns it will impact care for Medicare recipients. The Ways and Means Committee held a hearing on the topic earlier this month and Republicans on the House Energy and Commerce Committee last week offered up a proposal. However, the plan does not deal with the key issue of how to pay for the $140 billion cost over ten years, though there are lots of options for finding savings elsewgere in the healthcare budget.

Feeling the Heat to Act – Budget gridlock continues as senators have engaged in a public spat over going to a conference committee to negotiate differences in the FY 2014 federal budget resolutions passed by the House and Senate. Meanwhile, appropriators including House Appropriations Committee chair Harold Rogers (R-KY) are not looking forward to continued battles over spending levels and are calling for replacing the automatic cuts of sequestration with a smarter approach. Sen. Roy Blunt (R-MO) joined those calls with a recent op-ed. This comes as more Americans indicate they are feeling the pinch from the sequester in a recent poll. Lawmakers face a deadline of September 30 to agree on a spending blueprint in order to avoid a government shutdown. That could roughly coincide with when the statutory debt limit will have to be raised in order to avoid a national default. Check out these and other impending fiscal speed bumps with our updated infographic. CRFB offers its insight on what should be a part of the discussions as policymakers seek to head off these scenarios in a new paper, including agreeing on a comprehensive fiscal framework well ahead of the deadlines.  

Bernanke Prefers Slow Cook Approach – Federal Reserve chair Ben Bernanke is telling policymakers the high heat of sequestration cuts now will do little to address the unsustainable long-term debt picture. He suggests an approach that replaces some of the sequester cuts with savings that are more phased in over time and also more substantial. He says such an approach can promote the long-term economic growth and deficit reduction we need without derailing recovery in the near term.

Key Upcoming Dates (all times are ET)

June 4

• House Education and the Workforce hearing on the President's FY 2014 budget for the Department of Health and Human Services at 10 am.

June 7

• Bureau of Labor Statistics releases May 2013 employment data.

June 12

• House Budget Committee hearing on the  FY 2014 budget and the Department of Defense at 1 pm.

June 15

• Deadline for estimated quarterly individual and corporate tax payments.

June 18

• Dept. of Labor's Bureau of Labor Statistics releases May 2013 Consumer Price Index data.

June 26

• Bureau of Economic Analysis releases third estimate of 2013 1st quarter GDP.

June 28

• The date Treasury Department expects a nearly $60 billion payment from Fannie Mae, which will help delay the time by which lawmakers will need to raise the debt ceiling.

July 5

• Bureau of Labor Statistics releases June 2013 employment data.

July 16

• Dept. of Labor's Bureau of Labor Statistics releases June 2013 Consumer Price Index data.

July 31

• Bureau of Economic Analysis releases advance estimate of 2013 2nd quarter GDP.

At 11 AM Eastern time, the Social Security and Medicare trustees will release their respective reports on the finances of the two programs over the next 75 years. The release will be done at a press conference with Treasury Secretary Jacob Lew, Health and Human Services Secretary Kathleen Sebelius, Acting Labor Secretary Seth Harris, and public trustees Charles Blahous and Robert Reischauer. You can watch the webcast of the press conference here. We will embed the stream below if it becomes available.

Update: Treasury's summary of the reports is here. The Social Security report will be available here and the Medicare report here.

In our paper, "What We Expect From the Upcoming Fiscal Discussions," we referenced our latest official CRFB Realistic baseline. Although we have cited new Realistic projections prior to this paper, those estimates were "rough cuts" which did not fully incorporate all the changes in CBO's latest budget projections.¹

For background, CBO produces a current law baseline which is generally based on the law as it is written, and they produce an alternative fiscal scenario (AFS) baseline which assumes policymakers extend a number of deficit-increasing current policies. Yet there is a case to be made that the current law scenario is too optimistic about the future in some areas, and the AFS too pessimistic in other areas.

The CRFB Realistic baseline is an effort to construct what we think is a more likely portrayal of current policy. Of course, as we have discussed before, different observers may interpret current policies in different ways. Our baseline, which is the same as the baseline used by the Center on Budget and Policy Priorities (CBPP), differs from current law by assuming:

• Repeal of the sequester after 2013, with the sequester remaining in place for FY 2013
• A permanent extension of several tax credit expansions scheduled to expire in 2017
• Permanent repeal of the Sustainable Growth Rate, which requires a 25 percent reduction to Medicare physician payments in 2014, a patch which is often referred to as the “doc fix"
• A drawdown of war spending closer in line with current plans, instead of having funds grow with inflation from current levels
• A correction of the CBO current law projection of disaster relief, removing the assumption that temporary Hurricane Sandy relief spending will grow annually with inflation

Debt under these more realistic projections is projected to drop to a low of 71.9 percent of GDP in 2018 before rising to 75.5 percent by 2023; this is somewhat lower than and certainly an improvement from our prior projections of at 79 percent, though as we've explained before roughly half the difference is due to one-time rather than structural effects. Compared to CBO current law, which assumes sequestration remains in effect among other policy changes, the CRFB realistic outlook is slightly worse, although debt is on an upward trajectory at the end of the decade under both baselines.

The graph below shows the CRFB Realistic baseline and a few variants. The lower bound of the shaded area (71 percent of GDP in 2023) represents debt under CRFB Realistic assuming the sequester remains in place, and the upper bound (78 percent in 2023) represents CRFB Realistic debt assuming the temporary "tax extenders" are also extended.

Debt Under CRFB's Realistic Baseline

Our most recent CRFB Realistic projection uses a slightly different treatment of sequestration than in February: the cuts remain in effect for 2013, since they have been allowed to take effect already, while the sequester is repealed for 2014 and beyond (see here for a discussion of how to treat the sequester). Although this is by no means an obvious choice, it is meant to reflect the reality that both parties have more-or-less conceded spending at post-sequester levels for 2013 but have made no such agreement for 2014. In fact, as we explained in today's paper, both the House and the Senate are currently writing appropriations bills which would violate the sequester law, though in very different ways.

The table below shows a bridge of the policy differences between CBO's current law baseline and CRFB's Realistic baseline and the resulting Realistic budget metrics. Spending would fall from 22 percent of GDP in 2014 to 21.5 percent in 2017 before rising to 22.7 percent of GDP by 2023. Revenues would rebound as the economy continues to recover, from 18.3 percent to roughly stabilizing around 19 percent.

The trajectory of debt at the end of the decade in our most recent CRFB realistic baseline and the one produced in February are similar, even though levels may be lower. As we said in our analysis of the new budget outlook, the majority of changes affect the first two years, but do not leave us much closer to putting debt on a downward path. The short-term budget outlook has improved, but our long-term debt problem is still far from solved and additional savings will be needed.

^{1 A special thanks to Richard Kogan of the Center on Budget and Policy Priorities who helped us work through some particularly difficult technical issues related to this baseline.}