The Bottom Line

September 8, 2014

The Council on Foreign Relations has released a new report and scorecard comparing the United States federal debt situation to other G-7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom). The verdict is not good. While the U.S. had a much lower debt-to-GDP ratio in 2000 than the G-7 average, it has since caught up and is expected to have higher debt than every country in the group besides Japan by 2040. The report's author Rebecca Strauss shows the deterioration in the U.S. fiscal position since 2000 plus the daunting trajectory of debt going forward.

Although the G-7 as a whole has seen its debt rise as a percent of GDP since 2000, the U.S. government's rise has been much faster, with debt more than doubling over that time period. Average G-7 debt was 54 percent of GDP in 2000 compared to 34 percent for the United States. Since then, U.S. debt has grown to nearly the levels of the G-7, with average G-7 debt at 86 percent and the U.S. at 82 percent (note the report uses different numbers than CBO in order to make an apples-to-apples comparison with other countries). In addition, the share of debt owned by foreign countries has risen from one-third to about half in that period of time. Much of the growth in U.S. debt has come since 2009, when deficits averaged 7.6 percent of GDP largely due to the financial crisis, slow recovery, and economic stimulus measures.


Source: International Monetary fund

September 8, 2014

CBO’s baseline budget projections are often referred to as “current law” since they generally assume Congress continues the laws as they are written (even when that is not the most realistic scenario). However, CBO’s baseline deviates in several important ways from what would happen under a strict interpretation of current law -- that is, if Congress were to pass no new laws.

For context, the CBO baseline is based on specifications laid out in the Congressional Budget Act of 1974 and the Gramm-Rudman-Hollings Act of 1985. Lawmakers wanted the baseline to be a useful benchmark against which to measure legislative changes, so they modified the baseline's assumptions from "pure" current law to better accomplish that goal. These deviations ensure that lawmakers will get relevant information about the magnitude of policy changes rather than having them obscured by technicalities. CBO is instructed to modify the strict interpretation of current law in cases when not doing so would be clearly unreasonable and thus devalue the baseline's function.

CBO's baseline differs from a strict current law baseline in four main ways.

September 5, 2014

In a highly anticipated release, the Centers for Medicare and Medicaid Services (CMS) this week released updated data and projections on National Health Expenditures (NHE) and its components. This release updates the last set of projections put out in January and extends the time period by a year to 2023. Overall, the latest projections show another year of slow health care spending growth in 2013, but a pick-up in growth starting this year.

NHE growth is projected to have been just 3.6 percent in 2013, similar to what it has been since 2009 and only slightly above the 3.4 percent economic growth rate for that year. Growth is then expected to pick up -- as it has in past projections -- to 5.6 percent in 2014 as a result of the coverage expansions in the Affordable Care Act kicking in. It will then decelerate to 4.9 percent in 2015 due to reductions in Medicare Advantage payments, the expiration of a temporary hike in Medicaid primary care physician payments, and stabilization in Medicaid enrollment. For the rest of the projection period, growth will hover around 6 percent. Over the 2013-2023 period, NHE growth is projected to average 5.7 percent, 1.1 percentage points higher than the 4.6 percent projected economic growth rate, but still roughly a percentage point slower than the recent historical average.

The newest projections represent an improvement over CMS's previous ones, as NHE spending has been revised down by a total of $860 billion over the comparable 2012-2022 window.

September 4, 2014

With the economy recovering slower than originally anticipated, the government now expects to collect significantly less revenue this decade than it did just two years ago. The most recent budget projections from the Congressional Budget Office (CBO) show the government taking in $1.8 trillion less over a ten-year period than was projected in February 2013.

Growing entitlement spending is the primary source of growth in the federal budget, but this growth would not lead to higher debt if revenues kept pace. Despite the savings from the widely noted $900 billion slowdown in health care spending since March 2011, federal revenues are set even faster, widening the deficit. Over the same 2013-2021 time period, revenue projections have fallen $1.2 trillion since February 2013 and net health care spending has fallen $780 billion since March 2011.

February 2013 was the first budget baseline after the fiscal cliff law, which allowed certain tax cuts for high earners to expire while permanently extending most of the 2001/2003 tax cuts. In that baseline, revenues were expected to climb to 18.5 percent of GDP, both in the immediate future and by the end of the decade. Over the last two years, though, CBO has continually revised these revenue projections downward, particularly in their February baseline of this year. The last month's projections showed revenue staying under 18.2 percent of GDP throughout the period.

Half of the $1.8 trillion is due to decreases in individual income tax revenue. Payroll taxes experienced a similar but smaller decline. Corporate tax revenue is expected to be much lower than expected in the near term – projections for 2016 dropped over 15 percent – but only slightly lower over the long term. Excise taxes are the only exception to the decline, with projections that have slightly increased over the last two years.

September 3, 2014
Costs Could Exceed $10 billion per Year

Recent events in Iraq and Syria have raised the prospect of expanding military operations in the region beyond airstrikes. Gordon Adams in a Fiscal Times article roughly estimated that $10 billion-$15 billion per year would be required to expand air operations and provide ground support for a campaign against ISIS, though the estimate is uncertain because it is not clear exactly how the U.S. would respond.  Regardless of the exact number, it is clear that if the military is to expand its operations in Iraq and Syria, it would cost billions of dollars.

Given high and growing debt levels, lawmakers should avoid substantially adding to the debt to fund the operation.

Of course, the "path of least resistance" would be for Congress to fund these new costs by designating them as Overseas Contingency Operations (OCO), which are not subject to the same statutory caps that constrain most discretionary spending. And to be fair, the increased costs would indeed be used toward overseas operations in Iraq. Yet, every major budget assumes OCO spending will decline, and using the OCO designation as a slush fund for any new military operation could significantly worsen the debt situation.

A sensible solution to this concern might be to accompany any new funding for ISIS with a set of OCO caps, designed to limit total funds spent on military operations in Iraq and Afghanistan.

August 29, 2014

CBO's recent budget projections reaffirm that our debt problems are significant. Entitlements are projected to grow, as a result of a retiring population and increased health care costs. Revenues are not projected to keep pace, leaving the budget with ever-growing deficits and increasing interest payments. By 2024, annual deficits will reach almost $1 trillion.

Deficits will remain roughly stable over the next few years as the economy recovers and revenue collections pick up faster than the growth in spending. If nothing is done by 2018, however, deficits will begin to grow again. Interest payments are the fastest growing portion of the budget, more than tripling between 2014 and 2024.

August 28, 2014

CBO's latest budget projections, while a slight improvement, are not good news for the country's fiscal future. Debt is higher than at any time in our country's history other than World War II, will rise to 77 percent of GDP by the end the decade and continue to climb thereafter. But even these projections may be too optimistic, since they assume policymakers do nothing to add to the debt by extending expiring provisions, repealing savings already in place, or enacting new unpaid-for legislation. While this may be a realistic assumption in some cases, policymakers in other cases have shown reckless disregard for budget discipline.

To show that the debt could be worse under different assumptions, CBO produces an "Alternative Fiscal Scenario" (AFS), which assumes that policymakers extend all expiring and expired tax provisions, permanently extend "doc fixes" to avoid a 24 percent Medicare physician payment cut next spring, and repeal the sequester. With these assumptions, debt would reach nearly 86 percent of GDP by the end of the decade.

To show the range of possibilities, we have estimated the debt under two different scenarios.

August 28, 2014
Good Deeds Punished as Crossroads Dings Dems on Debt Plan

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

August 27, 2014

Moments ago, CRFB published a new 6-page paper summarizing CBO’s latest Budget and Economic Outlook. Under its current law baseline, CBO estimates that federal debt held by the public will reach 74 percent of GDP by the end of 2014 – a post-war record and more than twice the level at the end of 2007. Debt will fall slightly to below 73 percent by 2018 but, beyond that, CBO’s forecasts show that debt levels will resume their upward trend, reaching 77.2 percent of GDP in 2024.

This growing debt is largely the result of a projected rise in spending levels not matched by equivalent increases in revenue. While CBO forecasts revenue to remain roughly stable as a share of GDP, at about 18 percent, spending will increase from 20.4 percent of GDP in 2014 to 21.8 percent in 2024. As we explain in our paper:

Much of this increase is due to the growth in the entitlement programs resulting from health care cost growth, population aging, and the coverage expansion under the Affordable Care Act. Social Security will grow from 4.9 percent of GDP in 2014 to 5.6 percent by 2024. Meanwhile, federal health spending will grow from 4.9 percent of GDP to 5.9 percent by 2024. The fastest growing portion of the budget, however, is interest payments; they will rise precipitously as a result of rising interest rates and growing debt levels. Net interest costs are projected to double between 2014 and 2021 -- from 1.3 percent of GDP in 2014 to 2.7 – and grow to 3 percent of GDP by 2024.

Overall, health care programs, Social Security, and interest spending will account for a striking 85 percent of the increase in spending over the next decade.

August 27, 2014

The Congressional Budget Office (CBO) just released its August baseline, updating budget projections from April and economic projections from February. In short, CBO continues to show debt on an unsustainable path, rising continuously as a percent of GDP after 2018. Combined with its long-term projections released last month, the agency shows the clear need to enact deficit reduction to avert a huge rise in debt over the long term. 

While debt will improve in the near term, declining from 74.4 percent of GDP in 2014 to 72.8 percent by 2018, it will then rise to 77.2 percent of GDP by 2024. This upward trend would in all likelihood continue beyond 2024 as entitlement and interest spending growth will clearly outpace revenue. These ten-year numbers are largely similar to the April projections, which had debt reaching 78 percent of GDP in 2024.

Debt as a Percent of GDP in CBO's Baseline

August 26, 2014
Congress Must Act to Get the Economy Back on Track

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

A few years back, Federal Reserve Chairman Ben Bernanke gave a speech at the annual Fed gathering in Jackson Hole, Wyo., that devoted a good deal of attention to U.S. fiscal policy.

The speech was important not only because it was on target – Mr. Bernanke recommended reforming U.S. tax and spending policies in a gradual way to control the debt without creating “fiscal headwinds” on the recovery (translation: a Simpson-Bowles-like plan) – but also because he stepped beyond the world of pure monetary policy to address legislative issues. This only made sense since the economic recovery so clearly depended on both rational Fed and fiscal policies. Even then, Mr. Bernanke held back from being overly prescriptive because there is such strong a firewall between policies from the Fed and those on Capitol Hill.

It seems likely that as Fed Chairwoman Janet Yellen gave her keynote address at Jackson Hole last week focused on labor markets, she, too, would have liked to be able to give lawmakers a gentle nudge—or a shove—in the right direction.

August 26, 2014

The Congressional Budget Office (CBO) is set to update its budget and economic projections tomorrow, laying out the fiscal picture for the next ten years. We already know that the FY 2014 deficit is likely to be around $500 billion, close to where CBO had it in their last budget forecast in April. With ten months having been completed in the fiscal year, we can see how the actual data compares to their April forecast by seeing how growth in various programs and revenue sources has come in compared to CBO's expectations. While this exercise won't necessarily show the full picture of what will happen to CBO's outlook for the next ten years, it could illustrate areas where current year data may lead CBO to revise their estimates.

Overall, both spending and revenue through the first ten months of the fiscal year have grown slower than CBO expected. Revenue has fallen shorter of expectations than spending though, meaning that if these growth rates held up through the end of the year, the 2014 deficit would be about $15 billion higher than CBO predicted. Below the table, we look in depth at a few of the specific categories of spending and revenue that so far have differed from CBO's forecast.

August 22, 2014

Many policymakers have expressed concern about "tax inversions," transactions where American companies move their headquarters overseas in order to pay a lower tax rate. The inversions are estimated to cost about $20 billion in lost corporate tax revenue over the next ten years. Yet even as Congress and the Administration debate whether to stop inversions, there is bipartisan agreement on a series of tax breaks that could cost 35 times more. Reviving the tax extenders continually over the next 10 years will cost about $700 billion (about $400 billion in corporate tax breaks, and about $300 billion for other businesses and individuals).

Since the beginning of the year, at least 14 companies have announced mergers or purchases of overseas companies that would result in an American headquarters moving overseas. Commonly called "tax inversions," these transactions often take place only on paper – no offices or employees move, but the company is considered foreign for tax reasons. By inverting, companies avoid the U.S. corporate tax rate of 35 percent on their overseas earnings, instead paying a much lower (or sometimes zero percent) rate that other countries charge on income outside their borders. This erosion of the corporate tax base is problematic, and there's several ways to address it. One suggestion, by CRFB President Maya MacGuineas, calls for a strategic pause where companies agree not to invert for nine months, paired with a fast-track procedure to encourage comprehensive tax reform.

Inversions are estimated to cost about $20 billion in lost tax revenue over the next 10 years, or about 0.5% of the $4.5 trillion that will be paid in corporate taxes during the same period. Legislation stopping them would raise enough to pay for about one-quarter of the $85 billion cost of continuing the extenders for two years, as the Senate Finance Committee would do. But the extenders have often been extended year-after-year. For example, the current Finance Committee bill continues 52 out of 54 provisions, and expands some tax breaks that were not in the original bill. If the package were continually extended, the provisions would cost $700 billion. (The House, on the other hand, has taken a much more expensive approach, expanding the package to cost over $1 trillion.)

August 21, 2014

The Postal Service has been losing money in recent years and has needed to cut back on services and raise stamp prices. However, these latest reductions are setting off a squabble among lawmakers. After USPS announced plans to consolidate 82 mail processing centers in 2015 and shed 15,000 jobs, 50 mostly Democratic senators sent a letter to the Senate Appropriations Committee and Financial Services and General Government Subcommittee chairs and ranking members asking them to postpone the reductions for one year and return mail delivery standards back to where they were in July 2012 to buy time for postal reform. Senate Homeland Security and Government Committee Chairman Tom Carper (D-DE) responded with a statement arguing that the best way to address these concerns would be for Congress to enact reforms to fix the financial challenges facing the Postal Service. But are lawmakers close to an agreement?

The answer is unclear. Both the House and Senate have produced bills with similar elements, but they have different emphases when it comes to stemming USPS's flow of red ink.

August 21, 2014

The Bipartisan Policy Center's Health Project has kicked off a series of white papers on overcoming the obstacles to delivery system reform with an overview of the opportunities and challenges for reform, over a year after producing a comprehensive health care reform proposal. The white papers will be done in consultation with a diverse set of health care policy experts and stakeholders.

With the "doc fix" set to expire in April 2015, threatening to cut Medicare physician payments by about one-fifth, an opportunity exists for lawmakers to put in place a fiscally responsible replacement system. So far, the "fiscally responsible" part has been elusive, but there appears to be bipartisan consensus on at least what the framework of the replacement would be. These plans generally would establish a value-based payment system where physicians would be penalized or rewarded from year to year based on quality metrics. The plans would provide bonuses to encourage physicians to transition to alternate payment models. This first paper notes this agreement creates opportunities not only at the legislative level to create a better payment system, but also for the Centers for Medicare and Medicaid Services, who would likely be tasked with fully fleshing out the payment reforms.

The paper identifies three general alternative payment models that could be considered for physicians and the health care system more broadly: bundled payments, patient-centered medical homes, and accountable care organizations (ACOs).

August 20, 2014
Congress irresponsibly takes ‘pension smoothing’ from exception to habit

The Washington Post editorial board came out today criticizing the use of gimmicks, saying the recent use of pension smoothing was a new low in terms of fiscal irresponsibility. Pension smoothing was recently passed as part of an 8-month patch to the Highway Trust Fund, which will now have enough funds to pay for federal transportation projects through next May.

Pension smoothing raises money in the short term by reducing the amount of money that companies are required to put into their defined-benefit pension plans. Since companies can claim a tax deduction for pension contributions, making fewer contributions means paying higher taxes.  But over the long term, companies will need to replace those lost pension contributions, reducing revenue in the future. In the meantime, more companies will have underfunded or bankrupt pensions. This provision has been criticized from all sides as not actually reducing the deficit.

The editorial board criticized the fact that pension smoothing has become a normal provision used to pay for highways rather than a one-off policy. The bill extended pension smoothing for five years, which provided most of the savings to pay for the 8-month highway extension.

We call this a new low in fiscal irresponsibility not because pension smoothing has never been used as a “pay-for” previously. In fact, the bill Mr. Obama signed actually extends, by 10 months, a pension-smoothing provision that helped “fund” the two-year highway bill that preceded this one. But that is precisely the point: Pension smoothing has just crossed the line between exception and habit. Once a bit of an embarrassment, even to Congress, it’s becoming normalized.

August 19, 2014

Social Security is often portrayed in one of two ways, either as its own self-contained program (the “trust fund perspective”) or as part of the broader budget (“the unified budget perspective”). Although focusing on these two lenses is sensible, the reality is more complicated; especially when it comes to the role of general revenue. Even though Social Security is mainly funded by a 12.4 percent payroll tax, general revenue comes into play even under the trust fund perspective. Indeed, since 1965, over $2.5 trillion ($3.1 trillion in today's dollars) of the $20 trillion of income received by the Social Security Trust Funds has come from sources other than the payroll tax, representing 12 percent of the total.

There are three main ways that general revenue has directly or indirectly made its way into the Social Security Trust Funds:

  • Direct transfers from the General Fund: The general fund has occasionally reimbursed the Social Security Trust Funds in specific cases to compensate it for policy changes that would otherwise lower its balance. Most recently, Congress passed a payroll tax cut for 2011 and 2012, lowering the payroll tax rate by 2 percentage points to stimulate the economy but authorizing a general fund transfer so the Social Security Trust Funds would be no worse off. The holiday was responsible for $225 billion of transfers. Congress has also used general fund transfers to pay for extra benefit credits to active-duty military between 1957 and 2001, special age-72 benefits for people not covered by the program by 1968, a payroll tax credit in 1984, and other reasons. Overall, nearly $260 billion has been transferred from the General Fund since 1965, or $300 billion in today's dollars.
  • Taxation of Benefits: Since 1983, retirees with significant income from sources other than Social Security have paid income tax on a portion of their Social Security benefits (prior to that, benefits were tax-free for everyone). Although this money is paid via the income tax, it is credited back to the Social Security Trust Funds. Since 1983, $370 billion has been transferred from the General Fund due to the taxation of benefits, or $440 billion in today's dollars.
  • Interest paid on Social Security bonds: The Social Security Trust Funds currently contain $2.8 trillion of assets, mainly as a result of significant surpluses in the 1990s and 2000s. That money is invested in U.S. Treasury bonds, which earn interest paid from general revenue. The trust funds earned about $100 billion of interest last year and have earned about $1.9 trillion since 1965, or $2.3 trillion in today's dollars.
August 18, 2014

On August 15, PublicSquare.net hosted a debate on Social Security featuring CRFB's very own Ed Lorenzen. The event, titled "Can Simpson-Bowles Save Social Security?" involved Benjamin Veghte, Research Director at Social Security Works, and Lorenzen, a Senior Advisor at CRFB who served on the National Commission on Fiscal Responsibility and Reform that was chaired by Erskine Bowles and Al Simpson. The debate was moderated by Taylor Kinzler.

August 15, 2014

The use of supplemental appropriations got some press last month as the Obama Administration requested $4.3 billion to address the Central American migrant crisis and fight wildfires. Although neither funding measure passed, it showed the role that supplementals continue to play in the appropriations process. Lawmakers use supplemental appropriations to respond to needs that they did not foresee when they passed government funding measures. To see how much activity has taken place outside of the "regular" process, CBO has helpfully recapped in a new report total supplemental appropriations since 2000 (see the data in Excel here). They break down spending by year and type, showing both the amounts that have been requested and what ultimately was passed into law.

Overall, Presidential administrations have requested $1 trillion over the past 15 fiscal years, and Congress has enacted $1.1 trillion of appropriations ($1.15 trillion of gross spending net of $50 billion in rescissions of past authorized spending). The enacted amount is equal to 0.5 percent of GDP over that period, and it peaked at 1.3 percent ($191 billion) in 2009 when war spending was near its peak; by contrast, there was no supplemental spending in 2011 and 2012 and only $225 million so far in 2014. Including interest brings total spending to $1.4 trillion, or 0.7 percent of GDP.

August 14, 2014

It was on this day 79 years ago that President Franklin Roosevelt signed into law the Social Security Act of 1935. While lawmakers have expanded the program since 1935 and changed it in many ways, the Social Security system still protects Americans against the “vicissitudes of modern life.” Social Security is the flagship program of social insurance in the United States.

It’s no secret that Social Security faces serious long-term funding challenges, as the latest report from the program's very own trustees highlights. If no action is taken, all benefits are set to drop by 23 percent in 2033, when all the programs assets would dry up, and disability benefits are on course to drop by almost one-fifth by 2016 when the Disability Insurance trust fund goes dry. It is critical that lawmakers address the gap between Social Security spending and revenues so the program can enjoy another 79 years (and more) of providing full benefits to retired workers, disabled workers, spouses, and any surviving family members. And the longer we wait, the more difficult solutions will become.

Luckily, CRFB has an incredible interactive tool to get lawmakers and the public started on picking and choosing from many reform options to set the program on a sustainable path: CRFB’s Social Security Reformer.

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