The Bottom Line
In CBO's 2014 Budget and Economic Outlook released this week, they addressed the future of the federal government's largest program, Social Security. Social Security has two separate trust funds: one for Old Age and Survivors Insurance and one for Disability Insurance. It is clear from CBO's analysis that both face mounting fiscal challenges in the coming years.
Disability Insurance (DI)
The Social Security DI program pays benefits to some workers who suffer debilitating health conditions before they reach Social Security's full retirement age. Payments are also made to their eligible spouses and children. As CBO explains, the trust fund is paying out more than it is taking in, so its annual cash flows of the DI program, excluding interest, will add to federal deficits every year for the next ten years, by amounts ranging from $35 billion to $52 billion. Even with interest receipts included, the DI trust fund is expected to run a yearly deficit throughout that period. CBO estimates that, in the absence of legislative action, the balance of the DI fund will be exhausted in Fiscal Year 2017, though it appears that the trust fund would run out near the end of calendar year 2016. The chart below shows the outlook for the DI fund over the next decade (excluding interest payments and expenses):
By law, CBO is required to assume the Social Security Administration (SSA) will pay DI benefits in full after the trust fund is exhausted even though SSA is not allowed to pay benefits in excess of the available balances, borrow money from a trust fund, or transfer money from one trust fund to another. In Congressional testimony yesterday, CBO Director Doulas Elmendorf addressed this issue stating that in 2017 the DI program “would require then a substantial reduction in benefits to fall down to the level of the ongoing incoming receipts” unless Congress acted to shift money to the DI fund. If Congress wants to avoid a sizeable reduction in disability benefits, they will need to take action to shore up the program's finances.
Old Age and Survivors Insurance (OASI)
Unlike the DI program, OASI is currently running surpluses and will continue to do so through 2019, however, these amounts will decline over that period. By 2020, even with interest income, CBO projects the trust fund will start recording annual deficits. While about 46 million people received OASI benefits in 2013, more baby boomers are becoming eligible for the program and the number of people collecting those benefits will increase by an average of 3 percent per year. By 2024, CBO estimates 63 million people will receive benefits, 38 percent more than the number of recipients in 2013. Additionally, CBO estimates that the average benefit will increase by 3 percent each over the next decade. CBO shows the projection of decreasing surpluses and eventually deficits in their graph:
Annual Surpluses or Deficits Projected in CBO's Baseline for the OASI Trust Fund
Source: CBO cbo.gov/sites/default/files/cbofiles/attachments/45010-Outlook2014.pdf
Over the coming decade, Social Security spending will climb steadily (6 percent on average per year) due to the nation’s growing elderly population and rising benefits. Under current law assumptions, Social Security outlays will encompass 5.6 percent of GDP by 2024. CBO's analysis shows that in the near future, both Disability Insurance and Old Age and Survivors Insurance will face major funding challenges and will need to be addressed.
The Disability Insurance Fund will run out in 2016 or 2017, and Social Security as a whole will become insolvent by the early 2030s. As we discuss in our paper Social Security Reform and the Cost of Delay, acting sooner will mean that the necessary changes can be smaller and gradually phased in. If policymakers wait until Social Security is on the brink of insolvency, the problem becomes much more difficult to fix.
Yesterday, we updated our Q&A: Everything You Needed To Know About the Debt Ceiling to reflect the newest date for the debt ceiling, which will be reinstated after February 7. The debt ceiling was suspended in mid-October, following a partial government shutdown, and will be reinstated on Friday. This suspension will result in a de facto $600 billion increase, putting the new debt ceiling at approximately $17.3 trillion. After this date, the Treasury will start to use extraordinary measures, in order to allow the United States to continue borrowing and fulfill its obligations. Treasury Secretary Jacob Lew recently estimated that these extraordinary measures will be exhausted by late February, and urged Congress to take measures to raise the debt ceiling before that time.
Our Debt Ceiling Q&A explains the history and mechanics of the debt ceiling, as well as suggesting ways to responsibly address it. Below we summarize several of the questions that the primer answers. Click here to read the full Q&A.
What is the debt ceiling?
The debt ceiling is the legal limit on the total level of federal debt the government can accrue. The limit applies to almost all federal debt (certain types of debt are exempt, but are quite small in value), including the debt held by the public and what the government owes to itself through various accounts such as the Social Security and Medicare trust funds. The debt ceiling applies to both debt held by the public as a result of borrowing necessary to finance deficits, and debt owed to trust funds. As a result, the debt subject to limit increases both as a result of annual budget deficits financed by borrowing from the public and increases in government trust fund balances invested in Treasury bills. The current debt subject to limit of more than $16.7 trillion is composed of nearly $12 trillion in debt held by the public and slightly more than $4.7 trillion in debt held by government accounts.
What happens if the debt ceiling is breached?
Once the government hits the debt ceiling and exhausts all available extraordinary measures, it is no longer allowed to issue additional debt. At that point, the government must rely on its remaining cash on hand and incoming receipts to pay all obligations. However, when the federal government is in a period of running annual deficits – as is the case today – incoming revenues to the federal government are insufficient to cover all of the government’s obligations, be it salaries for federal civilian employees and the military, utility bills, veterans’ benefits, or Social Security payments, to name a few. Between October 18th and November 15th, for example, the Bipartisan Policy Center estimates that approximately 32 percent of the government’s obligations would have to go unpaid, if relying only on incoming receipts to pay bills. Instead of or in addition to failing to meet these obligations, the government could also potentially default on regular interest payments on the debt. A default, or even the perceived threat of a default, could have serious negative economic implications.
Can this be avoided without congressional action?
The Department of Treasury can use a variety of accounting gimmicks to postpone hitting the threshold. For example, it can prematurely redeem treasury bonds held in federal employee retirement savings plans, halt contributions to government pension funds, or accumulate certain special types of debt which are not subject to the limit. While these actions are within the Treasury's authority, they do not make for very good policy, and can have negative economic, financial, and political consequences.
What should policymakers do?
Failing to raise the debt ceiling would be disastrous, and would surely, and rapidly, result in severely negative consequences that experts are not capable of fully knowing in advance. Even threatening a default or taking the country to the brink of default could have serious negative repercussions. Given these facts, Congress and the President must raise the debt ceiling – and they should do so as soon as possible. Yet they should also pursue a deficit reduction plan which would ideally replace the sequester, reform the tax code to make it simpler and raise more revenue, slow the growth of entitlement programs, and put the debt on a clear downward path relative to the economy.
We hope that this Q&A will be a useful primer on the debt ceiling. Although the need to raise the debt ceiling can serve as a useful moment for taking stock of our fiscal state, lawmakers should enact a comprehensive deficit reduction plan without jeopardizing the full faith and credit of the U.S. government.
Yesterday, the Congressional Budget Office released its annual report on the federal budget, which outlines their projections of all federal spending and revenues over the next 10 years and serves as a baseline against which to measure all of this year's legislation. The report showed that the deficit is expected to fall by $166 billion since last year, from $680 billion in 2013 to $514 billion in 2014. However, this one-year improvement in the deficit is not a cause for celebration: it was largely the expected result of a recovering economy, and partially the result of one-time revenues. Not only does a close look at the report not indicate good news, but the long-term picture is significantly worse, with a ten-year deficit $1.7 trillion worse than previously projected.
Almost three-quarters of the deficit reduction should be no surprise at all: CBO's report last year expected deficits to drop to $560 billion because of increased revenue and decreased safety net payments due to the recovering economy. We will post a follow-up blog next week describing the sources of these "expected" changes, which include higher revenues from economic growth, new taxes passed as part of last year's fiscal cliff deal, and increased outlays for health care programs as a result of the Affordable Care Act. Without these expected changes, the deficit only dropped by $46 billion from last year's projection.
There were forces that shifted deficits both upward and downward since last year's projections. Unexpectedly good returns from Fannie Mae and Freddie Mac, which return excess profits to the Treasury, resulted in an $88 billion gain. New estimates for coverage under the Affordable Care Act reduced deficits by $8 billion: $6 billion from reduced exchange subsidies and $2 billion from reduced outlays for Medicaid and CHIP. Other economic and technical changes to CBO's projection methodology lowered budget outlays by another $8 billion. On the deficit-increasing side, Congress passed additional legislation increasing spending by almost $45 billion, most notably the Murray-Ryan budget agreement, which partially lifted the sequestration budget caps. Revenue also dropped by $13 billion, the net effect of improved economic projections and CBO's downward technical adjustments.
From the chart above, one can see that the annual deficit dropped by $166 billion since last year, but almost three-quarters of that figure was projected last year, as a natural response to the end of the recession. Excluding this expected drop, deficits only improved by $46 billion. Yet most of those changes were outside of Congress' control – such as increased revenues from Fannie Mae and Freddie Mac and CBO's technical corrections. If the deficit only measured by the actions of Congress, the deficit actually increased by about $45 billion.
This afternoon, the Senate is expected to vote on an extension of unemployment insurance, offset with so-called "pension smoothing" - a timing shift which doesn't actually reduce the debt. The criticism against using pension smoothing as an offset is growing louder, as both the right-leaning Heritage Foundation and the left-leaning Center on Budget and Policy Priorities have declared it a gimmick.
CBPP warns that the savings from a pension smoothing offset are merely illusory, and that it fails to serve as an offset outside the 10-year budget window.
This proposed change in pension funding rules can’t “pay for” anything. While it would raise money at first, it would lose money in later years. Although it would offset some or all of the cost of ending the medical device tax for several years, it would swell deficits and debt for some years after that.
The proposal could produce a net revenue gain within the ten-year budget window, but produce subsequent revenue losses. As a result, it would cease to function as an offset, and the package would then increase deficits and debt in all future decades.
The Heritage Foundation warns that changing the pension interest rate calculation could put taxpayers on the hook for bailouts, and increase the deficits that the Pension Benefit Guaranty Corporation runs.
The proposal to “smooth” pension contributions would merely shift tax revenue from the future into the present while destabilizing pensions even further and increasing the risks of a taxpayer pension bailout.
Senator Reed’s claims that the proposal would reduce the deficit by $1.2 billion are bogus, as they are based on a budget window accounting gimmick. The proposal would increase revenue in the short term but reduce revenue in future years. And by worsening some firms’ pension underfunding problems, it could actually increase the deficit in the long run.
We also have recently warned against using this gimmick as well, in a press release issued yesterday, where CRFB President Maya MacGuineas criticized pension smoothing.
"The bleak recent budget projections highlight the tremendous need to at least pay for new spending or tax cuts so we don't make the situation worse. Relying on phantom savings and timing shifts undermines the credibility of pay-as-you-go budgeting and, more broadly, fiscal responsibility."
"These are gimmicks, plain and simple...collecting more taxes now and less in taxes later doesn't help our bottom line."
On February 7, CBO estimated that the provision would raise $17 billion over the first six years, but lost money afterward. The losses in the next five years reduce the net savings to $4 billion. However, the provision continues to lose money outside the 10-year projection window. If lawmakers extend the pension smoothing gimmick to "raise" $4 billion, it will save $4 billion over the next ten years only, but lose money over the long term.
Legislators must understand the long-term implications of using the pension smoothing payfor, and that it is unequivocally a gimmick. There are plenty of real offsets that Congress should turn to instead.
Confused about what pension smoothing is? Read a more detailed description here.
Update 2/7/14: This post has been updated to reflect the Congressional Budget Office score for the actual pension smoothing provision used in the unemployment insurance legislation, released on February 7.
Soon, the Senate may consider the Comprehensive Veterans Health and Benefits and Military Retirement Pay Restoration Act legislation (the CBO scoring is available here) introduced by Senator Bernie Sanders (I-VT) to reverse the military retirement reforms from the Bipartisan Budget Act and create, expand, or extend a number of veterans benefits.
Encouragingly, the mandatory veterans provisions in the bill would not, on net, add the deficit – since the legislation extends several money-savings provisions (See the full CBO score here). However, when combined with the repeal of the military retirement reform, the legislation adds more $4 billion to the deficits – and tries to pay for that with phony war savings.
Specifically, the legislation would create a cap adjustments for overseas contingency operations (OCO) in 2018 through 2021, and would set that adjustment about $5 billion lower than the CBO baseline each year – or $20 billion over four years.
Yet to generate new savings, a cap on discretionary spending must lead Congress to actually spend less than they otherwise would. This cap would not.
By convention, the CBO baseline extrapolates current war spending with inflation – but in reality a drawdown in war spending is already long underway. By 2018, CBO's estimate of a war drawdown path – which would drawdown troop levels from 85,000 to 30,000 -- will be only two-fifths as high as the cap adjustment in this legislation. The President's Budget assumes a similar amount of spending as the CBO drawdown path.
In other words, the caps would be far higher than what Congress is likely to spend – and so they would not be binding and would not save any money. In addition, the legislation does not prevent Congress from declaring additional war spending as emergency spending if, due to some new large-scale international conflict, more spending was needed. As the non-partisan Congressional Budget Office explains (emphasis added):
The proposed limits on appropriations are $20 billion below the $409 billion projected for such operations over the 2018-2021 period in CBO's baseline. That $409 billion figure, however, is just a projection; such funding has not yet been provided, and there are no funds in the Treasury set aside for that purpose. As a result, reductions relative to the baseline might simply reflect policy decisions that have already been made and that would be realized even without such funding constraints. Moreover, if future policymakers believed that national security required appropriations above the capped amounts, they would almost certainly provide emergency appropriations that would not, under current law, be counted against the caps.
Indeed, using $20 billion of phony Overseas Contingency Operations (OCO) savings could be worse than no offset at all, because it could effectively establish a huge new slush fund.
Were Congress to further lower the 2018-2021 caps to accommodate a drawdown to 30,000 troops (as per CBO), they could generate an additional $250 billion of phony savings beyond the $20 billion in the Sanders bill. Were they to begin the caps in 2015, they could generate $400 billion. And if they also extended them through 2024, they could generate about $500 billion.
In other words, the legislation would add $4 billion to the deficit. But it would also give Congress a permission slip to add hundreds of billions more to the debt; and either to offset costs in other parts of the budget, to further backfill regular defense spending, or both.
Senator Sanders deserves credit for offsetting the portion of his bill focused on veteran's reforms. But as we’ve explained before, Congress should think carefully before reversing reforms to costly military retirement benefits. And certainly, Congress must not rely on a phony offset which would not only undermine PAYGO principles but create a huge slush fund for future deficit spending.
Yesterday, the Congressional Budget Office (CBO) reported a significantly bleaker fiscal picture than they had projected just last year, with debt now rising to 79.2 percent of the economy by 2024. Most reports are stating that deficits have been revised upward by $1 trillion, but on an apples-to-apples basis, the revision was even greater.
Due to a quirk in CBO scoring conventions, last year CBO had to assume that one-time disaster relief funding in the wake of Hurricane Sandy was extended annually forever, which artificially inflated their deficit projections by around $425 billion from 2014-2023. This year, however, CBO no longer has to assume continued funding for Hurricane Sandy.
Therefore, to compare the actual changes between CBO’s deficit projections, the applicable 10-year deficit total projected last May was $5.9 trillion, not $6.3 trillion. Similarly, debt was projected to reach 72.3 percent of GDP in 2023 after accounting for Sandy, rather than 74 percent.
The adjusted numbers imply that total forecasted deficits from 2014-2023 actually rose from $5.9 trillion to $7.3 trillion, a jump of $1.4 trillion. Similarly, projected debt in 2023 rose by nearly 6 percent of the economy that year, from 72.3 percent to 78 percent.
Given that the new 10-year budget window stretches from 2015 to 2024, one could also compare the change in estimated deficits over this period. On an apples-to-apples basis, adjusting for the Hurricane Sandy plug in CBO’s May 2013 projections, cumulative deficits increased by almost $1.7 trillion over this window, and projected debt in 2024 increased by nearly 6.5 percent of the economy.
CBO Director Douglas Elmendorf testified before the House Budget Committee this morning following CBO's release of the 2014 Budget and Economic Outlook on Tuesday. In his opening statement, Director Elmendorf addressed CBO’s projection of a return to rising deficits beginning in Fiscal Year 2016. While the budget deficit is projected to be on pace with historical levels at 3 percent of GDP in 2014, it will begin to rise once again in 2016 and will exceed $1 trillion by 2022. Elmendorf attributed this to spending increases driven by an aging population, expansion of federal subsidies for health insurance, rising healthcare costs per beneficiary, and mounting interest payments on the federal debt, among other factors. Additionally, the federal debt is and will be at historically high levels, and Elmendorf laid out the consequences:
The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards. We estimate that federal debt held by the public will equal 74% of GDP at the end of this year and 79% in 2024 under current law. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis.
Addressing the composition of spending, Elmendorf stated that Social Security, major healthcare programs, and net interest payments on the debt are the largest drivers of the debt, as we noted yesterday. While these categories increase, the rest of federal government spending is projected to fall from 9.5 percent of GDP in 2014 to 7.5 percent in 2024, its lowest level since at least 1940. As a result, Elmendorf highlights, an increasing share of the budget is going toward benefits from a few large and growing programs.
The hearing centered around CBO’s projection of falling labor force participation in coming years, which was a factor in the deterioration of the budget outlook and the topic of much discussion. In his opening statement, Elmendorf said:
The increase in participation stemming from improvements in the economy will be more than offset by downward pressure from demographic trends, especially the aging of the baby boom generation. After 2017, when the demographic trends will still be unfolding, but the effects of cyclical conditions will, we expect, have largely waned, the participation rate is projected to decline more rapidly. That is the main reason why beyond 2017 we project that economic growth will diminish to only a bit more than 2% per year, a pace that is well below the average seen over the past several decades.
Although he did not specifically mention the Affordable Care Act’s impact on labor force participation in his opening statement, committee member questions made it the focus of the hearing. The outlook identifies the ACA as a source of falling labor force participation. In response to a question from Budget Committee Chairman Paul Ryan, Elmendorf stated CBO projects a 1.5-2 percent decrease in the number of hours worked over the 2017-2024 window. In terms of Full Term Equivalency (FTE), this corresponds to between 2-2.5 million fewer FTE workers. Elmendorf clearly stated this is an issue of some workers choosing not to participate in the labor force, not one of employers slowing hiring or laying workers off. We will delve into CBO's labor force projections in great detail later this week.
Overall, despite a reduced deficit estimate for 2014, the longer-term outlook demonstrates that the drivers of our debt have not been dealt with and our fiscal issues remain far from solved.
Elmendorf's full testimony can be seen below.
Yesterday, the Congressional Budget Office released its 2014 Budget and Economic Outlook, serving as a budget baseline for the new year. To help make sense of the 182-page dense but informative report, CRFB has released a concise 7-page analysis that puts the new numbers in perspective.
As we said yesterday, much of the deterioration in CBO's new projections reflects weaker expectations for economic growth. CBO still expects the economy to recover to its full potential around 2018, but expects slower economic growth when it reaches that point due to slower productivity growth, less investment, and a smaller labor force than in previous projections. Economic growth was expected to average 2.9 percent over ten years last February, but new projections expect economic growth to average only 2.5 percent.
When combined with other technical and legislative changes, debt projections are significantly worse than in the last update. Debt as percentage of GDP will fall from 73.6 percent of GDP in 2014 to 72.3 percent in 2017 before then returning to an upward trajectory, reaching 78.0 percent of GDP in 2023 and 79.2 percent in 2024. For comparison, debt was projected to be 71.1 percent of GDP in 2023 in last May's projections. Average revenues over ten years are expected to be lower at 18.1 percent of GDP, compared to the previous ten-year average of 18.3 percent. Furthermore, average spending over ten years is expected to be significantly higher at 21.7 percent of GDP, compared to the previous ten-year average of 21.1 percent.
Last May, there was some excitement over the improvement in budget projections from February, and even suggestions that getting our fiscal house in order was no longer a pressing issue. However, as the graph below shows, the changes in this baseline from May were twice the size of those between February and May, only in the wrong direction. This report should be taken as a reminder that putting debt on on a sustainable path needs to be a priority.
Yesterday's summary could not cover everything in the report, which is why we will be continuing with a new blog series on the CBO report for the remainder of the week. In the coming days, we will explain why the deficit fell in 2014, what consequences high debt could have on the economy, what changed in CBO's economic projections this year, and many more topics. Check our first two posts, our reaction to the report and an examination of spending growth, and keep reading The Bottom Line as we continue to analyze the CBO report.
CBO's new outlook is a reminder that budget projections are always subject to uncertainty. It's important to make sure we put our debt on a sustainable downward path over the long term – if projections are better than expected, it is always easier to undo some changes than to enact additional savings. At the same time, we can enact phased-in, structural reforms that will not interfere with our recovering economy, and even stimulate economic growth further. As we conclude in our paper:
Building on recent bipartisan success in agreeing to reform certain spending programs and enact all twelve appropriation bills, we encourage Congress and the President to work toward comprehensive tax reform and structural entitlement reforms designed to put the debt on a clear downward path relative to the economy. At a minimum, policymakers should adhere to strict pay-as-you-go (PAYGO) rules to prevent the record-high debt projections from worsening further.
The CBO's baseline released today shows how spending is expected to grow over time and where that growth occurs in the federal budget. In general, spending grows from 20.8 percent of GDP in 2013 to 22.4 percent by 2024. However, different categories of spending have much different fates within the overall total.
Spending on interest expands the most, growing by 2 percentage points of GDP as interest rates rise and debt continues to grow. Spending on the major federal health care programs grows by 1.5 percentage points of GDP, largely from the Affordable Care Act's expansion of Medicaid and new subsidies for purchasing insurance in the health exchanges. Social Security spending grows by three-quarters of a percentage point as Baby Boomers continue to retire.
Meanwhile, spending on everything else declines significantly: discretionary and other mandatory programs combined fall by 2.6 percentage points of GDP in this period. The graph below shows the significant decline of these programs, which include safety net programs, defense, infrastructure, education, and energy spending.
The Super Bowl was held last Sunday, and the Olympics are coming up in a few days, but the biggest event this week happened today as CBO released its latest budget and economic projections for the next ten years. The odd scheduling of budget projection releases last year meant that there was no August update of the baseline, as there usually is, so these are the first projections in almost nine months. CBO's projections show a significantly worse outlook than their previous one did, with debt as a percent of GDP only reaching a low of 72 percent of GDP in 2017 and rising as a percent of GDP from 2018 onward to more than 79 percent by 2024 — much higher than their previous projection of 71 percent of GDP in 2023. These updated projections should serve as a warning that budget projections can change signifcantly in light of new data — especially new data on the economy.
In total, deficits are $7.9 trillion (3.5 percent of GDP) over the 2015-2024 period, compared to $6.3 trillion (2.9 percent of GDP) over the 2014-2023 period from last May's baseline. Debt falls from 73.6 percent of GDP in 2014 to a low of 72.3 percent by 2017 before rising to 79 percent by 2024. Throughout the ten-year period, debt would remain at elevated levels not seen since the aftermath of World War II. But even more worrisome is the clear upward path of debt this decade, compared to a more stable outlook in the previous projections.
Debt as a percent of GDP surpasses the 2014 level by 2020, whereas it did not surpass the 2014 level until after 2023 in the May 2013 baseline.
CBO warns about the high economic price of growing debt:
The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards….. Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).
Spending is gradually rising throughout the next ten years from 20.5 percent of GDP in 2014 to 21.4 percent in 2019 and 22.4 percent by 2024. This is due to several factors, including the gradual easing of downward pressure on spending from several near-term spending contraints, growing health care costs, the continued retirement of the Baby Boomers, and rising interest payments on a growing stock of debt. Meanwhile, revenue remains at around 18 percent of GDP, shrinking slightly in the near term as revenue from the Federal Reserve wanes and rising later on as income tax revenue grows and revenue measures from the health care law and fiscal cliff deal remain in place.
In short, the budget outlook has deteriorated from previous projections, mostly on the basis of CBO revising projections for economic growth, inflation, and the labor force.
Stay tuned to The Bottom Line throughout today and the rest of this week. We will have much more analysis of the report and how it differs from the May 2013 baseline.
Note: The graphs have been changed to show May 2013 current law numbers, rather than those numbers with an adjustment to remove extrapolated Sandy relief funding.
This morning, Secretary Lew spoke at the Bipartisan Policy Center about the imparative need to raising the debt ceiling, which has been suspended and is reinstated on February 7. At that point, the limit will be $17.3 trillion, according to estimates from the Bipartisan Policy Center.
At that time, the Treasury Department would have to begin use of a limited amount of accounting tools at their disposal, called extraordinary measures, to avoid defaulting on their obligations. However, even with such measures, the Treasury Department estimates that they will only be able to continue paying the nation’s bills until late February, by which point the debt ceiling would need to be raised.
Watch the event here:
Secretary Lew estimated that the extraordinary measures will only last through late February, stating:
Unlike other recent periods when we have had to use extraordinary measures to continue financing the government, this time these measures will give us only a brief span of time before we run out of borrowing authority. In February, the same large trust fund investments that were deferred last year are not available and at the beginning of tax filing season, tax refunds result in net cash flows that deplete borrowing capacity very quickly. We now forecast that we are likely to exhaust these measures by the end of the month.
If policymakers do not raise the debt ceiling by that point, the government must rely on its remaining cash on hand and incoming receipts to pay all obligations. Since the government is running annual deficits, incoming revenues to the federal government are insufficient to cover all of the government’s obligations, and some of the government's bills would not be paid on time, threatening the full faith and credit of the United States.
On the importance of raising the debt limit, Secretary Lew stated "It's imperative that Congress move right away to increase our borrowing authority. It would be a mistake to wait until the eleventh hour to get this done...The bottom line is time is short. Congress needs to act to extend the borrowing authority and it needs to act now." He went on to add "The longer we wait, the greater the risks become. Whether it's the economic recovery, the financial markets, or the dependability of social security payments and military salaries, these are not things to put at risk."
Want more information? See our short Q&A: Everything You Should Know About the Debt Ceiling.
Note: This blog has been updated to talk about the first blog post in the series.
For those in the budget world, today is not just the day after the Super Bowl, it's also Budget Day...sort of. The 1974 Budget Act technically requires the President's budget to be submitted on the first Monday in February, but with the delay in resolving appropriations, the budget will be delayed this year until next month.
While we won't get a budget today, the Brookings Institution's FixGov blog is launching a new series called "Reforming the Budget," which will look at ways to reform the budget process to make it function more smoothly. In the introductory post, Brookings fellow Elaine Kamarck notes that although there is criticism of the President's budget being late from Members of Congress, the frequent and increasing tardiness of legislators in passing appropriations bills has also plagued the budget process. As you can see below, lawmakers haven't passed an appropriations bill at the start of the fiscal year since 2007.
With lawmakers rushing to prevent government shutdowns, they have less time to examine programs and set priorities. The Brookings series started with Brookings fellow Phillip Wallach talking about why identifying waste, fraud, and abuse is not as easy as it seems. He takes Sen. Tom Coburn's Wastebook report and notes that a significant chunk of the $30 billion in savings is not actually "wasteful" in the sense that it is spending on an obscure or ridiculous-sounding priority. In one example, about the destruction of weapons used in Afghanistan, Wallach points out that the alternatives to preserve weapons are probably less cost-efficient. He also notes that the largest example, improper payments with the Earned Income Tax Credit, is well-known, is being worked on, and probably isn't what we traditionally think of as waste.
He also notes that simply looking to cut spending may not be the best way to reduce waste; sometimes, the federal government has to spend money to make money. For example, increasing the IRS's budget is scored as reducing the deficit, since the extra resources bring in previously uncollected revenue. This concept can be applied to some other programs that would signficantly benefit from program integrity spending (he mentions disability insurance as an example).
Wallach's post is the first in the series, and it will be interesting to see what will come out of this series going forward.
Click here to see the full series.
Senators Richard Burr (R-NC), Orrin Hatch (R-UT), and Tom Coburn (R-OK) recently released a legislative proposal that would repeal and replace the majority of the Affordable Care Act (ACA), although leaving in place the ACA's Medicare reforms. The Patient Choice, Affordability, Responsibility, and Empowerment Act (CARE Act) would repeal the ACA and replace it with a number of provisions to reform the individual insurance market, Medicaid, and the tax treatment of employer-based coverage. There is no formal cost estimate from the Congressional Budget Office (CBO) as it is not yet an official piece of legislation, so it is not possible to examine fully their claim of "not adding one cent to the deficit." There is a private estimate from an outside group that estimates it would achieve $1.5 trillion of net deficit reduction over ten years, but some important details of the legislation that could have significant budgetary impacts are still unclear, particularly the details of the cap on the tax exclusion for employer-sponsored health insurance (ESI) and the specifics of the Medicaid grants.
Medicaid Reform & Refundable Tax Credits
The Act alters healthcare options for low income individuals. Those making below 300 percent of the federal poverty level (FPL) would be eligible for an advanceable, refundable tax credit to assist in covering health insurance costs. This is a reduction from the 400 percent limit in effect under the ACA and is a significant source of budgetary savings. The proposal envisions creating an Office of Health Financing within the Treasury Department to oversee secure and efficient tax credit distribution. It also repeals the ACA's Medicaid expansion to cover individuals making up to 138 percent of the FPL. Instead, it proposes several Medicaid reforms including:
- Changing Medicaid payment to a system of targeted grants to states, similar to per-capita caps, for vulnerable populations such as pregnant women, low-income children and families, low-income elderly and disabled individuals. The grants would be based on the number of people in a state with income under 100 percent of the FPL, and would be adjusted annually for inflation plus one percentage point (CPI+1%) and for population and demographic factors. Because the grants would account for the growth in a state's low-income population, they would be more countercylical than standard block grants.
- Giving states a defined budget for long-term care services and support for low-income elderly or disabled individuals.
- Giving the option to those eligible for Medicaid to instead receive the tax credit and purchase private insurance.
- Reinstating Health Opportunity Accounts (HOAs), which were initiated as a five-year, ten state pilot in 2005. This program allows those eligible for Medicaid to obtain high-deductible insurance and federally- or state-funded savings accounts up to $2,500 per eligible adult and $1,000 per child to pay for medical expenses. Deductibles can be up to 10 percent greater than the HOA amount, in which case the recipient incurs out of pocket expenses for medical care within the coverage gap. CBO estimated the cost of the 2005 pilot program at $261 million over ten years. If expanded to all 50 states and made permanent, clearly the cost would increase.
Individual Mandate Repeal and Individual Market Structure
One of the key features of the Affordable Care Act is preventing insurance companies from charging higher premiums or denying coverage for people with pre-existing conditions. To prevent healthy people from waiting until they get sick to sign up for coverage, the ACA requires individuals to get insurance coverage each year or pay a penalty.
The CARE Act has a different approach to help prevent insurance companies from discriminating against people with pre-existing conditions. Instead of an individual mandate or an outright prohibition on companies denying coverage for pre-existing conditions, the CARE Act proposes a “continuous coverage” protection. Insurance companies must offer coverage at standard rates regardless of a pre-existing condition as long as the person has not had a lapse in insurance coverage, regardless of whether that coverage came from an employer, the individual market, or a public program. However, if they have had a lapse in coverage, insurers can take into account their health status and charge whatever premiums they like for a new insurance plan, or deny coverage altogether. There would also be a one-time open enrollment period after the Act’s rollout in which anyone could enroll in plans for standard rates regardless of health status. As a backstop for those without continuous coverage and in poor health, the Act would also provide some federal funding to help states administer high-risk pools for such individuals.
According to the bill's authors, this will sufficiently encourage insurance coverage without a mandate. While those who are uninsured would no longer face the tax penalty for lack of coverage, they would face the prospect of much higher insurance premiums in the future if they develop an expensive medical condition. To a perfectly rational consumer with foresight, this may actually be a stronger incentive to maintain health insurance for many Americans, but particularly combined with the partial rollback the ACA's Medicaid expansion, it appears likely that the CARE Act would leave more people uninsured than the ACA. The only private estimate to date projects that 5 percent fewer people would be insured in 2023 under the CARE Act than CBO's projection of coverage with the ACA.
Notably, the CARE Act would not establish federally-regulated marketplaces like the ACA, and no minimum benefits would be required of health insurance plans. Many more types of health plans, therefore, could be offered, including less comprehensive ones. Lifetime limits on benefits, however, would still be banned.
CBO’s most recent estimate of the revenue from the individual mandate penalty was $45 billion over 10 years.
The proposal removes the mandate penalty for large employers to provide health insurance and repeals several taxes, including the medical device tax, the tax on branded pharmaceutical drugs, and an excise tax on high-cost, “Cadillac" health insurance plans provided by employers. Instead, it places a cap on the tax exclusion for employer-provided health coverage, although the level of the cap is unclear, and indexes it to grow at CPI plus 1 percentage point annually. The primary summary states that the cap would be set at 65 percent of an average plan’s costs, but a Q&A released later states that it would be at "65 percent of the average market price for an expensive high-option plan." The difference between these two policies, and the specific levels they imply, will have a very large effect on the budget impact of the CARE Act.
While the tax repeals would account for substantial lost revenue (CBO estimated that just the ACA's additional Medicare payroll taxes are scheduled to bring in $318 billion through 2022), the new cap on the tax exclusion could provide a significant new revenue base, depending on its specifications. For reference, CBO recently estimated that replacing the Cadillac tax with a cap on the employer-sponsored health insurance exclusion at the 50 percentile of health premiums, indexed to economy-wide inflation, would raise more than half a trillion dollars over ten years.
On medical liability reform, the CARE Act is not specific, but it either enacts or provides incentives for states to adopt a range of solutions. The cost savings would vary based on the specific policies chosen, but most of the savings for the federal budget come from caps on lawsuit awards. CBO's Budget Options report has a relatively aggressive option which would save $64 billion over ten years.
The proposal also expands Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA), which let employees pay for health care expenses with pre-tax dollars. Certain eligibility restrictions would be eliminated, and the package of services covered would be expanded to include coverage for long-term care insurance and COBRA premiums.
Like the ACA, the CARE Act requires health plans to offer dependent coverage until age 26, although it gives states the ability to opt out of this provision.
The Republican Senators have put forth a serious proposal to replace the Affordable Care Act, which includes multiple measures with the potential to help bend the health care cost curve. It keeps all of the Medicare savings embodied in the ACA, but offers alternative methods to reform Medicaid and cover preexisting conditions without an individual mandate. Since the CARE Act is not yet legislation, the Senators have stated their next step is to work with their Congressional colleagues and experts in the health community to further develop and refine the proposal. It will be interesting to see how it progresses.
In an op-ed in the Washington Post, columnist Ruth Marcus laments the lack of discussion of fiscal issues in President Obama's State of the Union address. She points out that the point about the deficit falling by half is somewhat misleading (with an assist from us) and notes that the debt has run up significantly in recent years.
First, the vaunted halving stems from the remarkable (and justifiable) ramp-up in deficit spending at the start of the financial crisis. The deficit in 2009 was $1.4 trillion (and 9.8 percent of gross domestic product). The comparable 2013 figures are $680 billion and 4.1 percent, according to the Committee for a Responsible Federal Budget. Vastly improved, but higher in percentage terms than in all but seven years between 1948 and 2008.
Second, and more important, is the stunning rise in the amount of debt as a share of the economy. When George W. Bush took office, debt stood at 33 percent of GDP. Obama inherited a debt of 43 percent of GDP. That figure is now about 74 percent, the highest since 1950.
Of course, the biggest issue with debt is with the long-term picture. Marcus notes that debt projections show it rising as a percent of GDP starting in 2018 into the foreseeable future.
According to the Congressional Budget Office (CBO), the debt begins to slowly rise again, driven by increasing interest costs and growing spending for Social Security and government health-care programs. By 2038, the CBO projects, debt would reach 100 percent of GDP, more than in any year except 1945 and 1946.
This is scary, or should be. The CBO ticked off the reasons: Large deficits over the long term drag down economic growth, crowding out investment and driving up interest rates. For the federal budget, higher interest costs consume a growing share of spending, preventing revenue from being used in more productive ways. Sky-high debt constrains policymakers’ flexibility to respond to emergencies such as war or recession. It raises the risk of a fiscal crisis in which investors become unwilling to finance U.S. borrowing.
Marcus concludes that "Once this president promised to stop kicking the can down the road. Now he acts as if there is no can." While there has been progress on the deficit in recent years, that progress has mostly been confined to the short- and medium-term. The long-term debt problem remains. It should not be ignored.
Click here to read the full op-ed.
Making a Statement – President Obama gave the State of the Union address on Tuesday. While he presented an optimistic message of action to promote growth and opportunity, the speech also made clear the reality that expectations for legislative action were low in this election year. The president highlighted several unilateral actions he would take by executive order. Despite some recent breakthroughs on Capitol Hill, there is little hope for policymakers to accomplish many big things this year, clouding prospects for any breakthroughs. Although the president did mention the need for further deficit reduction, he did not make a forceful case for addressing the long-term debt and linking deficit reduction to economic growth. Meanwhile, lawmakers will be huddling at party retreats to scope out their respective strategies for this year.
Deficit of Specifics – In the speech, the president noted the need for further deficit reduction without offering many specifics on how to do it. An accompanying White House fact sheet provides a little more information, such as continuing the promise he made in last year’s speech to pay for all his new initiatives and calls for tax and entitlement reform. Abiding by PAYGO principles is critical to acting in a fiscally responsible manner. And fundamental tax reform (see areas ripe for reform here) and strengthening entitlements (such as Social Security and Medicare) are essential to addressing the drivers of the long-term debt. While these are important ideas, we had hoped to hear more specifics in the speech. In addition, we point out that deficit reduction and economic growth are not incompatible, which the president should stress more. We offered a summary of what we heard in the speech and also looked at the budgetary effects of the proposals in the address.
A Misleading Statement? – In the speech, the president also repeated a claim he has been making a lot lately, that the deficit has been halved in his term. In fact checking the statement, the Washington Post noted that the deficit is still higher than it was in 2008. While deficits are coming down in the short-term, long-term problems remain. A closer analysis shows that our long-term debt problems are very far from solved. Read our own fact check of the statement here. Despite attempts to declare “Mission Accomplished” on deficits, Americans still see deficit/debt reduction as a priority, with recent polls from NBC News/Wall Street Journal and the Peter G. Peterson Foundation putting the issue near the top of the list. Another poll from the Pew Research Center had support for deficit reduction as a priority falling (mostly due to decreased Democratic support) but still high on the list, especially among Independents and Republicans.
Debt Ceiling Ceasefire? – Signs are that Republicans are divided over how to approach the next statutory debt ceiling fight, which could be around the corner. The debt ceiling is suspended until February 7 and Treasury Secretary Jack Lew has been adamant that “extraordinary measures” won’t buy much more time beyond that before a national default occurs. The Bipartisan Policy Center is backing him up. Lew is imploring Congress to raise the limit by late February. Congressional Republicans don’t have a united front yet on what they want in return for another debt limit increase and House leaders do not want to risk the specter of default in an election year since President Obama has been clear he wants a clean increase. If Republicans do seek concessions, it may be be for non-fiscal items like approval of the Keystone XL Pipeline, although another “No Budget, No Pay” provision could also be attached as in last year, requiring Congress to approve a budget or lawmakers’ pay is withheld. With a likely short window, policymakers cannot afford to play games with the debt limit. Resolving the debt ceiling will take care of the final major fiscal roadblock until the fall, when government funding must be renewed. Learn more about the debt limit here.
Another Late Budget – The White House confirmed that the Fiscal Year 2015 federal budget, officially due the first Monday of February, will be released about a month late on March 4. But budget geeks will still see some action in early February as the Congressional Budget Office (CBO) will release its annual budget update on February 4. As last year’s budget deal includes top-line spending numbers for FY 2015, appropriators may begin the process of writing spending bills ahead of budget proposals.
Farm Bill Finally Sprouts – After months of negotiations, congressional negotiators Monday reached agreement on legislation renewing agricultural programs. The House passed the bill on Wednesday with a bipartisan vote and the Senate is expected to follow suit next week. CBO estimates the bill will save $17 billion over ten years compared to current legislation. Savings were achieved by reforming direct payments to farmers and nutritional programs. It is a positive sign that lawmakers once again reached bipartisan agreement on major legislation, building on recent budget and appropriations deals. It is also encouraging that the bill reduces the deficit, but legislators could have gone further, especially in restructuring farm subsidies. Read our analysis of the bill here.
Highway Trust Fund to Nowhere? – Federal transportation officials are warning that funding for transportation infrastructure will run out this summer. The Highway Trust Fund, which provides financing for most transportation projects, is projected to be depleted. The fund receives its revenue from fuel taxes. President Obama is renewing his call to increase revenue for infrastructure projects by reforming corporate tax loopholes. We previously examined the idea here.
Extending Emergency Unemployment Insurance a Tough Job – There is still no agreement in the Senate on extending expanded Unemployment Insurance benefits until the end of the year. How to pay for the extension remains the main roadblock. Senate leaders plan to put forth a three-month extension that would be offset, but the “pension smoothing” idea they reportedly are eyeing is essentially a gimmick, as we point out. Although it reduces the deficit in the short run, deficits will actually increase down the road by even more.
Crossing a Threshold on Immigration? – President Obama pushed for immigration reform in the State of the Union and that is an area where there is some hope for legislative action as House leaders look to engage on the issue. Last year, CBO projected that comprehensive immigration reform legislation passed by the Senate would reduce the deficit by $197 billion through 2023. Here’s our look at the CBO estimate.
The Doc Fix Not In, Yet – Committees in both the House and Senate have agreed on legislation to permanently repeal the Sustainable Growth Rate (SGR), which currently calls for a nearly 25 percent cut in Medicare physician payments on April 1. The CBO scored the House Ways and Means Committee version as costing $137 billion through 2024 while the Senate Finance Committee proposal has a $168 billion price tag through 2024. Agreement on how to offset the costs has not yet been reached, but rumors are that lawmakers may favor using “war savings” to pay for it. This gimmick is a popular choice for “paying for” many proposals. We show why that’s a bad idea here. Meanwhile, larger efforts to strengthen Medicare’s finances are under way with Sens. Ron Wyden (D-OR) and Johnny Isakson (R-GA) teaming up on a bill to improve the way Medicare manages care for patients with chronic conditions.
Key Upcoming Dates (all times are ET)
- Bureau of Economic Analysis releases advance estimate of 4th quarter GDP growth.
- Statutory deadline for the President to submit the Fiscal Year 2015 budget request.
- Congressional Budget Office (CBO) releases annual Budget and Economic Outlook.
- Senate Budget Committee hearing on the 2014 budget and economic outlook at 10:30 am.
- House Budget Committee hearing on the budget and economic outlook at 10 am.
- The extension of the statutory debt ceiling expires.
- Bureau of Labor Statistics releases January 2014 employment data.
- Bureau of Labor Statistics releases January 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases second estimate of 4th quarter GDP growth.
- White House releases Fiscal Year 2015 budget request.
- Bureau of Labor Statistics releases February 2014 employment data.
- Bureau of Labor Statistics releases February 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases third estimate of 4th quarter GDP growth.
- "Doc fix" expires.
When Congress ended the government shutdown last October, they also suspended the debt ceiling through February 7th, which is now only a week away. After that date, the debt limit will be reinstated at about $17.3 trillion, according to estimates from the Bipartisan Policy Center (BPC). After that date, Treasury can still use "extraordinary measures" to continue paying the nation's bills for a limited amount of time. However, even with such measures, the Treasury Department estimates that they will only be able to continue paying the nation’s bills until late February, unless the debt ceiling is raised.
In advance of the reinstatement of the federal debt limit next week, the co-chairs of our partner Fix the Debt — Sen. Judd Gregg, Gov. Edward Rendell, and Mayor Michael Bloomberg — released a statement urging Congress to raise the debt limit. They also noted that the nation’s rising long-term debt remains a serious problem.
Next week, the suspension of the federal debt limit will end, requiring an increase in the federal borrowing limit as soon as late February. Our leaders cannot afford to play games with the full faith and credit of the U.S. Government. Congress should work with the president to raise the debt ceiling in a responsible and timely manner.
At the same time, we must recognize that our long-term debt problems are still far from solved, and the debt ceiling vote should be viewed as a reminder that we still need to take steps to improve the country’s fiscal outlook. Congress and the president should embark on this process as quickly as possible.
Certainly, the debt ceiling should not be accompanied by measures that would worsen the national debt by increasing spending or cutting taxes, without offsets.
Fix the Debt calls upon Congress and President Obama to act swiftly in raising the debt ceiling and to pursue the tax and entitlement reforms needed to grow the economy and put our debt on a sustainable long-term path.
The approaching debt ceiling deadline is critical. Largely due to high numbers of tax refunds going out near the beginning of the tax filing period, The Treasury estimates it can only pay the nation's bills through late February. The Bipartisan Policy Center released a similar estimate today, that the government would be unable to pay its full obligations sometime between February 28 and March 25. In addition to defaulting on many obligations to Americans, BPC highlights that Treasury would also have to conduct major debt rollovers during this window and attempt to pay interest to bondholders.
BPC explains the gravity of failing to raise the debt limit.
“Absent an increase in the debt ceiling, there will come a day when Treasury exhausts its borrowing authority and runs out of cash on hand to pay the nation’s bills. Starting on that day – which the Bipartisan Policy Center (BPC) refers to as the X Date – daily revenues will be the only means by which Treasury can cover the payments that come due. Since the federal government is running a large deficit, these cash flows will be insufficient to meet all obligations.”
Want more information? Read our short Q&A: Everything You Should Know About the Debt Ceiling.
While the President's 2014 State of the Union address largely eschewed talking about fiscal policy directly, it did touch on a number of proposals that would impact the federal budget. In this blog, we will talk about the potential costs or savings of various policies he mentioned.
Business Tax Reform
In the speech, Obama expressed his desire to undertake business tax reform. He said:
Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let's flip that equation. Let's work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.
Moreover, we can take the money we save with this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes – because in today's global economy, first-class jobs gravitate to first-class infrastructure.
In this excerpt, he brought up his plan from last summer to invest temporary revenue increases from business tax reform into infrastructure spending. Since some provisions of tax reform can naturally result in temporary revenue, rather than a permanent increase in tax burdens, having a goal of revenue-neutrality over the long run will result in some additional revenue upfront.
The President's business tax reform was first outlined two years ago, with plans to cut the corporate tax rate to 28 percent, increase tax benefits for manufacturing and R&D, and identify enough tax expenditure and other reductions to make it revenue-neutral. We noted at the time that the latter goal of revenue-neutrality had not been accomplished, and that remains true: according to the CBO, after dedicating revenue to expanding and making permanent the R&D tax credit and small business expensing, the President's budget identifies $66 billion in net revenue (including the elimination of fossil fuel subsidies he mentioned in the speech), enough to lower the corporate tax rate by about 0.6 percentage points. The proposal did identify further savings through a minimum tax for multinational companies and mentioned addressing depreciation schedules, so it is likely that additional revenue to pay for the rate reductions would come from there.
By definition, the proposal would be roughly deficit-neutral, but there would need to be more specifics on corporate pay-fors for the whole of the plan to work out. Also, if the transportation spending was not one-time but a more permanent investment, it would increase deficits over the longer term as the upfront revenue increases from corporate tax reform faded away.
Earned Income Tax Credit
In talking about helping low-income workers and reducing inequality, the President brought up the Earned Income Tax Credit:
There are other steps we can take to help families make ends meet, and few are more effective at reducing inequality and helping families pull themselves up through hard work than the Earned Income Tax Credit. Right now, it helps about half of all parents at some point. But I agree with Republicans like Senator Rubio that it doesn't do enough for single workers who don't have kids. So let's work together to strengthen the credit, reward work, and help more Americans get ahead.
Sen. Rubio's plan, which was first outlined in a speech earlier this month, has brought increased attention to the relatively meager EITC benefits for childless workers compared to those with children. The benefit for childless workers is only $500 (compared to $3,300-$6,100 for workers with children) and phases out completely at an income level of only $14,600 (compared to $38,500-$47,000 for workers with children). Rubio proposed taking the child aspect out of the EITC so that childless workers would receive the same benefit as workers with children. This proposal is in line with plans like the Domenici-Rivlin tax reform, which also paired that reform with an increase in the child tax credit.
While the budgetary effect of Rubio's plan depends on the details, we do have a score for increasing the childless EITC from the 2009 House cap-and-trade bill, which doubled the credit starting in 2012; that policy would have cost $25 billion through 2019. The score may have increased because CBO's projections of total wage and salary income have decreased since 2009 (the effect could go both ways), and the budget window is different. It would also depend on the start date of the policy.
In talking about immigration reform, Obama touted the fiscal and economic benefits, saying:
Finally, if we are serious about economic growth, it is time to heed the call of business leaders, labor leaders, faith leaders, and law enforcement – and fix our broken immigration system. Republicans and Democrats in the Senate have acted. I know that members of both parties in the House want to do the same. Independent economists say immigration reform will grow our economy and shrink our deficits by almost $1 trillion in the next two decades.
According to CBO, the Senate immigration reform bill would save $880 billion over the next 20 years ($200 billion in the first ten, $685 billion in the next ten). It would be more like $780 billion if discretionary spending caps were increased to accomodate additional appropriations that would need to be made, instead of cutting other spending under the caps to make space. The score is the result of additional income and payroll tax revenue outpacing spending on low-income programs (and later on, Social Security and Medicare). Over those two decades, the Social Security portion of the budget is responsible for $785 billion of the deficit reduction while the on-budget portion is responsible for $95 billion.
The Chief Actuary of the Social Security Administration has also estimated that the Senate bill would close 8 percent of the program's 75-year actuarial deficit. For more discussion of budgetary analyses of the Senate's immigration plan, read CRFB's report.
Not surprisingly, President Obama called for extending emergency unemployment benefits in the speech. A full-year extension of the 73-week maximum collecting period would cost $25 billion, and a three-month extension would cost $6.4 billion. Another proposal to extend benefits up to 57 weeks through late November is mostly offset, although it relied on some savings very late in (and beyond) the ten-year window. The President did not specify his preference for the length of the extension (other than it should be at least three months), the number of weeks benefits can be collected for, or offsets he would be willing to use for the extension, so the budgetary effect is up in the air. CRFB continues to ask lawmakers to pay for any extensions in emergency unemployment benefits.
Prior to the speech, the Obama Administration announced that it would raise the minimum wage for workers on new federal contracts from $7.25 per hour to $10.10. He also announced his support for bills in Congress to raise it nationwide to that same amount.
Although circumstances can be different, CBO estimated that the last minimum wage increase in 2007 from $5.15 to $7.25 would have a negligible effect on the federal budget. Judging by that, it is likely that the executive order for workers on federal contracts would also have a negligible effect, although it would entail slightly more discretionary spending for wages within the caps that are in place. One could assume the same for the legislation, but there is a kicker: unlike the 2007 bill, the bills in Congress would raise the minimum wage for tipped employees (which has remained the same for more than 20 years) from $2.13 per hour to 70 percent of the normal minimum wage. This extra provision would mean many more workers would be affected by the increase than in 2007, although it is not clear how many more or whether that would change CBO's score.
In short, the effect on the federal budget is likely to be small, although we would need an official score from CBO to confirm.
Job Training and Scientific Research
In his speech, President Obama decried cuts to federally-funded research (presumably as a result of the sequester) and called for a review of the job training system. While details on these changes were not given, they could result in increased spending, particularly in research. However, both of these areas are in discretionary spending, which is subject to caps, so overall spending would not be increased unless lawmakers changed those caps. Instead, those increases would result in less resources going to other areas.
Last night, President Obama gave his State of the Union address to Congress, which mentioned fiscal policy on a several occasions. As one of the nation's accomplishments, he noted that "our deficits [have been] cut by more than half." This is not the first time the President has made reference to the recent decline in deficits. Throughout the summer, the President claimed that "our deficits are falling at the fastest rate in 60 years." These statements are factually accurate but missing important context.
Have deficits been cut in half?
Depending on what year is chosen for comparison, this statement checks out. When measured in dollars, the $680 billion 2013 deficit is slightly less than half of the $1.4 trillion deficit recorded in 2009. When measured as a share of the economy, the deficit was 4.1 percent of GDP, compared to 9.8 percent of GDP in 2009. But the rest of the story is how high the deficit was in 2009: at 9.8 percent of GDP it was a larger figure than any year since 1945, the last year of World War II.
In fact, the deficit in 2009 was larger than any time since World War II, and was nearly twice as big as the previous post-war record of 5.9 percent of GDP, set in 1983. The high deficit levels were largely the result of the great recession – including depressed tax revenue, a surge in the cost automatic stabilizers, a drop in GDP, a large stimulus bill (the American Recovery and Reinvestment Act), the TARP program to rescue financial institutions, and the government takeover of Fannie Mae and Freddie Mac.
Though the 2013 deficit partially reflects concerted efforts to cut spending and raise revenue, it is largely the result of waning stimulus measures and continued economic recovery. While the deficit has been more than cut in half since 2009, this follows an increase in the deficit by a factor of eight between 2007 and 2009. This brings us to the 2nd claim:
Have deficits fallen faster than any other point in the last 60 years?
Obama states the decline of the deficit from 2009 to 2013, a four-year span. During that time, the deficit declined from 9.8 percent of GDP to 4.1 percent, a 5.7 point drop and the largest decline in the deficit over a four-year time period since immediately after World War II. It is not, however, the largest decline overall in the post-war era: a 4.5 percent deficit in 1992 became a 2.3 percent surplus by 2000, a 6.8 point swing over an eight-year period covering most of the Clinton Administration. And an even greater decline coincided with the World War II demobilization, when the budget balance swung from a 29.2 percent of GDP deficit to a 1.2 percent of GDP surplus. Obama's claim is factually accurate and fair given that his term started in 2009, but it is highly dependent on the period of time considered.
However, the improvement in the short-term budget outlook was also a reflection of just how bad of fiscal situation has been over the past few years. The largest decline in deficits in the post-war era follows the largest increase in deficits since that time: an 8.7 percentage point jump between 2007 and 2009. This jump is nearly double the previous post-war record, when the deficit increased to 3.3 percent of GDP in 2003 from a 1.2 percent surplus in 2001—a 4.5 point increase. Because deficits skyrocketed during the financial crisis due to a faltering economy and stimulus policies, the deficit in 2013 of 4.1 percent of GDP is still high by historical standards - larger than all but 7 years between 1947 and 2008.
Furthermore, the focus on deficits may distract from another concern—our high levels of debt. Since 2007, the national debt has doubled to 72 percent of GDP, nearly twice our historical average and the highest it has ever been since the aftermath of World War II. Although deficits continue to come down, debt levels have continued to rise as a share of the economy.
On a positive note, the debt is projected to briefly reverse course after 2014, and modest declines in the debt-to-GDP ratio are expected through 2018 or so. However, with the long-term drivers of population aging and health care cost growth still unaddressed, debt will begin to rise thereafter and will soon grow to unsustainable levels.
The President and Congress have enacted significant savings over the past few years. Those efforts, in combination with a recovering economy, have led to a significant decline in deficits over the past four years. But our long-term problems are still far from solved and the longer we wait to begin addressing our fiscal challenge, the harder it will become. Lawmakers today face a greater challenge—both starting with a far greater debt burden and needing to deal with demographic and health care cost drivers. We can both promote economic growth and get our fiscal house in order and the President should make both a priority in 2014.
Note: This blog has been updated on 1/30/2013 to correct a date.
Yesterday, President Obama addressed the nation in his sixth State of the Union address. Unsurprisingly, the main focus of his speech was not on our country's fiscal issues and national debt, but instead on restoring opportunity and equality to all Americans. However, we were still disappointed the President spent so little time discussing the major fiscal issues facing the country such as growing entitlements and reforming an outdated tax code.
Our partner Fix the Debt enumerated several suggestions for what they wanted to hear during the State of the Union address. Specifically, they called for the president to: remind the public that our debt problems are not yet solved; present ideas to make entitlement programs more sustainable; call for comprehensive tax reform to encourage growth and competitiveness; offer ideas for how to pay for new proposals; and explain the important connection between jobs, economic mobility, competitiveness, and the debt.
We - and Fix the Debt - were disappointed with the lack of focus on the national debt and fiscal issues.
“The declining deficit and the President’s lack of focus on the nation’s fiscal situation has lulled many into a false sense of security, but the fact remains that the debt is at historically high levels and is slated to continue to grow unsustainably later this decade,” said Maya MacGuineas, head of the Campaign to Fix the Debt.
Indeed, the President did not mention the national debt once during his 65-minute address. He did, however, state that deficits have been cut by more than half in recent years, which we discuss here. Most notably, the President did not address at all two of Fix the Debt's suggestions: "present ideas to make entitlement programs more sustainable," and "offer ideas for how to pay for new proposals." And while he touched on tax reform, the President did not offer any new ideas or serious proposals.
Encouragingly, President Obama said that "we can still do more to invest in this country's future while bringing down our deficit in a balanced way." We agree with a balanced approach of deficit reduction, focusing on both entitlement and tax reform, but wish the President had laid out more of an agenda on how to tackle these items.
The President did touch on tax reform briefly: he called for an expansion of the Earned Income Tax Credit, for an end to tax breaks for fossil fuels, and for business tax reform that reduces the incentive to move business overseas. President Obama went on to say that tax reform should be used to raise revenue, and the revenue should be used to pay for new investments, instead of going toward deficit reduction.
CRFB and Fix the Debt President Maya MacGuineas responded:
"Rationalizing our spending and dealing with the longer-term debt problems would help free up the space for the kind of investments in infrastructure, education, and worker training that President Obama called for tonight; investments that could help add jobs and promote economic mobility. What we need though is a comprehensive economic growth strategy that includes smart investments and reforms partnered with measures to get the long-term debt under control--otherwise the looming debt will continue to threaten our future prosperity.
Every day that we fail to deal with the long-term drivers of the debt – including out-of-control entitlement spending and trillions of dollars of tax loopholes – is a day lost in making these changes in a smart and thoughtful way that would help grow the economy. While it may be politically convenient for politicians to try to avoid facing real budgetary tradeoffs, failing to do so puts at risk the economy and our citizenry. Tonight the President missed an important opportunity to get the process of confronting these issues underway."
In yesterday's State of the Union address, the President called for extending unemployment benefits that expired in December, which would affect roughly 1.6 million long-term unemployed people. Lawmakers were unable to agree upon an extension last December, when the emergency unemployment compensation program—originally passed in 2008—expired. In the wake of the President's speech, lawmakers are still debating whether to extend unemployment compensation, and how to pay for it.
A full one-year extension of the program would cost $25 billion, but many Democrats have set their sights on a lower hurdle: extending the benefits for three months, at a cost of $6.4 billion. If lawmakers extend unemployment insurance, they should abide by "pay-as-you go" principles and find savings or revenues elsewhere in the budget to prevent increasing deficits. However, news reports indicate that lawmakers are considering using a budget gimmick to "pay for" the extension (as we've explained before, as have other groups on the left and right).
Democrats are reportedly considering extending the "pension smoothing" gimmick from the 2012 transportation bill as a way to offset unemployment insurance costs. That provision raised money by temporarily reducing the amount that companies are required to pay into their pension funds. While pension smoothing saves the government money in the short term, it increases future deficits by more than it saves. This occurs because in the near term, companies have higher profits (or employees have higher wages) subject to taxes, since companies take fewer deductions for employee compensation (or employees have more taxable income). However, contributing less to pension plans now means that companies must make greater contributions in later years, thus increasing their deductions, reducing revenue, and increasing the deficit. In addition, underfunding pensions makes it more likely that a company will need a bailout from the federally funded Pension Benefit Guaranty Corporation.
On February 7, CBO estimated that the provision would raise $17 billion over the first six years, but lost money afterward. The losses in the next five years reduce the net savings to $4 billion. However, the provision continues to lose money outside the 10-year projection window. If lawmakers extend the pension smoothing gimmick to "raise" $4 billion, it will save $4 billion over the next ten years only, but lose money over the long term.
Lawmakers should abide by PAYGO and find savings to pay for the cost of extending unemployment insurance. But they should avoid budget gimmicks like pension smoothing that only appear to save money, while actually driving up our deficits.
Update 2/7/14: This post has been updated to reflect the Congressional Budget Office score for the actual pension smoothing provision used in the unemployment insurance legislation, released on February 7. The original version cited pension smoothing legislation from 2012.