The Bottom Line

March 26, 2015

With budget consideration underway this week, the House has passed its own resolution and rejected several proposed alternatives, while the Senate budget is still in the debate and amendment process. So far, different FY 2016 budgets have been proposed by President Obama (and scored by CBO), the House Republicans (from Chairman Price), the Senate Republicans (from Chairman Enzi), the House Democrats (from Ranking Member Van Hollen), the Congressional Progressive Caucus (CPC), the Republican Study Committee (RSC), and the Congressional Black Caucus (CBC). Each budget offers a variety of different plans for funding the government over the next decade.

Importantly, each budget goes to varying lengths to at least temporarily reduce our debt as a share of the economy in the next 10 years, though some go farther than others. On one hand, the President's budget, the Van Hollen budget, and the Black Caucus budget leave debt stable or on a slight upward path after 2020. The Price, Enzi, Progressive, and Republican Study Committee's budgets all put debt on a clear downward path, with the RSC budget reaching 48.1 percent of Gross Domestic Product (GDP) by 2025.

March 25, 2015

Earlier today, the Congressional Budget Office (CBO) released its score of the Medicare Sustaintable Growth Rate (SGR) reform bill under consideration in the House. According to CBO, the legislation would increase federal deficits by $141 billion through 2025 and much further in the second decade. By our rough calculations, including interest, that means the SGR reform bill would add over $500 billion to the debt by 2035.

More specifically, CBO estimates the spending increases in the legislation will total $210 billion over the next decade. Only about one-third ($70 billion) of this spending would be offset, with a combination of provider reductions, increased means-testing of Medicare premiums, and other minor reforms. (Details are available in the table at the bottom of this blog.)

As we had predicted, savings would then grow in the second decade but not by enough to pay for costs. In fact, according to CBO it would most likely barely be enough offset the additional costs beyond a payment freeze.

March 25, 2015

While considering the FY 2016 budget, the Senate Budget Committee voted on about 50 amendments before passing the budget resolution on a party line 12-10 vote.  (We described the underlying budget here).  Some of these amendments were steps toward fiscal responsibility, some were steps backwards, and some were more mixed. Below, we describe the good, the bad, and the other notable amendments, even though not all of them passed.


March 24, 2015
How the House and Senate Use Reconciliation Instructions in Their Budgets

Although the numbers in the budget resolution draw a lot of attention, one of the most impactful parts of the resolution deals with budget process, setting up the parameters for legislation later in the year. A key part of this process is reconciliation instructions, which help turn the assumptions in the resolution into reality.  Additionally, it provides a bill prepared by a committee filibuster-proof consideration on the floor.  This legislation would need to be signed by the President and have the force of law, while the budget resolution does not. Both the Senate and House Budgets provide reconciliation instructions, starting this potentially powerful legislative process.

But what are reconciliation instructions?

Reconciliation instructions are directions to a committee to report legislation that changes existing law to bring spending, revenues, or the debt limit in line with the budget resolution. Reconciliation specifies the committee or committees, the nominal dollar savings needed, and sometimes a deadline for legislation to be reported. A reconciliation bill that comes to the floor cannot be filibustered in the Senate – meaning it does not need 60 votes – and has a 20-hour debate clock in both chambers (unless waived by rule or unanimous consent). Reconciliation's special privileges are important because they are intended to ease the passage of politically difficult (usually) deficit reduction legislation.

March 24, 2015
House to Vote on Two Competing Frameworks

In order to resolve disagreement between defense hawks and fiscal hawks, the House will vote on two competing budgets with different approaches to funding for Overseas Contingency Operation spending (also known as OCO or war spending) and offsets. Neither of these versions is responsible, but one is more irresponsible than the other.

The first and less irresponsible version is the original House budget provision, which would provide $94 billion for OCO, $36 billion above the President's request for FY 2016 and $20 billion above the current level of $74 billion. This increase fills in almost all of the difference in the non-war defense budgets between the House and the President, thus creating a slush fund to slip normal defense spending into the war category. This would effectively provide the same amount of sequester relief for defense spending for next year while purporting to comply with the sequester caps on paper. However, the budget does require that the $20 billion of spending above current law be offset, so it at least partially pays for this increase.

As potentially irresponsible as this approach is, it is not as bad as the alternative, which would eliminate the requirement that the $20 billion in spending above the FY15 level be offset. This approach is counterproductive in both legitimizing the use of OCO as a slush fund and undermining the principle that sequester relief must be offset by savings elsewhere in the budget.

March 24, 2015

House Budget Committee Ranking Member Chris Van Hollen (D-MD) yesterday released the House Democratic alternative budget, which provides similar deficit reduction to the President's budget. The budget reduces deficits on net by just under $1.3 trillion compared to CBO's baseline, the majority of which comes from eliminating war spending after FY 2016.

The budget would put debt on a downward path by its own numbers to 70 percent of GDP by 2025, down from 74 percent in 2015. However, it appears that the budget takes into account the economic benefits of immigration reform; using CBO's GDP numbers, debt would be on a stable (if not a slight upward) path at 72-73 percent in the latter part of the budget window.

March 23, 2015

Now that we have shown that the "doc fix" proposal in the House will likely add to the debt in the longer term – refuting a key argument for not fully offsetting the ten-year cost of the bill – supporters of the legislation have come up with a cynical new argument.

March 20, 2015

There was a lot of discussion in the run-up to the release of the Senate budget about disputes within the Republican caucus over defense spending. The original budget proved to be responsible compared to the House budget on defense, and particularly on war spending, but it took a clear step back during the mark-up yesterday. Here’s how.

As we’ve already discussed, the House budget took an irresponsible stance on war spending by spending in FY 2016 $36 billion above the President’s requested $58 billion, essentially to provide backdoor sequester relief for defense. It provided further sequester relief for defense by cutting non-defense discretionary spending below sequester levels, which may prove difficult to sustain over a long period of time.

The originally-released Senate budget took a more realistic and responsible approach on defense. For war spending, not only did it spend at the President’s request of $58 billion, but also it created a point of order, which could be overridden with 60 votes, against any bill that raises it above that amount. This enforcement was especially helpful considering that lawmakers spent $8 billion more than what the President requested in the CRomnibus last year.

March 19, 2015
Plan Could Cost $400 Billion or More Over Two Decades

Note: The analysis below is based on an earlier version of the SGR plan, which has since been adjusted to include modestly larger offsets and – more significantly – slower growth in physician payments beyond 2025. Our latest analysis shows that debt would increase by $500 billion by 2035.

Proponents of the SGR reform plan currently under discussion have suggested that lawmakers ignore its $140 billion ten-year cost and focus instead on the legislation’s long-term effects. Over time, they argue, spending reductions in the legislation will grow and thus reduce long-term debt levels. Unfortunately, this claim appears to be false – the legislation would add to the debt both this decade and next. Even accepting optimistic savings estimates, we estimate that debt would increase $400 billion by 2035 (including the cost of interest) as a result of this deal.

According to recent reports, the SGR reform bill currently under consideration would cost about $210 billion through 2025, while offsetting $65 billion – leading to about $140 billion of net costs. Some have argued that the savings will grow over time and thus the legislation will be fiscally responsible over the long-run. Yet while it is true that the savings will be greater in the second decade, costs will grow as well – and under the current framework, costs will most likely remain higher than savings in the second decade as well as the first.

In other words, proponents of the “second-decade theory” appear to be looking only at one side of the ledger. They are counting the long-term savings while ignoring the long-term costs.

To the plan's credit, Medicare savings from the offsets in the reform package will grow over time. Although some of the savings are temporary, some of the changes are not only permanent but will likely save much more in the second decade than the first, including changes to post-acute care payments, Medicare means-testing, and Medigap reform. (Importantly, much of the reason is not because the savings grow faster over time, but because these policies don’t begin for a number of years and therefore generate savings over less years in the first decade than the second).

According to one estimate by Doug Holtz-Eakin of the American Action Forum, Medicare means-testing and Medigap reform could save $230 billion in the second decade. Notably, these numbers appear to us to be significantly higher than likely savings, but even accepting these numbers, total savings over two decades would be about $300 billion.[1] Meanwhile, the total costs could total more than $550 billion.

March 18, 2015

Senate Budget Committee Chairman Mike Enzi (R-WY) has released his FY 2016 budget resolution, which prescribes $5.1 trillion of spending cuts to reach a balanced budget by 2025. Those spending cuts, which exclude savings from drawing down war spending, include $4.2 trillion of program changes (almost entirely from mandatory spending including the Affordable Care Act), $710 billion of interest savings, and $164 billion from the "fiscal dividend" that counts the economic benefits (and short-term costs) of the deficit reduction contained in the budget. The Senate budget is slightly less aggressive than the House budget, with most of that difference coming from fewer non-defense discretionary cuts.

With its relatively aggressive savings targets, the Senate budget would put debt on a sharp downward path as a percent of GDP, from 74 percent in 2015 to 57 percent by 2025. Even excluding the fiscal dividend's effects on spending and revenue (the budget does not count the increased growth in its GDP numbers), debt would only be about 0.6 percentage points higher.

The budget also significantly reduces deficits, having them fall from 2.7 percent of GDP in 2015 to 0.5 percent in 2018 and to a small $3 billion surplus by 2025. Although the budget would not balance without the fiscal dividend, it would only record a small deficit of $52 billion (0.2 percent) in that year. Even then the budget might be close to balance, because the budget bases its numbers off CBO's January baseline, which has a $49 billion higher 2025 deficit than CBO's most recent baseline released last week.

March 18, 2015

House Budget Committee Chairman Tom Price (R-GA) released his FY 2016 budget yesterday, outlining a framework that would significantly reduce the debt as a share of the economy and balance the budget by 2024. Our initial analysis of the budget showed it decreased deficits and placed debt on a clear downward path. This post examines the House budget's spending and revenue levels. 

The Price budget achieves balance entirely on the spending side, using a cumulative $5.5 trillion of spending cuts over 10 years to gradually reduce spending from 20.4 percent of GDP today to 18.3 percent by the end of the decade. This brings spending and revenue closely in line, with the small difference made up for by an assumed "fiscal dividend" of about 0.3 percent of GDP in 2025.


We described some of the details of Chairman Price's $5.5 trillion in spending cuts here. They included significant reductions to both domestic discretionary and mandatory spending. Some of the largest cuts include a repeal of the coverage provisions in the Affordable Care Act and block granting Medicaid and food stamps. Beginning in 2017, the budget proposal would also cut future non-defense discretionary spending to well below sequester levels – by over $700 billion through 2025, on top of the $360 billion from sequester. At the same time, it would restore over $350 billion of the $550 billion of defense sequester cuts.

March 18, 2015

One of the most important functions of budget resolutions is to set the spending limits for the coming fiscal year. At first glance, the House budget would seem to take a straightforward approach by abiding by the sequester-level defense and non-defense caps for FY 2016. But as David Rogers of Politico points out, the budget in effect breaks with the caps by increasing war spending by $36 billion above the Pentagon's request. Although the budget would follow the President's budget path for war spending after that, the 2016 figure represents a dangerous precedent that could significantly undermine the spending caps.

We have long warned about the practice of lawmakers using the uncapped war spending category (Overseas Contingency Operations, or OCO) as a slush fund to slip in non-war defense spending to get around the spending caps. We have shown how they have done this in the past two omnibus bills by overfunding categories in the OCO category relative to the Pentagon's request. By stretching the definition of war spending or sometimes outright ignoring it, lawmakers make extra room in the non-war defense budget for other spending.

However, the House budget's approach goes further in both scope and purpose than previous attempts. It provides $94 billion for OCO, more than was provided in FY 2013 when full combat operations were ongoing in Afghanistan and $36 billion more than the Pentagon's request for 2016. The $36 billion increase is much greater than the amounts actual spending has exceeded requests in the past, and the increase seems more explicitly designed to provide nearly the entire amount of sequester relief the budget seeks in other years rather than reflect actual funding needs. In other words, rather than having appropriators marginally game the OCO category late in the budget process, the budget would give lawmakers license up front to shift large portions of non-war spending into OCO.

March 17, 2015

This morning, House Budget Committee Chairman Tom Price released his FY 2016 budget proposal, "A Balanced Budget for a Stronger America." The budget reaches balance in 2024 by cutting about $5.5 trillion of spending over ten years (relative to a "PAYGO baseline" which excludes savings from drawing down war spending), and it assumes an additional $147 billion in deficit reduction from a "fiscal dividend" that incorporates the longer-term economic benefits (and short-term economic drawbacks) of the deficit reduction contained in the budget.

Importantly, the budget puts debt on a clear downward path as a share of the economy, with debt falling from about 74 percent of GDP today to 55 percent by 2025. Even excluding the higher revenue, lower spending, and higher GDP created from the fiscal dividend, debt would still fall to 56 percent by 2025 and would still be on a clear downward path.

Chairman Price’s first House budget is very similar to last year’s budget by then-Chairman Paul Ryan. It gets the bulk of its savings from health care programs, particularly the Affordable Care Act, and also includes sizeable cuts to other mandatory programs. In addition, the budget calls for somewhat similar domestic discretionary cuts (while increasing defense spending) after abiding by the current spending caps in law for the first year, as the budget resolution did last year. Finally, the budget assumes the fiscal dividend would generate $83 billion of savings in 2025.

This last assumption is based on CBO's estimate about the economic benefits of the budget's deficit reduction, though we would caution against banking these uncertain savings. Still, even without the fiscal dividend, the 2025 deficit would only be $50 billion, or less than two-tenths of one percent of GDP. However, the budget might balance, because it calculates its savings against CBO's January baseline, which has a 2025 deficit that is about $49 billion higher than their most recent baseline released last week.

March 16, 2015

This weekend, The Wall Street Journal announced its support for the permanent Sustainable Growth Rate (SGR) replacement currently being negotiated in Congress. Although full details are not yet available, the legislation apparently has about $200 billion of costs, accompanied with roughly $60 billion of offsets – half from beneficiaries and half from providers. In other words, the legislation is largely unpaid for and would add about $140 billion to deficits through 2025, before interest.

Despite its long-standing support for controlling the growth of Medicare costs, The Wall Street Journal endorses this Medicare spending increase under the premise that the SGR itself is a “fiscal deception,” and that past offsets used to pay for avoiding it “are usually fake.” However, for the most part, these arguments do not stand up to scrutiny.

Below, we explain why many of their claims are either inconsistent with the facts or else counterproductive to achieving the overall goal of reforming Medicare and reducing its future costs.

Claim #1: Ending the SGR does not add to the deficit.

The Wall Street Journal claims that politicians are under a false “impression that the formula leads to real savings, and thus ending it adds to the deficit” and that “the SGR merely lets Congress hide the future spending it is going to do anyway.” Yet while it is true policymakers have continuously prevented the across-the-board SGR cuts from happening, they have also offset the cost of doing so 98 percent of the time. As Margot Sanger-Katz of The New York Times explained, “With only a few exceptions, Congress simply cuts other parts of the budget to compensate for the extra money for the doctors. And that money almost always comes from Medicare or other health care programs."

In fact, our analysis shows that these offsets -- nearly all of which are health-related -- will save about $165 billion (before interest) through 2025.

March 16, 2015

As doc fix discussions continue in Congress, three opinion pieces recently declared support for fully offsetting the cost of a replacement for the Sustainable Growth Rate (SGR) formula. Editorials in the Washington Post and National Review plus an op-ed in The Hill by Heritage Foundation Senior Fellow Robert Moffit all called for an SGR fix to be fully offset, in contrast to the current discussions that apparently would only offset part of the cost.

The National Review wrote:

The unpleasant fact is that there is no way to make our current entitlement programs sustainable absent deep structural reform. But if Congress is unwilling to undertake that reform, then keeping SGR as is, or fully offsetting the cost of repealing it, would be the next best outcome.

The worst outcome — abandoning those spending restraints while doing little or nothing to mitigate the fiscal impact of doing so — is, unfortunately, what is currently under consideration. If presented with that option, conservatives should put their foot down — on the neck of this profligate, deficit-swelling deal.

March 16, 2015

The federal government will reach its second Fiscal Speed Bump today, as the debt ceiling will be reinstated after having been suspended since last February. The Treasury Department will be able to push back the actual day of reckoning until the fall with "extraordinary measures," but lawmakers will have to lift it later this year to avoid a default on the debt. At times, raising the debt ceiling has involved unnecessary brinkmanship, but it has often been used as a catalyst to make important fiscal reforms. To further the latter and minimize the former, the Better Budget Process Initiative has proposed ten options to change the debt ceiling to make it a more effective tool for fiscal responsibility while improving financial stability in a new paper entitled "Improving the Debt Limit".

The paper divides the changes into four broad categories: linking debt limit changes to achieving fiscal targets, incorporating the debt limit into Congress's decision making, applying the debt limit to more meaningful measures, and replacing the debt limit with a limit on future obligations. The ten options are below: 

Link changes in the debt limit to achieving responsible fiscal targets

1) Presidential authority to increase the debt limit if fiscal targets are met
2) Presidential authority to increase the debt limit if accompanied by a plan to put debt on a declining path as a share of GDP
3) Suspend the debt limit automatically if fiscal targets are met

March 16, 2015

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, testified last Wednesday in front of the Senate Budget Committee for a hearing on the benefits of a balanced budget.

In her testimony, MacGuineas told Senators that we are not out of the woods yet from the economic problems following the Great Recession and that critical national objectives require controlling our historically high national debt.

MacGuineas’ testimony focused on four key points:

Our deficit and debt problems are far from solved.

While the deficit has come down by about two-thirds since the 2009 peak, this was only after a 780 percent increase in the prior two years. Importantly, the recent declines in the deficit are only temporary. The deficit is only projected to shrink for the next three years, and trillion-dollar deficits are projected to come back within a decade. In addition, CBO’s already-bleak projections might be too optimistic, since they assume that lawmakers won’t further increase the deficit, including by continuing temporary policies as they often have in recent years.


March 13, 2015

We've released our analysis of CBO's estimate of the President's budget, breaking down the report and its supplementary data in less than six pages. Our paper explains that CBO finds that many policies would save less than the President's budget claims shows debt on an upward, rather than a downward path.

Although CBO shows lower debt as a percent of GDP than OMB does, it also shows debt on a slight upward path after 2020, meaning the budget is less likely to stabilize debt over the long term using CBO's numbers (OMB's numbers showed stable debt through 2040). Debt would fall from 74 percent of GDP in 2014 to 72 percent by 2020 before rising gradually to 73 percent by 2025. Thus, the budget would likely have to do more to truly put debt on a sustainable path.

Debt as a Percent of GDP in the President's Budget

Debt would rise after 2020 because deficits would increase throughout much of the ten-year window. Although they would fall from $486 billion (2.7 percent of GDP) in 2015 to $380 billion (2 percent) in 2016, they would rise continuously after that to $801 billion (2.9 percent) by 2025. The 2025 deficit is lower than CBO's baseline deficit of 3.8 percent but higher than OMB estimated deficit of 2.5 percent.

March 12, 2015

CBO has just released its analysis of the President's FY 2016 budget, using its own numbers and methods to re-estimate the budget. While CBO reveals lower debt as a percent of GDP than OMB did when it estimated the budget, it also shows debt on an upward path after 2020. Thus, CBO's estimate demonstrates that the budget would have to go further to put debt on a truly sustainable path.

We will have a paper on the analysis later today and a deeper dive into different aspects of the re-estimate in the coming days. Stay tuned!

March 10, 2015

The latest CBO projections show a slight improvement on our fiscal situation over the previous ones made in January, and lower projected health insurance premiums are at the center of that improvement. Not surprisingly, then, the agency's latest estimate of the coverage provisions of the Affordable Care Act improved as well.

The net cost of coverage -- the coverage expansions net of mandate penalties, revenue from the Cadillac tax, and related effects -- dropped by $142 billion over ten years, from $1.35 trillion to $1.21 trillion. Simultaneously, CBO projects that there will be 4 million fewer people uninsured in 2025 than they did in January. There are plenty of different effects at work, so let's take a closer look at what happened with their ACA estimates.

The largest factor, lower private health insurance premiums, comes about as CBO takes into account the slower-than-expected premium growth from 2013 and puts greater weight on the slow growth since 2006. CBO now anticipates a slower bounce back in premium growth than they expected before as the economy continues to recover. As a result, projected 10-year spending on subsidies for health insurance purchased through the exchanges dropped by one-fifth, from $1.06 trillion to $850 billion.

At the same time, though, the lower premiums mean that the Cadillac tax on high-cost insurance plans will now raise $62 billion less than expected, continuing a trend of downward revisions to projected Cadillac tax revenue (the 2023 projected revenue is now 60 percent less than was expected two years ago). The lower premiums also translate to lower revenue as a result of the fact that people losing employer coverage due to the ACA will have less compensation shifted into taxable income (lower anticipated premium growth similarly increased CBO's projections of baseline wages and salaries).

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