The Bottom Line
Continuing in our analysis of the FY 2014 budget resolutions, we will be discussing the things in the budgets that the authors didn't tell you. There were a lot of specifics in these plans that were left up to committees to figure out or for policymakers to work out down the road. Doing so is not really a gimmick, since budget resolutions cannot enact any actual policies; rather, they create processes or parameters within which Congress works. Still, there were many areas where budgets did not specify what they would like to see in areas where they called for savings. Leaving these savings unspecified, without giving illustrative policies, may hide difficult choices that lawmakers would have to make.
We will examine some areas where the three party-endorsed budget resolutions -- from the House Republicans, Senate Democrats, and House Democrats -- left fill-in-the-blanks. They are:
- Tax Reform: This is definitely the biggest question mark in all three budgets. According to the Tax Policy Center, the Ryan budget specifies tax reform parameters -- 10 and 25 percent rates, Alternative Minimum Tax repeal, Affordable Care Act tax increase repeal, and a 25 percent corporate tax rate -- which would reduce revenue over ten years by $5.7 trillion. Since the budget maintains current law revenue levels, that means there is a $5.7 trillion hole that would have be filled with tax expenditure reductions and eliminations or other revenue sources. Both the Murray and Van Hollen budgets call for revenue -- $975 billion and $1.2 trillion, respectively -- from reducing tax expenditures for high earners and corporations. While this is a more easily reachable goal than the Ryan budget's, Howard Gleckman of TPC notes that political reality may make this goal more difficult than it seems. Still, it is in reach as long as policymakers are willing to put the largest tax expenditures on the table. Murray's budget specifically mentions a broad-based limitation on deductions.
- Doc Fix: Senator Murray's budget, to her credit, fully represents the cost of repealing the Sustainable Growth Rate (SGR) formula ($138 billion over ten years) in her budget. By contrast, both the Ryan and Van Hollen budgets call for repeal of the SGR in the context of a deficit-neutral reserve fund. This means that the details of how to offset the doc fix are left up to lawmakers, but they are able to count those offsets in their budget. Granted, both budgets call for health savings that are greater than the cost of the doc fix, but dipping into those pool of savings would obviously increase their deficit numbers. Which brings us to...
- Health Savings: Both the Murray and Van Hollen budgets call for about $275 billion of gross health savings but does not explicitly endorse any policies. The Van Hollen budget does say that those savings could include expanding Medicaid rebates to low-income beneficiaries in Medicare Part D and using recommendations from the Government Accountability Office (GAO) and MedPAC for reducing overpayments and altering mis-aligned incentives. CBO scored the drug policy itself last year, saying that it would raise $137 billion in the 2013-2022 period. Assuming the estimate hasn't changed drastically, that would get the budget half way to its target. The Murray budget is more vague about where the health savings would come from, mostly discussing expanding on the delivery system reforms in the Affordable Care Act and increasing program integrity spending in health care spending to root out waste, fraud, and abuse. As of yet, there aren't savings to be attached to the things mentioned in Murray's budget because they are not specific enough.
- Other Mandatory Savings: All three budgets call for other mandatory savings that are not fully specified. Both Van Hollen and Murray have holes of only about $75 billion to fill, about a third of which is taken up by reductions in farm subsidies. The Van Hollen budget also mentions reforms to the Pension Benefit Guaranty Corporation (PBGC) and eliminating duplications mentioned in GAO reports. The Murray budget mentions selling excess federal property, reducing improper payments, and taking a look at the President's budget's "Cuts, Consolidations, and Savings" section. The Ryan budget calls for $962 billion of other mandatory savings over ten years relative to current law. Its detailed committee report provides specific savings for a number of policies -- block granting food stamps, increasing federal employee retirement contributions, repealing the Social Services Block Grant, reforming the Postal Service, and reducing farm subsidies -- that total about $325 billion, leaving another $635 billion. The budget does mention other policies like reforming the PBGC, reforming or repealing financial regulations, and winding down Fannie Mae and Freddie Mac, and although the savings and policies are not exactly specified, they most likely would not total $635 billion. The budget also calls for reforms to education programs and other means-tested entitlements, but it is unclear how much they would save without more details.
Budget resolutions are not necessarily supposed to be fully completed documents, but this blog shows that if one of these resolutions was accepted, policymakers would still have plenty of work to do to figure everything out.
Although the budget resolutions out now take a variety of paths to deficit reduction, we've noticed something that all have in common: they all succeed in putting debt on a downward path as a share of the economy. It's been true of all the budgets released so far, including proposals from the House Republicans (Ryan), Senate Democrats (Murray), House Democrats (Van Hollen), Republican Study Committee (RSC), Congressional Progressive Caucus (CPC), and Congressional Black Caucus (CBC).
It's easy to take this for granted, but the consensus is striking. Earlier in the year, we set a goal for lawmakers of $2.4 trillion in additional deficit reduction, a target that would be enough to put debt on a clear downward trajectory. While some budget resolutions fell short of the target CRFB believes in necessary to provide fiscal flexibility, long-term stability, and greater growth, all were able to put debt at least on a slight downward path.
In a Wall Street Journal breakfast yesterday, Senate Majority Whip and former Fiscal Commission member Dick Durbin (D-IL) reiterated his support for entitlement reform in a comprehensive debt deal. We've said time and time again that the only way lawmakers are likely to resolve our long-term debt problem is by putting everything on the table, and we commend Durbin for his approach.
Many lawmakers often talk about health care as a driver of our long-term debt problem, and Durbin spoke of the importance of trying to slow the growth of health care, especially given our aging population. But Durbin also mentioned another entitlement program, Social Security and argued that it was also in need of reform, proposing a commission to come up with a plan to ensure solvency.
Well, first, it is a serious problem. And you know the numbers. Social Security untouched, unamended, will make its payments for 20 years. That’s pretty good by federal standards but not good enough, because a lot of people plan on being on Social Security 20 years from now.
When we talk about fixing Social Security, I’ve said before Social Security is simple math; Medicare is advanced calculus. We can figure a way through Social Security. I could give just, you know, off the top of my head some ideas that I think would move us toward additional solvency on Social Security.
I want to credit Mark Warner for giving what I think ought to be our standard for Social Security. And this came up in the Gang of Eight discussions. He said 75-year solvency reviewable every 10 years, which I think is a thoughtful approach, particularly in light of what I’m going through in the state of Illinois, which some of you know now, which is the worst possible shape, the lowest credit-rating in the United States because of our pension — unfunded pension liability. So yes, Social Security should be addressed, could be addressed, and I think under the right circumstances, we can come up with a good bipartisan approach.
Senator Durbin clarified that he did not believe that Social Security was a substantial contributor to our debt problem but said that ensuring long-term solvency for the program was greatly needed regardless. Making gradual changes now would give individuals time to plan and adjust while keeping the program paying full scheduled benefits.
But it is still our responsibility to make sure that it’s there. And I honestly believe, if you sit down with most people and said, for example, let’s extend the Social Security retirement age to age 68 – what we said in Simpson-Bowles, let’s do it over 40 years – 40 years. One year of eligibility over 40 years. That’s increasing the eligibility for Social Security by nine days a year. So next year, it’s 67 years and nine days you qualify for Social Security. And the following year, 18 days.
What I’m getting to is, there are things we can do if we do them early over a gradual period of time that will give this solvency to Social Security. But people are afraid to walk into this thicket. I think we can and we should. And I go back, again, to my Illinois illustration. We’ve ignored our pensions for 40 years, and now, we don’t know how to get out of this mess. I don’t want to see anything like that with Social Security.
Besides raising eligibility ages, Durbin also suggested another change that we talk about frequently on this blog, the chained CPI:
I think it’s – that chained CPI is a real possibility, and only if it is crafted in the right way. And let me tell you what I mean. Despite some of the projections on the impact of chained CPI, I would like to give you an illustration, which I’ve used over and over, maybe not convincingly, in my Democratic caucus elections. The average Social Security recipient receives about $12,000 a year. Assuming a three percent COLA is announced for the next year, and then you apply the chained CPI, it would reduce that COLA by .25 percent.
The cost, then, to the average recipient would be $3.50 a month reduction in the COLA payment that they were going to receive. At the end of the year, $42 in the reduction of the $360 COLA payment they were going to receive.
Now, you could play that number out, as my critics do, to thousands of dollars 20 years from now. And I’m sure they’re right in their calculations. But if you said to the average Social Security recipient, the cost is $3.50 a month, and the dividend is 50 more years of solvency – and I’m not saying doing this alone would reach that, but it’s an important part.
To get the process rolling, Durbin suggested proposing a Social Security commission to offer a proposal to achieve solvency. Here is how he described it.
Here’s what I’m working on, and it’s a Social Security commission like Simpson-Bowles. And it would basically say to a commission with a very limited timeframe — within a very limited timeframe to come up with a proposal for 75-year solvency of Social Security. And then — and this is important, it would be referred to both chambers and on an expedited procedure, allowing any members to offer substitutes to the commission proposal — substitute amendments as long as they meet the same test — 75-year solvency.
Social Security is often lost in the deficit reduction debate, given that it has its own revenue source. But Social Security is due to become insolvent by 2033, at which point benefits will be cut by 25 percent. Making changes to the program now should ease the transition, and Durbin should be commended for putting good ideas on the table.
To read a transcript of the full interview click here.
The field has been narrowed from 68 to 64 teams, and the NCAA Tournament is ready to kick off in full this afternoon. But the Big Dance isn't the only March madness going on right now. In Congress, both chambers are set to take a number of budget-related votes in the hours and days ahead.
One of those issues, though, just got resolved today. Both the House and Senate passed separate government funding bills, the House acting two weeks ago and the Senate approving a bill just yesterday by a 73-26 vote. The House this morning approved the Senate bill 318-109, so it will be sent to the president for signing.
The bill is a hybrid in that it has both appropriations bills and a CR. The bill gives full appropriations bills to Agriculture, Commerce-Justice-Science, Defense, Military Construction-Veterans' Affairs, and Homeland Security. Appropriations bills generally allow for more flexibility in the use of funds and provide a greater ability for Congress to shift around funds from the previous CR, rather than just having them stick with the current allocation.
Below, you can see the differences in funding between the new funding bill and the previous CR below. We have also included the old House-passed bill in the table for comparison. Note that none of these totals account for the sequester, which will cut on average about 8 percent from defense budget authority and 5 percent from non-defense budget authority (totals for individual bills may vary due to exemptions). It will reduce base discretionary budget authority from $1.043 trillion to $984 billion.
|Base Funding by Appropriations Bill (Billions of Budget Authority)|
|Energy and Water||$36.8||$36.7||$33.0|
At the micro level, the bill shifted funds around to protect certain spending programs. According to Congressional Quarterly's Budget Tracker (subscription required) and The New York Times's Jonathan Weisman and Annie Lowrey:
- $55 million of cuts were restored to meat inspectors (at the expense of other agriculture programs, including a school breakfast program)
- $10.4 billion in defense spending was shifted towards operations and maintenance accounts
- Customs and Border Protection and Immigration and Customs Enforcement saw funding increases
- Embassy security saw a large increase in funding
- Head Start and Child Care block grants were increased
- The Special Supplemental Nutrition Program for Women, Infants, and Children saw a $250 million funding increase
- The Energy Department's nuclear weapons program will see a funding increase
- Military construction would take a significant hit of $2.4 billion
- Energy research would take a $44 million cut
- The Secret Service would see its funding cut by 3 percent
- The Transportation Security Administration would take a cut while the Coast Guard and FEMA would get increases
The budget for FY 2013 is now settled. But there is still the FY 2014 budget to be determined by October 1, not to mention the possibility that the budget resolutions will lead to broader budget negotiations. There is also the debt ceiling looming in the summer. In short, although they have solved this part of the madness and unlike the NCAA Tournament, this year's budget battles will go far past early April.
Earlier this month, we reported on CBO’s updated cost estimate for switching to the chained CPI to provide a more accurate measure of inflation for indexed provisions in the tax code and in spending programs. Yesterday, the Moment of Truth Project released an updated version of their report Measuring Up: the Case for the Chained CPI along with a new one-page summary reflecting the latest cost estimate as a result of legislative changes in the American Taxpayer Relief Act (ATRA) and new data.
In recent budget negotiations, both President Obama and Speaker Boehner supported switching to the chained CPI as part of a broader deficit reduction framework. The policy has continued to receive bipartisan support from lawmakers and experts on both sides of the aisle. As lawmakers carry on their work toward reaching a budget deal, the Moment of Truth’s updated report offers a helpful explanation of the budgetary and policy impact of this policy.
Specifically, the report includes new information about the increased savings – now projected to save $340 billion over the next decade ($390 billion including interest), up from $250 billion in previous estimates ($290 billion including interest). It also discusses the distributional impact on Social Security benefits and after-tax income in light of tax changes in the ATRA and finds the chained CPI is still roughly distributionally neutral across income groups. The report argues that concerns for the impact on vulnerable populations can be addressed through targeted policy changes to help those populations:
Chained CPI is a more accurate measure of inflation and there is no reason to maintain an average $320 tax windfall for those in the top quintile as a result of using an inaccurate measure of inflation in the tax code just to prevent a $20 tax increase for those in the bottom quintile. Likewise, there is little reason to provide higher than warranted increases in benefits for all Social Security beneficiaries just to protect lower-income beneficiaries when those concerns could be addressed by much more targeted policies and at lower overall costs.
As we’ve argued many times before, switching to chained CPI would provide not only a more accurate measure of inflation for inflation calculations in the federal government, but also significant deficit reduction and a reduction in the Social Security funding shortfall.
To read the full paper click here.
Madness Returns – It’s that time of year again. Predictions are made and office pools are formed. Yes, budget wonks are pitting budget against budget to see which will prevail. And we hear there’s a basketball thing going on. Congress is trying to wrap up this week a spending plan for the rest of this year and a budget for next year ahead of a two-week Easter recess. Meanwhile, spring has begun and debate over how to address the national debt continues. Will a debt deal defy prognosticators and make a Cinderella run?
Budgets Take to the Floor – Congress is considering fiscal year 2014 budgets this week. The House on Wednesday considered the budget authored by House Budget Committee chair Paul Ryan (R-WI) as well as alternative budgets proposed by House Democrats, the conservative Republican Study Committee, the Progressive Caucus, the Congressional Black Caucus, and a Republican amendment with the text of the budget drafted by Senate Democrats. None of the alternatives passed and the Ryan budget is expected to be approved on a largely party-line vote on Thursday. Meanwhile, the Senate is planning its first budget vote in four years on the budget drafted by Senate Budget Committee chair Patty Murray (D-WA). Check out our comparison of all the budgets here.
2013 Spending Not One and Done – As Congress tries to adopt a budget for next year, it is still attempting to finalize a spending plan for the rest of this fiscal year. On Wednesday the Senate passed a continuing resolution to fund the federal government through September 30, the end of fiscal year 2013. The bill also provides more flexibility to some agencies for making spending cuts dictated by the sequester. The House is expected to vote on the bill on Thursday. A stopgap measure needs to be enacted before March 27 in order to prevent a government shutdown.
Budget Reform Ready to Come off the Bench – The wrangling over this year’s and next year’s budget is a stark reminder that the budget process is broken. The National Priorities Project has a nice infographic showing the dysfunction of the process. Senators Jeanne Shaheen (D-NH) and Johnny Isakson (R-GA) have reintroduced their bill to institute a two-year budgeting cycle. Check out more budget reform ideas here.
President Brackets Deficit and Economy – The White House came under some criticism for producing a tournament bracket but not a budget yet, which is not expected until April 8. But it did release last week the annual Economic Report of the President. It notes, “As we continue to grow our economy, we must also take further action to shrink our deficits. We don’t have to choose between these two important priorities—we just have to make smart choices.” It also included an analysis of health care spending that we looked at earlier this week.
Deficit Takes the Court at Hearing – On Thursday the Joint Economic Committee of Congress convened a hearing on addressing the national debt. Former Senate Budget Committee chair Judd Gregg testified that, despite progress, more work is still required to rein in the national debt. Former Office and Management director Alice Rivlin argued that policymakers need to address the debt and economy together. Meanwhile, over 160 economists echoed that sentiment in an open letter to the President and congressional leaders.
Corker Wants Grand Bargain in the Big Dance – Over the weekend Sen. Bob Corker (R-TN) said that Republicans could get behind a comprehensive deal that involves entitlement reform and increased revenue through tax reform. “Republicans, if they saw true entitlement reform, would be glad to look at tax reform that generates additional revenues. That doesn’t mean increasing rates; that means closing loopholes. It also means arranging our tax system so we have economic growth.” The comments indicate that President Obama’s effort to court congressional Republicans through meetings could pay dividends.
Furlough Notices Quiet the Crowd – The automatic budget cuts of sequestration will start to hit home as the Department of Defense will send furlough notices to some employees on Friday. Public pressure as the effects of the sequester are felt may prompt policymakers to finally agree on a smart, comprehensive deficit reduction plan that is phased in over time to replace the sequester.
Tax Reform Looks to Move On – Fundamental tax reform continues to move forward, with House Ways and Means Committee chair Dave Camp (R-MI) saying that the deduction for state and local taxes could be ripe for change.
Key Upcoming Dates (all times are ET)
- Current continuing resolution (CR) funding the federal government expires.
- Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.
- Congress must pass a budget resolution as specified in the Congressional Budget Act. Also, due to the debt ceiling suspension bill, lawmakers will have their pay withheld after this date until their respective chamber passes a resolution.
- Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.
- Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.
- Dept. of Labor's Bureau of Labor Statistics releases April 2013 employment data.
- Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.
- The debt limit is re-instated at an increased amount to account for debt issued between the signing of the suspension bill and this date. After re-instatement, the Treasury Department will be able to use "extraordinary measures" to put off the date the government hits the debt limit potentially for a few months.
- Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.
Yesterday, House Ways and Means Committee Chairman Dave Camp (R-MI) took a hard look at the deduction for state and local income taxes at a hearing on tax expenditures that affect state and local governments. There is a significant amount of forgone federal revenue in this particular tax provision, $50.3 billion in 2013 and $277.6 billion from 2013-2017 according to estimates by the Joint Committee on Taxation (JCT).
In his opening statement, Camp said that the the state and local income tax deduction should be considered in reform not only due to the lost revenue, but also for distributional reasons:
Over the last several years we’ve heard much about how the tax code might be changed in ways that could affect State and local government activity. Some, such as President Obama, argue that exclusions (such as those for State and local bonds) and deductions (such as those for State and local taxes) inappropriately provide larger subsidies for high-income taxpayers and have advocated limiting the value of deductions and exclusions or replacing them with credits.
A Tax Policy Center analysis confirms this observation, as much of the tax benefit for the state and local deduction goes to higher-income earners.
Source: Tax Policy Center
With substantial forgone revenue from the deduction, it is worth asking whether the deduction should be eliminated or changed to make it less costly and more progressive. Changing specific tax expenditures can be difficult, as Camp acknowledges, because there are many taxpayers that benefit from this preference:
But we are not writing a tax reform bill in some ivory tower. Changes to the tax code will have a real impact on State and local economies, and the Committee needs to hear directly from these stakeholders before considering any proposals as part of comprehensive tax reform.
But its worth noting that many commissions that have taken up tax reform proposed changes to the state and local deduction. The Fiscal Commission, the Domenici-Rivlin Deficit Reduction Task Force, and the 2005 Advisory Panel on Federal Tax Reform eliminated the deduction in their plans. The current tax code disallows the deduction of state and local taxes in the Alternative Minimum Tax.
Many different changes could lessen the revenue loss in the state and local tax deduction while improving progressivity, including ending the deduction outright; converting it into a credit; limiting the value of the deduction to a percentage of adjusted gross income (AGI), a nominal dollar amount, or a tax rate; capping the amount that can be deducted; or having different tax treatment of state and local property taxes, sales taxes, and income taxes. CBO scored two of these changes in their 2011 Spending and Revenue Options, estimating that eliminating the deduction would save $862 billion from 2012-2021 and capping the deduction at 2 percent of AGI would save $629 billion over the same period. That score would be different if done today, but it's not clear if it would be higher or lower.
It is good to see Camp examining this tax provision, as well as the many other provisions the Ways and Means Committee's 11 working groups will investigate in the coming weeks. Tax reform could lead to a simpler and more efficient tax code that could promote growth, although this will require some popular tax expenditures to be eliminated or reduced. Our leaders will have to make hard choices, but given our fiscal circumstances, these are choices we have to make in order to get a more efficient tax code that raises the revenue we need.
It is a well-known fact that the U.S. spends a sizeable amount on defense, more than the next 15 countries combined, including China and Russia. But the Budget Control Act (BCA) discretionary spending caps will require the Pentagon to rein in spending levels, even if sequestration is replaced.
The Congressional Budget Office explores strategies for reducing defense spending in a new report, "Approaches for Scaling Back the Defense Department's Budget Plans." The Defense Department projects for five years the expected cost of its defense plans in an annual report every March, the Future Years Defense Program. However, CBO's analysis of this report last summer showed that under less favorable -- and arguably more realistic -- assumptions of cost growth, spending in DoD's plan would exceed the amount allotted to defense under the BCA caps, and would not come close to meeting the levels under sequestration (naturally, since the Administration wanted to replace the sequester).
In the report, CBO presents several options to meet the BCA caps under its more realistic cost projection baseline, with different combinations of reductions to force structure (overall size of force), acquisitions, and operations. While reducing force structure would likely lead to additional related savings in acquisitions and operations, CBO also identifies possible savings without reducing force structure through civilian and military pay freezes, TRICARE reform, and procurement reform. CBO provides four illustrative options that would include a combination of savings in different areas:
- Option 1: Preserve Force Structure; Cut Acquisition and Operations. Due to force structure being entirely preserved, this option would require a 31 percent cut to spending on acquisition and operations by 2021.
- Option 2: Cut Acquisition and Operations; Phase in Reductions in Force Structure. With acquisitions and operations being cut first, reductions in force size could be phased in, although spending related to force size would be 11 percent less by 2021.
- Option 3: Achieve Savings Primarily by Reducing Force Structure. Although cuts to acquisitions and operations would allow a transition, spending related to force size would be reduced by 23 percent by 2021.
- Option 4: Reduce Force Structure Under a Modified Set of Budget Caps. This option would make cuts entirely through reductions to force structure, although it would use modified caps to allow for a smoother transition. Spending to maintain force size would have to be reduced by 25 percent by 2021.
CBO illustrates how difficult it will be to meet the caps without taking a look at the whole defense budget and allocating resources according to the greatest priorities. Without making reductions to force structure, other areas of the Defense budget would need to be cut dramatically, which could result in the U.S. losing its technological superiority or its ability to maintain its volunteer force. On the other hand, as CBO points out, a smaller force would be less able to engage in long or multiple conflicts, possibly limiting military capabilities. Many plans that reduce defense spending also call for a change of military strategy in line with the reallocation of resources proposed in the plan. CBO's report demonstrates the trade-offs that come with matching the budget to the military's overarching strategy.
The full CBO report can be found here.
Yesterday, the House Republican Study Committee (RSC) released its "Back to Basics" budget, which aims to balance the budget in four years instead of ten years as the Ryan budget seeks to accomplish. It reaches a surplus of $22 billion in 2017 and has a ten-year surplus of $33 billion. The House Budget Committee's proposal was not that far from balanced in its fourth year, with a $54 billion deficit in 2017, so the RSC's budget did not need to go a lot further beyond that proposal to reach balance in 2017.
Like the Ryan budget, the RSC budget accomplishes its savings on the spending side. On discretionary spending, it allows defense spending to follow the levels in the discretionary spending caps (without the sequester) while it holds non-defense spending to below 2008 levels. Funding for the wars overseas is phased out after 2017. On health care, the budget repeals the spending increases in the Affordable Care Act, block grants Medicaid and freezes it at 2014 levels, transitions Medicare to a premium support system by 2019 for new beneficiaries, and raises the Medicare retirement age to 70 and indexes it to life expectancy. Unlike other budgets, this one also addresses Social Security specifically by switching to the chained CPI for cost-of-living adjustments and increasing the full retirement age to 70 and indexing it for life expectancy.
The budget also includes a number of other cuts to domestic spending, such as reducing crop insurance subsidies and eliminating direct commodity payments, eliminating the mandatory spending portion of the Pell Grant program, increasing federal employee retirement contributions, privatizing Fannie Mae and Freddie Mac, and eliminating the Consumer Financial Protection Bureau.
On taxes, the budget first repeals the tax increase from the American Taxpayer Relief Act, effectively enacting a full extension of the 2001/2003/2010 tax cuts. It then calls for tax reform, proposing an alternate system that taxpayers could choose to file under rather than the current one. The new individual income tax system would have two rates of 15 and 25 percent, a $12,500/$25,000 standard deduction and $12,500 dependent exemption, no estate tax, and a 15 percent top rate on investment income (capital gains taxes would be levied only on inflation-adjusted gains). On the corporate side, the new system would have a 25 percent tax rate and a territorial international tax system. Beyond this system, the budget calls for further tax reform, citing the Fair Tax system or a flat tax as models.
The budget contains some similarities to the Ryan budget. Both keep the sequester but shift it from defense to non-defense cuts (the RSC budget provides lower discretionary spending). Both propose block granting Medicaid, although the Ryan budget increases the block grant with inflation plus population growth, while the RSC budget freezes it. A difference between the two is that the Ryan budget draws down war spending to $35 billion a year through 2023, while the RSC cuts off that funding after 2017. In addition, the RSC budget implements premium support for Medicare five years earlier than the Ryan budget, so the savings from that policy show up in the ten-year window for the RSC.
Overall, the RSC budget includes about $7 trillion in deficit reduction, with $7.7 trillion of spending cuts netted against roughly $700 billion of tax cuts. You can see the breakdown of the budgetary impact, as we understand it, below.
|RSC Savings/Costs (-) by Category (2014-2023 in billions)|
|Compared to Current Law|
|Other Health Spending (including ACA)||$2,696|
Source: RSC, CBO
As a result of these cuts, debt would fall from 77 percent of GDP in 2013 to 50 percent by 2023 and spending would fall from 22.3 percent of GDP in 2013 to 17.8 percent by 2023.
|Republican Study Committee's FY 2014 Proposal (Percent of GDP)
Source: Republican Study Committee, CBO
*Positive number is a deficit, negative number is a surplus
Source: HBC, RSC, SBC, CBO
The Republican Study Committee budget, like the other budget resolutions released thus far, puts the debt on a downward path as a share of the economy. It is clearly the most aggressive proposal to date on debt reduction, reducing debt by about 5 percentage points of GDP below the Ryan budget by 2023.
We will continue to analyze budgets as they come out and update our comparisons of the budgets.
Late last week, the Council of Economic Advisors (CEA) released the annual Economic Report of the President outlining the Administration's latest economic policies and priorities. The report includes a wealth of useful information, including a section on health care which is definitely worth a read.
However, one part of the health section includes a graph that -- absent more information -- could be used to suggest health care cost-growth is no longer a threat to our fiscal sustainability. Specifically, the CEA report includes a chart showing that if, over the next 75 years, per capita Medicare spending grew at the same nominal rate as it has on average over the past 5 years (3.6 percent), then Medicare spending in 2085 would be about the same as today.
The report rightly states that "this should not be interpreted as a forecast but rather an indication of how sensitive long-term projections are to the assumed rate of growth of Medicare spending per beneficiary," but it could be misunderstood as it continues to receive a great deal of attention from a number of bloggers and commentators.
To be clear, there is no evidence that currently exists suggesting federal Medicare spending will be flat as a share of GDP, and the analysis to suggest that might be true is deeply flawed in a number of ways.
As we've discussed many times before on this blog, and as the report itself emphasizes, recent health care cost growth has in fact slowed substantially over the last several years -- a positive sign that we hope (but aren't sure) will continue. There is much debate surrounding how much of the recent reduction in health spending is due to a temporary reduction in spending due to the recession, how much to a structural reduction in the overall level of health spending, and how much due to a structural reduction in the growth rate of health spending.
It would be our hope that a larger portion than projected of the slowdown is due to changes in the growth rate. But as we show below,drawing assumptions from the CEA would be a big mistake for four central reasons:
Any assertion that per capita health costs will continue growing at 3.6 percent per year suffers from a number of flaws, including:
- Assuming the continuation of nominal not real growth trends (i.e. not accounting for inflation)
- Ignoring the effect of one-time level-reducing Medicare cuts from the Affordable Care Act
- Failing to account for aging within the Medicare population as more baby boomers reach their 80s and 90s
- Assuming 100 percent of the health spending slow-down is due to a reduction in the growth rate rather than level of spending, a highly unlikely scenario
Using nominal variables -- The average per beneficiary growth rate over the last five years has been 3.6 percent, but that was in a period of relatively low inflation. Over that time, by our estimates, inflation has only averaged around 1.6 percent -- meaning real growth has been close to 2 percent. The Medicare Trustees project long-term inflation will be roughly 2.4 percent a year, suggesting that if real growth stayed constant, costs would be growing not at 3.6 percent, but at 4.4 percent per year. This is a significant difference. If real Medicare spending per beneficiary grew at the same rate as the last five years, spending in 2085 would be closer to 6.5 percent of GDP rather than 3.8 percent.
Source: Rough CRFB calculations based on estimates from the Congressional Budget Office and the Social Security and Medicare Trustees.
Failing to Account for the ACA -- Assuming growth in future years will reflect growth over the last five years also ignores the fact that some of the slower growth is due to legislative Medicare spending cuts from the Affordable Care Act (ACA). In fact, by our rough estimates, growth over the last decade would have been closer to 4.1 percent (2.5 percent in real terms) absent those Medicare cuts. Importantly, some of those ACA cuts are meant to slow growth, such as productivity adjustments to certain providers, but other cuts just reduce the level of Medicare spending (i.e. the reductions in subsidies to Medicare Advantage plans). When we remove the one-time level-reducing cuts, spending still would have grown about 0.3 percentage points faster -- roughly 3.9 percent in nominal terms and 2.3 percent in real terms. If we were to assume 2.3 percent real annual per capita growth, Medicare spending would reach almost 8 percent of GDP rather than the 3.8 percent in the CEA graph.
Aging of the Medicare Population -- Finally, the assumption that Medicare costs will continue to grow as they have the last five years chart does not account for the fact that the Medicare population itself is getting older. Right now, many baby boomers are still in their 60s and are generally healthier and therefore relatively cheap for the program. As they age into their 70s, 80s, and 90s, the cost per-beneficiary should go up. The increase in the average age of beneficiaries will continue through about 2053, according to the Social Security and Medicare Trustees.
Assuming the Slowdown is Entirely a Structural Change -- Setting aside the flaws above, relying entirely on recent growth rates to make projections would be effectively assuming that 100 percent of the slowdown is due to structural changes in the trajectory of health spending growth. Although there is substantial disagreement over the extent to which the cost-trend has slowed and some hopeful optimism that it is significant, few analysts believe this explains the entirety of what is going on. More likely, we are witnessing some combination of a temporary spending reduction due to the deep recession, a permanent reduction in spending levels due to structural changes, and a reduction in the growth rate of spending going forward. Specifically, multiple studies have shown a correlation between declines in employment, private health insurance, and consumer spending in recent years slowing health care cost growth rates. A careful read of the CEA report offers significant insight into each of these factors.
* * * * *
There is no question that Medicare cost growth has slowed over the past five years, and we are hopeful that part of this represents a fundamental shift in spending growth. If true, this fact would be very helpful for containing debt levels -- particularly over the long-run. However, a small sample of data should not be used or misused to suggest our task is over. This is especially true given that the primary driver of growing debt over the next couple of decades is actually the aging of the population and that many analysts (including the Medicare Chief Actuary) believe the Trustees' current law projections are not too pessimistic, but in fact too optimistic.
Source: Medicare Trustees
While there has been growing consensus in recent budget negotiations to reduce federal health spending, assertions that there is no problem based on back-of-the-envelope calculations offer a misleading distraction from the important work facing lawmakers to put health spending on a sustainable path.
Rep. Chris Van Hollen (D-MD), Ranking Member of the House Budget Committee, has released an alternative budget on behalf of House Democrats, "Jobs, Growth, and a Stronger Future." His budget succeeds in putting debt on a slight downward path with $1.8 trillion of savings compared to current law, or $2.3 trillion compared to the CRFB Realistic baseline.
Debt would rise compared to current law in the short term due to the budget's $200 billion in job creation measures and cancellation of sequestration, but then gradually decline after 2014. Debt would decline from a projected 79.4 percent of GDP in 2014 to 70.4 percent by 2023.
Source: House Budget Committee, Senate Budget Committee, Republican Study Committee
The House Democratic budget contains a mix of revenue and spending cuts, though it relies more on revenue than the budget offered by Senate Democrats. It would get roughly $1.2 trillion of its savings from additional revenue and roughly $600 billion of spending cuts net of jobs measures.
|House Budget Committee Democrats' FY 2014 Proposal (Percent of GDP)
|Van Hollen Budget|
Source: House Budget Committee Minority
On the spending side, the House Democratic alternative budget would save $141 billion from Medicare through a combination of different approaches, including negotiation of pharmaceutical drug prices for Medicare part D and several recommendations from MedPAC. Defense spending would be cut by $200 billion, and the budget would assume war funding would be zeroed out after 2014. The budget would also include $73 billion in mandatory savings reductions, through reducing agriculture subsidies, increasing Pension Benefit Guaranty Corporation fees, and other changes.
To achieve additional revenues, the budget recommends eliminating certain tax expenditures for higher-income earners and corporations, although like the House and Senate budgets, it leaves the specifics up to the tax-writing committee, in this case the House Ways and Means Committee.
The exact details on the savings are a little unclear right now, but we will update this post as we learn more to show exactly where the savings come from relative to both current law and current policy.
It is unlikely that Van Hollen's budget proposal will receive enough support to pass in the House. However, like the other FY 2014 budgets, this budget does put debt on a downward path, going beyond just stabilizing debt at the end of the ten-year window. That is a good sign of where the debate is heading.
We will continue to have further analysis as other budgets come out.
Last week, the House Republicans and Senate Democrats put out their FY 2014 budgets, showing two different approaches to tackling deficit reduction. While there was clear divergence between the policies in the two budgets, both were able to put debt on a downward path as a share of the economy. If lawmakers can agree on that goal for deficit reduction, then the two sides may not be as far apart as it might appear.
Former Senator Judd Gregg (R-NH), a former Chairman of the Senate Budget Committee, writes in today's The Hill that if lawmakers look toward compromise, a deal to put the debt on a responsible path and replace sequestration may be in reach. Writes Gregg:
Debt reduction done right can actually strengthen the economy down the road. A recent analysis from the Congressional Budget Office found that a $2 trillion reduction in primary deficits could boost GNP by nearly 1 percent over 10 years.
The deal that can avoid this crisis is apparent and very doable.
Our fiscal problems will self-correct if our government reduces our deficits and debt over the next 10 years by at least an additional $2.4 trillion. Those reforms should also increase in their effectiveness beyond this 10-year window.
A sum of $2.4 trillion may seem like a great deal of money. But when one considers that it is off a base of approximately $40 trillion of spending over the next 10 years, it is definitely manageable.
What is the deal we need? It should obviously start with an agreement to replace the sequester with targeted and effective changes to federal fiscal policy.
The president has proposed a specific and significant action: changing the manner in which the federal cost of living adjustment (COLA) is calculated to make it more accurate.
In their latest framework, former Sen. Alan Simpson and former chief of staff to President Clinton, Erskine Bowles, have put forward $600 billion as a credible and bipartisan target for health savings over 10 years.
Of course, there is also the proposal for approximately $200 to $300 billion in entitlement savings that was reportedly agreed to between the president and the Speaker in the summer of 2011.
Take any permutation of these proposals, add in the CPI change proposed by the president known as “chained CPI,” and throw in a long-term adjustment in the eligibility age for Medicare and Social Security. You immediately have the spending side of a very strong package.
Comprehensive tax reform is also necessary. Reforming the tax code to lower rates and broaden the tax base will be both good for economy and our fiscal health.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
Frequent reader of the blog? The Committee for a Responsible Federal Budget (CRFB) is seeking to add a new member to our policy team.
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Why join us? As a senior policy analyst with The Committee for a Responsible Federal Budget, you will be at the forefront of one of Washington’s most dynamic policy areas. Areas of responsibility include researching, writing, and publishing new policy content, along with tracking and analyzing legislation and approaches to federal budget policy. This individual will become a member of a growing team of budget policy thought leaders in a unique, bipartisan environment.
A full description of the position, qualifications, and details on how to apply can be found at: crfb.org/jobs.
We've discussed many times before the important role entitlement reform plays in addressing our long-term debt. As the baby boomer generation continues to age and health care costs continue to grow faster than the economy, federal health care spending is expected to rise and comprise a growing share of the federal budget.
The latest biannual report from the Medicare Payment Advisory Commission (MedPAC) notes that in the next ten years, Social Security, Medicare, Medicaid, other health insurance programs, and net interest expenses stemming from them will account for more than 16 percent of GDP, while total federal revenues have averaged 18.5 percent of GDP in the past 40 years. MedPAC emphasizes the need for an efficient health care system, one in which beneficiaries are able to access top-quality care at reasonable prices.
In order to increase the efficiency of Medicare, the report makes a strong call for the repeal of the sustainable growth rate (SGR) formula, which links physician fees to Medicare spending growth in setting payment amounts for fee-schedule services. Since 2002, the SGR has called for annual negative update to fee-for-service physician payments. However, for every year since 2003, including 2013, Congress has also temporarily overridden these cuts to physician payments, thus snowballing the effect of the cuts over time (although that trend has reversed a bit recently). Over the years, last minute "doc fixes" have frustrated providers and delayed submission and processing of claims. On the whole, the report argues that the SGR system has failed to restrain health care utilization effectively and may actually have exacerbated it, in part because it does not discriminate between physicians who work to restrain volume growth and those who don’t.
In their report, MedPAC emphasizes five key aspects to SGR repeal:
• Repeal is urgent. Delay will not provide more favorable options, and repeal is likely to become more costly over time.
• Beneficiary access must be preserved.
• The physician fee schedule must be rebalanced to achieve equity of payments between primary care and other services.
• Pressure on FFS must encourage movement toward new payment models and delivery systems.
• Repeal of the SGR must be fiscally responsible.
MedPAC has called for reform of the SGR many times before, but this report makes a particularly strong case for the urgency of repeal today. This comes as a result of new CBO projections which reduced the cost of repealing SGR from $250 billion over the next decade in their August baseline to $140 billion in their February baseline. MedPAC says:
Repeal is now less costly than it has been for many years and it could be accomplished – depending on how the Congress decides to finance it – with less burden on physicians, other providers, beneficiaries, and taxpayers.
MedPAC also cautions that the budget score is volatile, and the cost of repeal could rise again as enrollment and volume of services per beneficiary increases.
Last month, CRFB blogged about potential repeal packages for the SGR. MedPAC's October 2011 proposal, referred to in today's report, would repeal the SGR, freeze payment rates for primary care providers, and provide non-primary care specialists with a 5.9 percent reduction for three years and then freeze them through the end of the decade. The budgetary impact of this would be slightly less than a strict freeze (which is the CBO option), and MedPAC agrees that the repeal's cost should be paid for either with Medicare or other savings.
In addition to their SGR recommendation, MedPAC's report offers numerous other recommendations regarding provider payments and Medicare Advantage, along with providing an update on the Medicare Part D program. As lawmakers continue to look for ways to improve and reduce federal health spending, MedPAC's recommendations should be part of the menu of options they consider moving forward.
In today's The New York Times, Fix the Debt Steering Committee member Steven Rattner writes on the need for a comprehensive deal to put the debt on a downward path as a share of our economy. According to Rattner, a failure to enact a long-term deficit reduction plan creates unfairness for future generations who must shoulder the burden later on. He calls for action now, not later:
Our budget outlook is so grim and the policy changes that are required will be so painful — politically as well as financially — that putting efforts to get our fiscal house in order on hold would be the height of irresponsibility.
Proponents of taking a pause offer a variety of arguments in support of their view: Congress can’t do two things at once, and the need to fight the sequester should take precedence. The budget outlook for the next 10 years isn’t so bad. The bond market is quiescent, even in the face of continuing large government borrowings.
Those assertions may contain grains of truth, but none changes the overarching fact that working toward a sensible long-term fiscal policy is every bit as important as pushing for better short-term policies.
Thanks to decades of accumulated federal budget deficits and, more significantly, imprudent Medicare and Social Security policies, we’ve stolen almost $60 trillion from our children.
That’s the amount that would be required to both pay off our national debt (a comparatively modest $11 trillion) and provide for benefits that we awarded ourselves without paying for them.
Every year that goes by – indeed, every day that goes by – causes this amount to increase. As shown below, just five years ago, these unfunded liabilities totaled $45 trillion.
Rattner says that the focus should be on the long term, so younger generations can prepare for changes that must eventually be made. He also notes that the longer we wait, the worse the longer-term problem gets:
Starting to chip away at this mountain of obligations doesn’t require immediate austerity. In fact, what often gets lost in the debate over whether to address long-term deficit reduction now is that the policy changes needed to fix the long-term problem need not have any immediate deleterious effect.
History and common sense tell us that those kinds of changes are likely to be more palatable if they are phased in very gradually. So waiting for the problems to become more acute is exactly the wrong approach.
Click here to read the full piece.
Despite a growing chorus of debt deniers, most economics continue to agree that putting in place a long-term plan to responsibly address our growing debt would help promote long-term economic growth and stability.
Today, the Fix the Debt campaign released a letter signed by 160 economists and thought leaders and sent to President Obama and House and Senate leadership. The letter called for a smart and gradual deficit reduction plan, that includes tax and entitlement reform. Signatories of the letter include former Chairmen of the Federal Reserve, former members of the President's Council of Economic Advisors, former directors of the Office of Management and Budget, former directors of the Congressional Budget Office, former Treasury secretaries, a number of academic economists and other experts in the field. They write:
Dear President Obama, Speaker Boehner, Majority Leader Reid, Democratic Leader Pelosi, and Republican Leader McConnell:
We are writing to urge you to continue the work of addressing our nation's economic challenges and our mounting debt burden.
Promoting an economic expansion that accelerates job creation, while at the same time addressing the long-term debt challenge, will require that we change our current approach to fiscal issues.
Rather than indiscriminate cuts to just one part of the budget, we need a smart and gradual debt reduction plan that will promote long-term growth and stability. By enacting a comprehensive plan now that reforms the tax code and addresses the largest drivers of our fiscal problems over the long term, policymakers could avoid the negative effects of abrupt cuts, sustain key investments in productive public programs, and simultaneously set a more sustainable trajectory for the nation’s debt—creating a virtuous cycle of growth and budgetary responsibility.
While the recent Budget Control Act and American Tax Relief Act represent progress, we believe there is a need for substantial further deficit reduction if the country is to remain economically strong. This is especially true over the long-run, where rising health care costs and changing demographics threaten to drive our national debt to unprecedented levels.
We encourage you, our nation’s leaders, to identify a combination of spending reductions and tax and entitlement reforms sufficient to put the national debt on a downward path relative to the size of our economy. With a well-designed deficit reduction package, we can reassure markets and employers, grow our middle class, and restore faith in our political system.
On the other hand, failing to act could very well jeopardize our economic prosperity and the future of key programs on which millions of Americans rely—both today and for generations to come.
While we may find differences of opinion about the specific policies that should be included in any plan, we all agree on the need for significant additional progress on this front.
Policymakers should enact a plan as soon as possible to improve our fiscal trajectory, grow the economy and put the debt on a more sustainable path.
The full letter and list of signers can be found here.
Update: blog updated at 3:55pm on 3/15/2013
Update: This post has been updated to incorporate new numbers for the Congressional Black Caucus budget.
Budget season is well underway as the House Republicans and Senate Democrats have both released their respective budgets. But two alternative budgets were also offered yesterday, one from the Congressional Black Caucus (CBC) and another from the Congressional Progressive Caucus (CPC). Both budgets rely more heavily on revenue than either the Ryan plan or the Murray budget, showing the substantial savings that could be achieved if lawmakers take up tax reform.
The Congressional Black Caucus Budget
CBC Chair Marcia Fudge (D-OH) has put forward a FY 2014 budget entitled, "Pro-Growth. Pro-People. Pro-America." The budget contains $2.8 trillion in net deficit reduction relative to current law and $3.3 trillion relative to the CRFB Realistic baseline, which would put debt on a downward path after the expiration of short-term stimulus spending. Debt would fall from 78.8 percent of GDP in 2014 to 66.2 percent of GDP in 2023.
The Congressional Black Caucus budget directs the Ways and Means Committee to find $2.7 trillion in additional revenues, providing a number of options for getting that amount (the options total $4.2 trillion combined). They include lowering the threshold for the tax cuts extended in the American Taxpayer Relief Act (ATRA) from $450K to $250K, taxing capital gains and dividends as ordinary income, and enacting a financial transactions tax. It would also cancel sequestration, enact a permanent "doc fix", and include $862 billion in jobs measures and long-term investments. Revenue would rise to 20.5 percent of GDP by 2023 in the CBC's budget, compared to 19.1 percent under current policy. Spending would fall to 22.3 percent of GDP by 2023 under current policy, and would fall to the same level under the CBC's budget though with a great deal of short-term stimulus measures.
The Congressional Progressive Caucus Budget
The Congressional Progressive Caucus also put forward a FY 2014 alternative budget, the "Back to Work Budget." The budget contain $2.15 trillion in net savings, enough to put the debt on a downward path throughout the decade. Debt would rise in the first few years to 79.9 percent of GDP in 2013 and 84.6 percent in 2014 due to a number of up-front jobs measures, but fall steadily after 2014, reaching 68.7 percent in 2023.
The CPC's budget takes a revenue-heavy approach, raising $5.4 trillion in additional revenues relative to current law. Among its proposals are using the $250K threshold instead of $450K for the tax cuts in ATRA, having additional tax brackets for millionaires and billionaires up to a 49 percent top rate, capping the value of itemized deductions to 28 percent, enacting a carbon tax of $25 per ton of CO2, and eliminating various individual and corporate tax expenditures. The CPC's budget would have revenues at 21.8 percent in 2023, well above the 19.1 percent in current policy.
On the spending side, the budget would increase spending by $3 trillion over ten years, with $2.5 trillion in temporary jobs measures. The budget would remove the Budget Control Act caps for non-defense discretionary spending and increase it beyond that while maintaining defense spending at sequester levels. The budget would also institute a public option, allow pharmaceutical drug price negotiation for Medicare Part D, and reduce farm subsidies, among other proposals. Spending would end up at 23.0 percent of GDP in 2023, about the same as current policy.
Source: Congressional Black Caucus, Congressional Budget Caucus, House Budget Committee, Senate Budget Committee, CBO
Both these budgets would put debt on a downward path and reduce debt to below 70 percent by 2023. Obviously, both rely on a revenue-heavy approach, similar to how Congressman Ryan's budget relies on spending cuts. Still, we encourage members of Congress to continue to add to the debate by presenting their ideas for the budget.
Yesterday, we presented an overview of the Murray budget, describing the policies of the budget and showing savings relative to different baselines. In this blog, we will look closer at where the budget resolution would leave the federal government in terms of its size and the size of its deficits and debt.
Compared to current law, the Senate budget resolution would increase spending slightly in the short term due to the infrastructure spending and the cancellation of the sequester. In the following years, though, the budget would reduce spending through its health and discretionary reductions, with outlays running about a percentage point of GDP below current law by 2023. Meanwhile, revenue increases gradually above the baseline throughout the next ten years, reaching nearly 20 percent of GDP by 2023, 0.7 percentage points above current law.
|Budgetary Metrics in the Murray Budget Resolution (Percent of GDP)
Source: SBC, CBO
The graph below show spending and revenue in Murray's budget compared to the baseline that she uses (discussed more fully here).
Source: HBC, SBC, CBO
Although Senator Murray does not provide long-term estimates, a plan like the one she presented is likely to keep the debt stable relative to the economy through the mid-2020s and then begin to rise, though much more slowly than the debt would under our realistic baseline. As the House and Senate continue to debate their budgets, stay tuned for our continued analysis.
The Atlantic held its 2013 Economy Summit yesterday, featuring more than twenty-four speakers on tax reform, the future of entitlement programs, and the role of debt and deficits in current policymaking. Experts from a wide range of different perspectives discussed how to deal with our debt and boost the economic recovery, arguably the two greatest challenges for policymakers today.
The first panel featured speakers with differing perspectives on debt, deficits, and policy solutions to our economy's biggest issues. The panel included Craig Alexander from TD Bank, Robert Kuttner from the American Prospect, Paul McCulley of the Global Interdependence Center, Yves Smith, publisher of Naked Capitalism, and Maya MacGuineas, President of the Committee for a Responsible Federal Budget. Some panelists argued that dealing with the big drivers of the debt may be distracting attention from the other goal of creating new jobs in a fragile economy, while others argued that the two objectives were not mutually exclusive, if deficit reduction was done in the right way and on the right timeline. CRFB President Maya MacGuineas explained:
Passing sound fiscal policy would add something we don’t currently have: stability in the economy. Healthcare and Social Security are things that people plan for, and so if we continue to say ‘yes, we know these things need to change’, but then can’t give the specifics of what that change is, we will do more damage. It would be helpful to pass policies now, so that we have time to phase them in in a gradual way.
On the timing of deficit reduction, MacGuineas said: "We can’t destabilize an already weak recovery, but we also can’t short change the future. We think using a mid-term timeline, probably about a decade, for these policies to begin taking place, is probably the right way to think about this." Alexander echoed the sentiment that there may be ground in the middle, saying "you can’t live beyond your means forever and expect nothing to happen."
In a conversation with The Atlantic's Senior Business Editor Derek Thompson, Alice Rivlin emphasized that deficit reduction should focus on coming up with a plan for changes further down the road, so people can plan for them. She gave the example of Social Security’s insolvency:
Social Security will take a big hit in 2033, and for the people in their forties currently, 2033 is going to be when they retire. And they need to know that Social Security will be around and strong for them. We need to do this also to reassure ourselves and the world that we’re serious about our fiscal house, and secondly, these programs, which are really important, we need to put on strong footing.
Such a long-term plan could yield immediate benefits as well. Former Treasury Secretary, Robert Rubin claimed that phased-in deficit reduction enacted gradually could have a positive short-term effect, spurring job growth and investment, as a result of increased confidence in our fiscal outlook and ability to govern.
While political perspectives varied throughout the day, speakers at the Economy Summit commented widely that our current fiscal environment holds room for improvement in managing major areas of the budget, including the tax code and management of major entitlement programs. When asked about sequestration, many speakers also held the view that while the across-the-board cuts constitute poor deficit reduction policy, $85 billion in cuts is more favorable than nothing at all. But there is clearly much more we could be doing that would help both the economy and make our budget sustainable.
Although video of the event is not currently available, it should be up here soon.
Trying to determine the actual level of savings in budget proposals can be confusing, as there is no single agreed-upon set of baseline assumptions to follow. Both Congressman Ryan (R-WI) and Senator Murray (D-WA) use their own baselines from which to measure savings, which differ in a couple ways from current law or CRFB Realistic. While these differences do not change the actual numbers that their budgets arrive that, they can change the level of total savings and the relative balance between spending cuts and revenue increases that are claimed.
Congressman Ryan's baseline is similar to CBO's current law baseline, which assumes many expiring measures will be allowed to end, including the "doc fix" next year and the 2009 expansions of refundable credits in 2017, and the sequester will not be canceled. But Ryan would also assume that war spending and Hurricane Sandy relief are drawn down as planned rather than maintained at the same inflation-adjusted level in perpetuity, and he would not count these changes as savings.
Senator Murray's baseline is more similar to the CRFB Realistic baseline. Both baselines assumes that the sequester is waived, the "doc fix" is permanently extended without offsets, refundable credit expansions are extended, tax extenders are allowed to expire as scheduled, and Hurricane Sandy relief would be drawn down as planned rather than maintained at inflation-adjusted levels. Where Murray's budget differs from CRFB Realistic is that Murray assumes an even faster war drawdown and eliminates funding entirely for those accounts after 2015, instead of keeping a small amount of funding. The budget does not count this drawdown at all for savings, instead putting it in the baseline.
The table below shows the savings from each budget under the four different baselines as we understand them using the numbers available.
|Ryan and Murray Budgets Compared to Different Baselines (2014-2023, billions)|
|Current Law||CRFB Realistic||House Budget Baseline||Senate Budget Baseline|
|War and Sandy Drawdowns||$931||$1,230||$47||$346||$0||$299||-$299||$0|
|Health Care Law||$1,837||$0||$1,837||$0||$1,837||$0||$1,837||$0|
Source: HBC, SBC, CBO, CRFB calculations
In the end, where a budget leaves the debt-to-GDP ratio might be more important than total savings, which can easily be manipulated by different assumptions. We have set $2.4 trillion compared to CRFB Realistic as a target for deficit reduction, as that would put debt on a clear, downward path but the trajectory rather than the total is more important. A sustainable budget would have debt growing slower than the economy over the longer-term, and that is what people should look for in these budgets.