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.

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.

^{Source: CBO}

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.

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)

March 27

• Current continuing resolution (CR) funding the federal government expires.

March 28

• Bureau of Economic Analysis releases third estimate of 2012 4th quarter and annual GDP.

April 5

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 employment data.

April 15

• 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.

April 16

• Dept. of Labor's Bureau of Labor Statistics releases March 2013 Consumer Price Index data.

April 26

• Bureau of Economic Analysis releases advance estimate of 2013 1st quarter GDP.

May 3

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 employment data.

May 16

• Dept. of Labor's Bureau of Labor Statistics releases April 2013 Consumer Price Index data.

May 19

• 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.

May 30

• Bureau of Economic Analysis releases second estimate of 2013 1st quarter GDP.

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.

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. 

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.

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.

^{Source: MedPAC}

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.

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

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.

^{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.