The Bottom Line
This afternoon, CRFB President Maya MacGuineas testified before the National Commission on Fiscal Responsibility and Reform, offering several suggestions for the commission's work leading up to the December report. She argued that:
- The Commission needs both a medium- and long-term fiscal goal. (As we've argued for here)
- It's time to get specific.
- Focus on policies that are conducive to growth.
- Process reforms can be used to both help force changes and enforce a plan.
In the vein of getting specific, MacGuineas offered her own specific plan on how to stabilize the debt at 60 percent of GDP by 2018, proposing a package of $650 billion in savings in 2018. Included were savings from revenue changes, defense, Social Security, health care, and some other discretionary changes. Click here to read her testimony and see her plan.
As for her last point, the Peterson-Pew Commission on Budget Reform is currently working on its second report focusing on comprehensive budget process reform. Stay tuned for its release this fall.
After much anticipation, the CBO has released its Long Term Budget Outlook, which gives the first glimpse at the long-term effects of the recently-enacted health care legislation. In the report, which was released at the third meeting of President Obama's fiscal commission, the extended-baseline scenario (current law) shows drastic improvement from last year's outlook, but the alternative scenario, which is composed of policies more likely to occur, shows a shocking amount of debt.
First, the good news. The extended baseline scenario shows health care spending coming down from levels in the 2009 outlook. By 2083, health spending is about 2 percent of GDP lower than it was projected last year. This decrease is due to both the effects of the health care legislation and to a methdological change by CBO in which they assume lower health cost growth.
Total spending in 2083 is about nine percentage points lower in the 2010 extended baseline outlook compared to last year. About 85 percent of that drop is due to a decrease in spending on interest, which stems mainly from drastically higher revenues that hold debt down compared to the 2009 outlook. Revenues were projected to reach about 26 percent of GDP by 2083 in the 2009 outlook, but this year's outlook projects revenues to reach 30 percent mostly due to tax increases in the health care legislation. The higher revenue obviously decreases the debt, which significantly decreases interest paid on the debt.
Ironically, the biggest driver of the decreased spending in the 2010 extended baseline scenario is higher taxes.
|Spending Category||Extended Baseline Scenario (% GDP)||Alternative Fiscal Scenario (% GDP)|
Now the bad news.
While the extended baseline presents a much rosier scenario compared to last year, the alternative scenario paints a fiscal nightmare. Debt held by the public threatens to break into the quadruple digits (though we would surely never get there), and spending on interest takes up more than half the entire budget by the end of the outlook.
The alternative fiscal scenario assumes that the 2001/2003 Bush tax cuts are made permanent, the AMT and Medicare physician payments continue to be patched, and most importantly, the Medicare spending cuts and slowing of the growth rate of the health insurance subsidies do not occur after 2020.
Under this scenario, primary spending is at 35 percent in 2083, only about 3.5 percentage points higher than current law. However, interest spending is at an astounding 45 percent of GDP, meaning we will be paying more to our creditors than for every government program combined. This leaves total spending at an unbelievable 80 percent of GDP. Revenues don't contribute to debt reduction in this scenario because CBO assumes that lawmakers will change the tax code to keep them at a constant 19.3 percent of GDP after 2020.
The main lessons to draw from this report is that there is still serious work to be done on the spending side. We must be vigilant to make sure health are cost-cutting measures stick, and we will also need to raise sufficient revenues. Even under the rosy scenario of current law, debt is above 100% of GDP and government is spending is 37 percent of GDP. Those levels are well above historical averages and approaching records. Also, it is unlikely that lawmakers would have the political will to raise anywhere close to 30 percent of GDP in revenues to keep the debt in check. The long term outlook underscores that we have to get to work now to solve our future fiscal problems.
This morning, CBO Director Doug Elmendorf released CBO's long-term outlook at the third public meeting of The National Commission on Fiscal Responsibility and Reform. The commissioners are also holding a public listening session right now. We will provide more information on the long-term outlook after it comes out.
Beginning at 9:30, you can watch the video here:
CBO’s Long Term Budget Outlook, released today (see our press release here), paints a more alarming picture of the U.S. debt path than had been previously expected. Under its extended-baseline scenario—assuming the closest approximation of current law to continue in the future—CBO’s 2009 Outlook predicted that our debt held by the public would hit 56 percent of GDP in 2020, and would skyrocket to 128 percent by 2050. Its 2010 revised baseline scenario shows debt-to-GDP at 66 percent by 2020—surpassing the commonly-considered 60 percent sustainable debt level—and reaching 90 percent by 2050.
Yet even more alarming are the numbers predicted under CBO’s alternative fiscal scenario, which is generally considered to be a more likely picture of our future fiscal path, and includes the extension of various tax provisions and other programs set to expire soon. The 2009 Outlook predicted that our debt held by the public would hit 87 percent of GDP by 2020 under these projections, and would more than triple to a whopping 321 percent by 2050—far, far beyond any common benchmark of sustainability. But 2010’s outlook seems even worse: we are now expected to hit the 100 percent of GDP mark by 2023, only a little over a decade from now, and in 2050, our public debt will be almost 350 percent of GDP. In 2084, CBO projects our debt to reach an unfathomable 947 percent.
CBO’s report reflects the importance of acting soon to change the prospects for our fiscal future. With these projected numbers rising year after year while we stay on our current fiscal path, it is clear that we should expect the debt to rise exponentially in the coming decades as well. Unless something is done soon to adjust our growing deficit, it will reach critical and unmanageable levels. It will become harder year after year to return to a sustainable path, and it is thus critical to act now.
Watch for CRFB’s more detailed analysis of CBO’s report soon.
The CFR has a paper out called "How Dangerous is US Government Debt?", looking at the possibilities of a spike in interest rates in the future. They noted that there were many domestic factors that pointed to such possibility, and potential volatility with regards to foreign inflows.
On the domestic front, they talked about the deterioration of short-term/medium-term fiscal outlook. In particular, they brought up an analysis by Thomas Laubach that linked each percentage point increase in the projected deficit-to-GDP ratio to a 0.25 percent increase in "longer-term" interest rates. If you combine that correlation with the current deficit projections, CFR claimed that the fiscal situation would lead to a one percentage point increase in long term rates.
Otherwise, they noted that the Federal Reserve has been purchasing long-term Treasury securities since March 2009, a move that has helped ease the enormous strain that the current huge deficits have had on the Treasury markets. Although these purchases appear to have no sign of slowing down soon, when the Fed does pull out, it will put extra pressure on the bond markets. Another factor that could put upward pressure on long term interest rates is inflation expectations, which were on a "post-crisis upward march" and which they expected to accelerate once the recovery got a stronger hold.
In terms of foreign inflows, obviously the US is very much dependent on them to finance its public sector debt. Currently, foreigners own about half of all Treasuries, so a move away from bonds could mean significant increases in interest rates. The CFR said that the US got a bit of good luck with the timing of the European financial turmoil, since foreign inflows were headed clearly in the direction of the eurozone and away from the US before then. According to CFR, the eurozone crisis, and the flight-to-quality that followed, might just be masking an underlying lack of confidence in US debt like the one we saw in early 2009.
Finally, they warned that this "respite" might be an excuse to run up the debt even further. That obviously should not be the case. Regardless of where the market is this moment, we should develop a plan to deal with our debt in the medium-term. And no, this is not saying we should cut back now while the economy is weak, just because bad things might happen if we don't. We're saying the US should try to minimize the chance that interest rates could jump in the future by cutting back when the economy has recovered. Low interest rates are no excuse not to act.
Major legislation reforming the financial regulatory process hit a snag today as Senator Scott Brown (R-MA) said he would not support the bill because it relies primarily on a $19 billion levy on large financial institutions and hedge funds to pay for its costs. At least a couple of Republicans will need to vote for the bill in order to overcome a Senate filibuster and Brown was one of the few GOPers to vote for a previous version of the measure.
It looks like, once again, the matter of offsets has, at least temporarily, derailed major legislation. Leaders in Congress will have to reopen the House-Senate conference process to consider changes to the bill. One option being discussed is to replace the bank tax with bringing the Troubled Assets Relief Program to an early conclusion. Terminating TARP ahead of the scheduled October 3 end date could save $11 billion to use towards the financial overhaul, but we oppose the use of this since it is essentially double-counting savings. A better option is to institute another increase in the fees banks pay to the FDIC.
Congress is still feeling its way through this whole paying-for-legislation thing.
Extenders Put on Hold – Legislation to extend some tax breaks and expanded unemployment insurance has been put on the back burner because senators could not agree on how to finance the package. Senate leaders decided to move on after they failed to end debate on the latest version in a 57-41 cloture vote.
Temporary “Doc Fix” Makes it Through – Congress did manage to enact a fully paid-for extension of the so-called “doc fix” that delays a 21 percent cut in Medicare payments to physicians until the end of November. The measure was broken out from the extenders bill after it became apparent that agreement could not be reached on the larger package.
Appropriations Begins – The appropriations season began last week with the first spending bill clearing a subcommittee. The Homeland Security appropriations bill was marked up for the full House Appropriations Committee. As we pointed out last week, conditions could cause the process to be even more unwieldy than usual. Many of the measures could wait for a lame duck session after the November elections.
No Budget Blueprint This Year – Leaders in Congress finally confirmed last week what had been long expected, that there will be no budget resolution this year. They will instead opt for what they are calling a “budget enforcement resolution” that will “deem” spending caps for one year, not the five year blueprint that the budget resolution usually provides. The lack of a resolution underscores the need for serious budget process reform.
Decisions Loom for War Supplemental – With the Pentagon pressuring Congress to provide funds to continue operations in Afghanistan and Iraq ASAP, leaders must decide what else they will try to attach to the bill. Such must-pass legislation often attracts riders and House leaders are considering adding $10 billion to prevent teacher and other public employee layoffs and nearly $5 billion for Pell Grants. As has been pointed out, the Pell Grant money may be important, but it is not an emergency as the fund has enough to cover expenses for the coming school year. In the quest to avoid offsets, leaders are playing a game of chicken with our troops.
Unbeknownst to the public, Olivier Blanchard and Carlo Cottarelli ascended Mt. Sinai at some point earlier this year. Last week, they came down with the Ten Commandments for Fiscal Adjustment. In their IMF blog post, they make recommendations for how G-20 countries can have successful and productive fiscal consolidations. The commandments are below:
Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor.
Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.
Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.
Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.
Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.
Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.
Commandment VII: You shall implement wide reforms to boost potential growth.
Commandment VIII: You shall strengthen your fiscal institutions.
Commandment IX: You shall properly coordinate monetary and fiscal policy.
Commandment X: You shall coordinate your policies with other countries.
Commandments I and III are especially central to CRFB's message, and we are working on VIII with the Peterson-Pew Commission on Budget Reform. Commandment II is an important one in the context of the current debate about the timing of cutbacks, and the two took a page out of the Announcement Effect Club when they said "while front-loading fiscal tightening is, in general, inappropriate, front-loading the approval of policy measures...will enhance the credibility of the adjustment." Interestingly, they also took a page out of Paul Krugman's book with the ninth commandment, stating that "if fiscal policy is tightened, interest rates should not be raised as rapidly as in other phases of economic recovery."
However, the crux of the success of fiscal adjustments will be in Commandments IV-VII. Unfortunately, these commandments can sometimes conflict with each other. Generally, economists agree that spending cuts are less harmful to economic growth, which complies with the fifth commandment, but may violate the sixth. Also, the seventh commandment, which emphasizes the promotion of investment, may require new spending or tax cuts that would be at odds with a fiscal consolidation plan. The fifth commandment is an absolute must, but how they do it requires walking a tightrope between growth and equity. Either way, the IMF's Ten Commandments show that HOW you consolidate is important along with IF you consolidate.
In his Sunday Wonkbook post, Ezra Klein highlighted CRFB’s Stabilize the Debt interactive online game, which allows visitors to pick and choose for themselves the policies and programs to cut in order to balance the budget and reduce the federal debt at 60 percent of GDP.
The national debt and how it should be reduced is a topic too easily weighed down by complex and confusing vocabulary, and Klein says that the Stabilize the Debt game helps to clarify and “bring discipline and realism” to a persistently difficult-to-answer question. “’Debt' isn’t a buzzword, it’s a math problem,” says Klein, and the Stabilize the Debt game can help us learn how to solve it. Thanks, Ezra.
Ezra’s column addresses the magnitude of the changes necessary to bring our debt to a sustainable level, the same changes we illustrate in the interactive game on our (according to Ezra) “sexed up” website. We encourage everyone to check it out for themselves at http://crfb.org/stabilizethedebt.
The declaration from the G20 meetings in Toronto this past weekend sounds, at first, to be taking a strong stance on fiscal consolidation.
“There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.”
Ok, that sounds pretty good, but wait a second. Halve deficits? This is that old game started in the Bush years and taken up by the Obama administration of halving something from a completely nutso starting point and calling it a victory. It’s like setting a goal of losing half your pregnancy weight.
The projected deficit for 2010 is 10.3% of GDP. It would drop to 4.5% by 2013 under the President’s budget. Under a current law scenario, it is projected to be 3.1% of GDP that year—so significantly better. Economic improvements alone are easily expected to cut the deficit in half by 2013 – this requires no change in policy in the U.S. So not exactly a heavy lift.
But then again, what happens in 2013 is probably less important than thereafter. The goal of stabilizing the debt by 2016 is a big deal. Keeping the debt-to-GDP ratio stable requires that the long-term deficit problems—driven by healthcare costs and aging—are addressed. You can’t get there any other way. This would be a huge accomplishment.
Not allowing the debt to grow faster than the economy is necessary to get control of the situation, as is getting debt levels back down to a manageable level where fiscal flexibility is preserved. We have recommended 60% by 2018 and lower thereafter. Anything higher would leave the U.S. without the fiscal firepower to respond to future crises.
As we have said before, we need both a medium-term goal and a long-term goal, both of which are included in the G20’s Declaration this weekend.
An important question is whether these G20 targets are credible. President Obama did not emphasize the fiscal targets in his remarks, and his administration is currently more focused on stimulus measures than specific measures to get the budget under control. But there needs to be a credible commitment to budget reform to reassure financial markets and keep our interest rates from rising. Also, given the political environment, it appears there will be little appetite for further stimulus measure unless important measures are taken that will get the debt under control.
The best path forward—something recognized in the G20’s Declaration—is an emphasis on necessary short-term stimulus along with putting in place medium-term budget plans. The U.S. needs to focus on both. Rather than pairing back stimulus measures, the key here is to craft effective short-term stimulus while putting in place the medium-term budget changes. Other countries are ahead of us on this piece, and the U.S. should step up the emphasis on policy changes to get the budget under control. Without growth and a credible consolidation plan, our fiscal situation will remain precarious.
Here they go again. As they have for years, lawmakers are attempting to tuck billions of dollars for unrelated programs into the war supplemental spending bill. The House version of the $61.5 billion appropriations bill, likely to go to the floor this week, contains funding for a variety of non-war programs, including some $5.7 billion for the Pell Grant program.
As our New America Foundation colleague Jason Delisle recently pointed out, education advocates view this funding as crucial because Pell funding provided under the American Recovery and Reinvestment Act of 2009 soon will be depleted. If the funding is approved, Congress would only have to provide $17.5 billion in Fiscal 2011 rather than $23.2 billion to keep the maximum grant funded at $5,550 for future years. It should also be noted that the Pell Grant program is in surplus right now due to a supplemental $13.5 billion appropriation in the Health Care and Education Reconciliation Act signed into law in March. Given this funding surplus, there is no need to fund the Pell Grant as an emergency – there is absolutely no risk that a student would be denied his or her Pell Grant under the maximum award level of $5,550 for the 2010-11 academic year.
It appears that it's business as usual on Capitol Hill. War supplementals often are considered must-pass bills, so members hang unrelated funding they consider essential onto the bills. In addition, providing funding for Pell in the supplemental would loosen up more money in the upcoming Labor-Health and Human Services-Education appropriations bill--another favorite practice. The Pell charade has gone on for years. Congress divides up money for the program among several spending bills and does not fund Pell where it should be funded--in the Labor-HHS-Education appropriations measure. However, some members are complaining about the overall cost of the bill and the cost of the war effort, so the fate of the measure remains somewhat unclear. Domestic spending in the bill may be considered in separate legislation.
Meanwhile, is it any wonder that the federal debt continues to soar? Congress continues to use backdoor funding to pay for priorities. If the Pell program is the priority it appears to be, it should be funded through the normal appropriations process. At the very least, if money is to be included in a supplemental, offsetting cuts should be found elsewhere. CRFB warned previously of slipping in programs in the stimulus that are intended to be permanent, now we are sadly seeing that come about.
This is another instance of the failure of the budget process. That is why the Peterson-Pew Commission on Budget Reform is studying the process and will issue recommendations for an improved budget process later this year.
Today, Congressional negotiators agreed upon a plan to reform the American financial regulation system—which, if it passes next week, would constitute the “most sweeping set of financial reforms since those that followed the Great Depression,” according to Treasury Secretary Tim Geithner. The proposal includes a ban on proprietary trading by banks and much more extensive oversight of the derivatives market, two major reforms coming on the heels of the efforts earlier this month to step up regulation of hedge funds and make it easier for investors to sue credit rating companies. If passed in its current state, the PAYGO bill is expected to be budget-neutral, covering its $19 billion in costs with a fee on banks and hedge funds. It is meant to curb excessive risk-taking and change the ‘too-big-to-fail’ mentality of large-scale American financial firms.
The American economy can’t risk another financial crisis—we don’t have the fiscal resources to get us out of another one. Under current trends, we won’t have the budget flexibility to respond like we have been. Let’s hope this package of reforms prevents the need for future financial rescues and bailouts. But as we’ve seen through the current crisis, budgetary flexibility is extremely important in being able to quickly respond to crises, giving us all the more reason to look at each area of the budget to ensure that, in the future, we continue to have it.
For weeks, Congress has been re-tooling and re-tooling the extenders bill (HR 4213), looking for 60 votes to pass. Two things have held constant: lawmakers have been unwilling to enact the bills, and lawmakers have not offset the costs. Of course, the two are related. The newest Senate bill, released on Thursday, trims the gross cost and deficit impact to $103 billion and $27 billion, respectively, from $118 billion and $55 billion.
The newest one saves money by scaling back the extension of increased Medicaid matching for states, cutting stimulus-increased food stamp payments in 2014, and eliminating the advanced Earned Income Tax Credit. This comes after the Senate already scaled back its original bill by decreasing unemployment benefits and cutting short the doc fix. A summary of the now six versions of this bill is below.
|Version of Tax Extenders/Safety Net Bill (H.R. 4213)|
|Doc Fix||Patched through 2013||Patched through 2011||Patched through 2011||Patched through 2011||Patched through November||Dropped*|
|Unemployment Benefits||Extended through 2010||Extended through November||Extended through November||Extended through November||
Extended through November (but eliminates extra $25/week enacted through the 2009 stimulus)
|Extended through November (but eliminates extra $25/week enacted through the 2009 stimulus)|
|COBRA Benefits||Extended through 2010||Extended through November||Dropped||Dropped||Dropped||Dropped|
|Medicaid Matches to States||6 month extension||6 month extension||Dropped||6 month extension||6 month extension||Shortened extension|
*The doc fix was passed separately by both Houses in HR 3962 and is going to the president's desk to be signed, so it isn't counted here in the bill. The CBO includes the doc fix in its most recent cost estimate of HR 4213, adding about $6 billion to the gross cost and deficit impact.
The good thing about this extenders bill is that some of the cost reductions come from real cuts, not just omissions. The food stamp benefit reductions and the elimination of the advanced EITC represent legitimate cutbacks (the latter being on President Obama's hitlist for the last two budgets.) But even with these scalebacks, those two constants are still there. This bill will still add to the deficit, and the Senate fell three votes short of getting the bill passed.
It's time that lawmakers finally got the will to pay for the bill. Obviously, repeated scalebacks are not convincing the moderate on-the-fence voters to support it, and using omissions rather than real cuts makes the bill fiscally irresponsible anyways. The Senate should go back to the drawing board and create some offsets.
See related posts below:
On the eve of the G-20 in Toronto this weekend, U.S. financial markets have continued to be dominated by safe haven effects as investors (domestic and foreign) have sought what they consider the safety of Treasury instruments, particularly at the long end of the market. Safe haven effects have been driven by persistent fiscal worries about the eurozone’s ability to manage its fiscal crisis.
But investors are also concerned about the global slowdown: in Europe, because of fiscal tightening; in the United States, because recent economic data (like the new cautionary tone coming out of the Fed earlier in the week) suggests that growth momentum may be slowing and inflation remains very subdued; for China, while its currency appreciation (if sustained) may make global trade more market-based in the longer run, it may dampen growth in the nearer term - at the same time everyone else’s economy is slowing. These global slowdown concerns have accelerated movement out of stocks into the U.S. bond market, as well.
In the run-up to the G-20, Fred Bergsten has a very relevant op-ed in the Financial Times on our continuing economic challenges, which may well become even tougher by the way the global economy is “rebalancing” while the United States just goes along.
And we have also seen a remarkable development: reports have appeared that investors are moving more into Fannie and Freddie [mortgage market] holdings, at a time when the U.S. mortgage market appears to be softening. (And it has still never recovered from the subprime debacle). Explanations are challenging, but perhaps the answer lies with Congress: the financial sector reform bill appears to have been finalized and the difficult challenges of unwinding Fannie and Freddie from the government’s balance sheet have been separated from the bill - and perhaps delayed. Thus, Fannie and Freddie remain as always – backed by the government (this backing became more explicit with the unfolding of the financial crisis).
The increase in demand for U.S. government instruments due to these various effects has resulted in even lower interest rates, particularly at the long end of the market. The yield curve has flattened.
Even in best years the congressional appropriations process usually results in a proverbial train wreck. And this year is shaping up to be such a bad year that news headline writers may have to come up with a new description. The spending process which begins this week is fraught with bumps and unanswered questions.
First, House Democrats have been unable to reach a deal among themselves on a Fiscal 2011 budget resolution. The Senate Budget Committee, on the other hand, passed a budget blueprint in April. Since there won't be an official budget reconciliation process this year, the budget's main purpose is to set an overall discretionary spending level for the year. There's the rub. The House is likely to "deem" an overall spending plan that is some $7 billion below President Obama's budget plan. The Senate Budget Committee budget is $3 billion higher than the House. If a budget resolution had been adopted, those numbers would be the same. Without a budget resolution, each chamber can go on its merry way, spending up to its ceiling. A deal on discretionary spending would not be reached until the end of the process when the two Houses will have to agree on programmatic spending levels.
Then, there is the issue of whether there even will be a formal appropriations process as called for by law. Since 2010 is an election year, members will want to leave Washington early in the fall to go home and campaign. They may punt spending decisions until after the election, during a lame duck session. At that point, retiring and defeated members will be making key budget decisions.
Whatever happens, House Democrats are going to have to waive an obscure budget point of order to be able to even leave for the July 4th recess. Section 310(f) of the 1974 Budget Act prohibits the House from considering a resolution calling for an adjournment period lasting more than three days during the month of July unless it has completed work on its annual appropriations bills.
In short, the budget process is a mess and must be fixed. Spending decisions are being made on an ad hoc and haphazard basis. That is why the Peterson-Pew Commission on Budget Reform is preparing a proposal for a new budget process that would bring order and discipline to this mess. Its report will be issued later this year.
Americans will get the chance to have their voices heard on what policymakers should do about the unsustainable fiscal outlook at some upcoming events.
On Saturday, June 26, a “National Town Meeting” will seek to spur a national discussion on our fiscal future. AmericaSpeaks: Our Budget, Our Economy will convene meetings across the country and connect them via interactive video broadcast. Individuals can also participate from home via webcast. The goal of the forum is to encourage Americans to “come together to put our country on a sustainable path by setting national priorities and making decisions about how we are going to pay for them.” The organizers of the event will present the priorities that emerge from the discussion to policymakers. Information on where meetings will take place and how to participate is available here.
Concerned citizens will also have an opportunity to speak directly to key policymakers at the next meeting of the President’s National Commission on Fiscal Responsibility and Reform. The panel will conduct an open hearing on Wednesday, June 30 in Washington, DC. Information on how to sign up to speak is available on the commission’s website.
Public input will be critical to move politicians to act responsibly. A new survey from Public Agenda of “D.C Influencers” underscores the challenge. While eight in ten “movers and shakers” in Washington agree that the federal budget is on an unsustainable course and that national debt could harm the economy in the long run, few say that they are advocating policies based on reducing the debt. The overwhelming majority feel that although they believe there are practical policies for dealing with the debt, they don’t see them as politically possible. And few political leaders and opinion elites know what the current debt-to-GDP level is.
The National Academy of Public Administration will host an event on June 30 to discuss the results and “how America can rise above the partisan divide that is impeding progress on the issue.” Click here for information and registration for the event.
CRFB’s Stabilize the Debt online budget simulator is a great tool for learning about the fiscal situation and exploring solutions. Since its unveiling last month, over 50,000 people have checked it out. Users have spread the word virally and have shared their thoughts on CRFB's Facebook page. Policymakers and the public would benefit from doing the simulator to see what the current debt-to-GDP ratio is, where it is headed, and what can be done to get it to a sustainable level.
So, try the simulator, get the facts and then express your opinion at the public forums and see how to convince our leaders to work together to put the country on a solid fiscal course.
If the fiscal consolidation appears to the public as a credible attempt to reduce public sector borrowing requirements, there may be an induced positive wealth effect, leading to an increase in private consumption. Furthermore, the reduction of government borrowing requirements diminishes the risk premium associated with government debt issuance, which reduces real interest rates and allows the “crowding-in” of private investment.
Exactly. Along this same line of thinking, ECB said that there were many situations in which the costs are low and the benefits are high for fiscal consolidation:
- if confidence in a country's public finance is low
- if fiscal consolidation is pursued credibly and consistently
- if it makes the long-term finances more sustainable
- if economic adjustment is not impeded by nominal rigidities
- if many consumers are "Ricardian consumers" (meaning they think that fiscal consolidation precludes the need for more drastic fiscal adjustment in the future and increase their consumption)
- if the economy is very open
- if the fiscal consolidation is offset by expansionary monetary policy or currency depreciation.
Obviously, the first condition applies to many European countries, especially the PIIGS, who would have much to gain from an increase of confidence in public finance. ECB says that for these countries, fiscal consolidation can be beneficial in both the long-run and the short-run. For other countries, they indicate that the short-run costs may still be offset to an extent by the "expectation effects" of announcing a fiscal plan. And of course, they say that the long-term benefits to economic growth of reduced public borrowing more than outweigh the short term costs.
The ECB is now in the Announcement Effect Club. Congratulations.
In remarks at the think tank Third Way, House Majority Leader Steny Hoyer covered the bases in talking about our deficits and debt. Among the topics he covered were timing of deficit reduction, PAYGO, temporary policies, entitlements, defense, and the fiscal commission.
First, he defended the stimulus as necessary in order to save the economy from a nose-dive and made the case for more stimulus. He did, however, say that we should not simply deficit spend:
And many Members of Congress agree with the Washington Post, when it argued in an editorial this month, ‘We’d find the stimulus-now, spinach-later argument more credible if its advocates gave some hint of where the long-term belt-tightening will take place.’ I agree. An excellent way to build support for the job creation we still need is making credible and detailed plans to tackle the long-term debt. So now is the time to start talking about a solution to the structural deficit—one we’ll be ready to put in place once the economy is fully recovered.
Hoyer then went on to talk about the necessity of PAYGO and, interestingly, the necessity of a loophole-ridden PAYGO:
Some have criticized PAYGO for exempting the extensions of current policy on middle-income tax cuts, the estate tax, the alternative minimum tax, and the ‘doc fix’ that helps seniors see their Medicare doctors. I understand that criticism—but it neglects the fact that a PAYGO law without those exemptions would simply be waived again and again and would become toothless.
He also pointed out that PAYGO's effect goes beyond bills that Congress passes. Rather, its effect is more fully measured in "the bills that never see the light of day because we can't find offsets for them." Obviously, it's impossible for the public to know exactly how much PAYGO has stifled potential bills, but as Majority Leader, Hoyer has claimed to have seen it alot.
As for some of those exempted policies, Hoyer called for permanent fixes. The AMT, the estate tax, and the doc fix, he said, should all be fixed permanently. He also said that "at a minimum," the House will not extend the 2001/2003 tax cuts for those making $250,000 or more, opening up the possibility that he may take a bigger bite out of those tax cuts than his own Democrats prefer.
Hoyer also said that no part of the budget should be off limits. He praised Defense Secretary Robert Gates' efforts to scrub the defense budget clean of unwanted or unnecessary spending. He also said that revenue has to be on the table, especially since "the Republican Party has run away from Paul Ryan’s plan, even though you’d expect it to rush to embrace a proposal based on spending cuts."
The Majority Leader also brought up a "budget enforcement resolution" that the House was working on that would "set limits on discretionary spending that require further cuts below the President’s budget; reinforce our commitment to PAYGO; direct committees to identify reforms to eliminate waste, duplication, and inefficiencies within their jurisdiction; endorse the goals of the president’s bipartisan fiscal commission; and reiterate the commitment to vote on the commission’s recommendations." He seemed to be hopeful that the executive fiscal commission could provide the starting point for a bipartisan deficit reduction plan.
On the entitlement side, he offered a few solutions: raise the retirement age and peg it to life expectancy, and make Social Security and Medicare benefits more progressive (presumably by instituting progressive benefit indexing and raising premiums for upper-income recipients, respectively).
Overall, Hoyer's remarks are very much in line with our own. He emphasized pairing short-term stimulus with a longer-term deficit reduction plan to take effect when the economy recovers, much like what we have said (see here, here, here, and here for example.) He also said to keep no part of the budget untouched in order to keep a sense of fairness and balance. We appreciate Rep. Hoyer's remarks on dealing with our debt issues, and we hope he has success in enacting a successful plan.
As our Budget Simulator grows in popularity, more and more people have taken the spending challenge to voice how they would like to see government spending cut. One popular suggestion has been that something be done regarding federal pay and benefits, which have fared relatively well in this economy while the private sector has felt the stronger sting of the recession.
Truth be told, federal employees do quite well for the most part. In fact, a recent USA Today analysis found that in a job-to-job comparison, a typical federal employee is paid about 20% more than his private sector counterpart.
It is true that much of this difference is due to differing levels of education attainment, as Peter Orszag explains here. But in addition to high wages, federal employees receive extremely generous benefits. Among them are a very generous health care plan, life and disability insurance, two types of retirement benefits (a DB pension and a 401(k)-type plan with a match), and a significant amount of paid time off. Not to mention flexible work schedules and a level of job security unheard of in the private sector.
The gap between federal and private employees has worsened some as the recession has taken hold. Over the past two years, government wages have grown 4.5% while private wages have grown only 2.2%. Over the last year, private wage have actually fallen. In other words, government wages have maintained strength over the course of the recession, while private sector wages have suffered.
Source: Bureau of Economic Analysis, National Income and Product Accounts Table, 6.6D
One recent analysis actually found that 19% of civil servants earn salaries above $100,000 – compared to 14% before the recession. Few other industries have been so lucky. To us, this suggests that federal compensation might be an area ripe for reform.
And military compensation must be on the table as well as civilian compensation. The 2008 Quadrennial Review of Military Compensation found that service members made a larger salary than 80 percent of comparable civilians. And a Defense Department sponsored study by CAN Corp. found in 2006 that enlisted service members made over $13,000 more (including benefits) than their civilian counterparts. Officers were found to make almost $25,000 more.
To be sure, we cannot solve our debt woes just by reining in on federal wages and benefits. If the pendulum swings too far in the other direction, the quality of our federal workforce could suffer.
Still, there are a number of ways we could begin to pare back some of the generosity in federal compensation. Some of the options highlighted below could help produce savings for our fiscally-strapped government:
|Policy Option||Savings (billions)|
|Reduce military pay raises by 1 percent for five years||$15|
|Calculate federal pension benefits based off five years of earnings to conform with private sector||$4|
|Base COLAs for federal and military pensions and veterans' benefits on alternative measures of inflation||$23|
|Increase federal employees' contributions to pension plans||$9|
|Reduce benefits under the federal employees' compensation act||$2|
|Freeze federal civilian pay for 1 year||$30|
|Freeze federal civilian pay for 3 years||$90|
|Base federal retirees' health benefits on length of service||$1|
|Adopt a voucher plan for the Federal Employees Health Benefits Program||$33|
|Increase health care cost sharing for family members of active-duty military personnel||$7|
|Introduce minimum out-of-pocket requirements under TRICARE for life||$40|
|Increase medical cost sharing for military retirees who are not yet eligible for Medicare||$25|
|Require copayments for medical care provided by the Dept. of Veterans Affairs to enrollees without a service-connected disability||$7|
|Remove tax exclusions on certain allowances for federal employees abroad||$18|
|Remove the tax exclusions of military pay and benefits||$68|
|Remove tax exclusions on veterans' disability compensation and pensions||$43|
Some of these options deal with pay directly. A one-year freeze on federal civilian pay (in other words, no cost of living adjustment) would save $30 billion over the next decade and restore much of the growing wage disparity resulting from the recession. We estimate a three-year pay freeze could save three times that. And simply tying basic military pay raises to 0.5 percentage points below the Employment Cost Index (the measure used for calculating wages and salaries of private-sector workers), for five years rather than 0.5 percentage points above it, could save $15 billion.
Pension benefits can also be reformed. In the private sector, where defined benefit pensions still exist, benefits tend to be based off of five years of earnings – yet public pension benefits are calculated off of three years, which does not usually capture as big of a range of earnings. Meanwhile, federal employee contributions to their pensions tend to be low, and benefits are adjusted annually based on an inaccurate measure of inflation. Correcting these issues, together, could save more than $35 billion dollars over a decade.
And then there is health care. Federal, military, and veteran health benefits are driven by the same factors as Medicare, yet were left untouched in health reform. Some reforms to the Federal Employee Health Benefits (FEHB), such as replacing it with a voucher program, could save over $30 billion. Meanwhile, introducing some cost sharing and premiums into the military TRICARE program – which hasn’t seen either rise in even nominal terms since its creation – could save over $70 billion.
Finally, there’s the matter of tax expenditures. The tax code itself subsidizes federal workers in a number of ways. For example, many benefits and allowances, and even some types of direct pay, are exempt from taxation for members of the military. The same is true for many federal workers living abroad. And veteran’s pension and disability benefits also seem to get a special place in the tax code. Taken together, these benefits will cost taxpayers about $130 billion in lost revenue over the next decade.
To be sure, even adopting every one of the policies together would still only reduce the deficit by less than $400 billion over the next decade. That isn’t nearly enough to stabilize our debt or get deficits under control. But it would be a great start, and certainly one worth considering.
Today, the British government released its latest proposed budget, one which will dramatically slash spending and significantly raise taxes. All government departments will be forced to cut spending across-the-board, aside from the National Health Service (which is protected by law). On January 4th of next year, Britain’s Value-Added Tax (or VAT) will increase from 17.5 percent to a full 20 percent, expected to raise government revenues by 13 billion pounds annually. At midnight tonight, a higher capital gains tax rate will take effect, impacting Britain’s highest earners, while the effects of the budget cuts on the nation’s poorer citizens is meant to be offset by a increase in the number of Britons who will qualify to pay no income tax at all.
Britain’s Chancellor of the Exchequer, George Osborne, said that these dramatic new budget measures—amounting to the nation’s “harshest budget in decades”—are critical to the stabilization of the recently ballooning British deficit (projected to be 12% of GDP this year, highest of all the EU nations) and the establishment of a sustainable long-term fiscal path. It comes in response to increasing worries in recent years over the UK federal debt, which has been growing at a rate faster than any other European country in recent years and has made this budget “unavoidable.”
Osborne claims that this proposal should ensure that the structural current deficit will be balanced by 2015, with debt beginning to fall as a percentage of GDP (from this year’s 62.2%) by roughly that same year. The budget proposal is also meant to jumpstart economic growth in Britain, predicted to rise from a tiny 1.2% to 2.3% in 2011—and decrease unemployment two percentage points, from 8% to 6%, by 2015.
These budget cuts are indeed a bold move, but indicative of the kind of widespread, sweeping changes that we may need to make in the United States as well in order to curtail our growing deficit and expanding debt. As Osborne told the British Parliament today, “Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice. The crisis in the Eurozone shows that unless we deal with our debts there will be no growth.”