The Bottom Line

April 1, 2015

With the Murray-Ryan deal expiring at the end of September, the sequester will once again be a hot topic as lawmakers will be prompted to deal with the discretionary spending reductions it prescribes. Despite the House and Senate being controlled by the same party, their budgets take very different approaches to the sequester. The two budgets have large differences in the amount of defense and non-defense discretionary spending and slight differences in their approach to war spending. Although both only get a small portion of their deficit reduction from discretionary spending, the two budgets get there in different ways. In addition, the Senate budget provides a more realistic method for a future sequester relief deal, by establishing a deficit-neutral reserve fund for that purpose.

Both budgets abide by the sequester levels for non-war spending for FY 2016, although they would also effectively raise defense spending by creating a $38 billion slush fund in war spending so that their total defense requests equal the President's budget, which instead provides sequester relief through the normal channel, offset with other savings. After 2016, the budgets would remove the slush fund and make changes to the cap themselves.


 Changes in Discretionary Spending in the House and Senate Budgets (billions)
 Budget 2016 2017
2018
2019 2020 2021
2022
2023
2024
2025
2016-2025
House NDD $0 -$44 -$63 -$71 -$79 -$84 -$92 -$100 -$108 -$117 -$759
Defense $0 +$38 +$50 +$49 +$47 +$45 +$43 +$41 +$38 +$36 +$387
 
Senate NDD $0 -$9 -$12 -$15 -$17 -$19 -$28 -$37 -$46 -$55 -$236
Defense $0 $0 $0 $0 $0 $0 -$14 -$14 -$14 -$14 -$56

March 31, 2015

Now that the Senate and House have passed their respective budget resolutions, a budget conference committee is right around the corner. One aspect of the competing resolutions that will have to be dealt with are provisions related to the budget process. Both budgets include provisions to address issues with the budget process that our Better Budget Process Initiative (BBPI) has identified. While we have previously written on both budgets' treatments of reconciliation instructions, below we’ll go further and highlight some of the other budget process provisions. 

The House

The House’s resolution embraces both the dynamic scoring rules put into place at the start of the 114th Congress as well as the rules prohibiting a general fund transfer from the Social Security Old Age and Survivors' Insurance (OASI) trust fund to the Disability Insurance (DI) trust fund that does not also improve overall solvency. In addition, the House’s budget scores general fund transfers to the Highway Trust Fund as new spending. This is significant given the impending insolvency of the Highway Trust Fund on May 31, one of the upcoming fiscal speed bumps.

We have advocated that the budget process should better focus on the long term. The House budget partially addresses this by including a long-term spending point of order.

The House budget also adds rules regarding so called fair-value estimates of government credit programs.  Specifically it provides for supplemental analysis from the Congressional Budget Office (CBO) at the request of the Chair or Ranking Member of the Budget Committee. Further, it allows the Chair of the Budget Committee to use this supplemental estimate as the official score for budget enforcement.

March 27, 2015
A Compilation of Doc Fix Offsets

We have spent much space on this blog highlighting the fact that temporary delays of the cuts dictated by Medicare's Sustainable Growth Rate (SGR) formula have almost always been offset (98% of the time since 2004), producing $165 billion in deficit reduction all told, almost entirely from health care programs.

And despite assertions to the contrary, these health savings shouldn’t be dismissed lightly. There have been numerous recommendations put forward by the Medicare Payment Advisory Commission (MedPAC), Health and Human Services' Office of the Inspector General (OIG), the Government Accountability Office (GAO), and others that likely would have been ignored but for the need to replace savings from the SGR.

MedPAC, for instance, has warned for years that Long-Term Care Hospitals (LTCHs) and Inpatient Rehabilitation Facilities (IRFs) are paid more than is necessary for many of the cases they handle. To offset the 10% cut dictated by the SGR in 2008, Congress adopted MedPAC recommendations to reduce payment updates for both IRFs and LTCHs, and also modified the prospective payment system for LTCHs. Then again in the 2013 “doc fix” bill, in line with recommendations under discussion by MedPAC at the time, Congress applied site-neutral payments for certain conditions treated in LTCHs.

The latest “doc fix” exemplifies this trend. The largest savings in the bill, from allowing the Department of Health and Human Services (HHS) to collect and use data on values of physician services to more accurately set Medicare payments, is a variant of a direct recommendation from MedPAC the last two years.

March 27, 2015

The bipartisan duo of Reps. John Delaney (D-MD) and Tom Cole (R-OK) have reprised a bill from last year to create a Social Security Commission. The bipartisan and bicameral commission would be required to come up with a plan to make Social Security solvent for 75 years.

The commission would involve 13 members, with 3 each appointed by the party leaders in the House and Senate and a Chair appointed by the President. It would have to report its recommendations within one year of its first meeting, and it would take 9 votes for the report to be sent to Congress. At that point, the legislation would get expedited consideration and an up-or-down vote in Congress.

Both Congressmen stressed the need to make changes to Social Security to avoid a large across-the-board cut in benefits when the program goes insolvent, currently projected to happen in 2033 according to the Social Security Trustees. Both also noted the need to move quickly, a smart move because the needed changes get larger the longer we wait.

March 26, 2015

The Senate is undergoing vote-a-rama, an annual event where the Senate considers hundreds of amendments before voting on the budget resolution. Of the dozens which are normally voted on, most are typically policy statements or messaging documents, rather than changes to the underlying numbers in the budget.

One of the few amendments that would actually lead to savings will be offered by Senator Mark Warner (D-VA). The amendment would restore $1.6 billion in funding on “program integrity” activities to reduce overpayments and fight fraud and abuse in Medicare, Medicaid, and disability programs. Program integrity funding is currently not included in either the House or Senate budgets, despite the fact that the Budget Control Act allows funding of up to $1.6 billion for these activities in FY 2016.

March 26, 2015

A big discussion has ensued in both the House and Senate about defense spending, and for the FY 2016 budget, that has meant how much to increase war spending (Overseas Contingency Operations) above the President's request which would effectively provide a defense slush fund. The original Senate budget had no slush fund at all, setting war spending at $58 billion and creating a point of order against exempting more than that amount from statutory spending caps that could only be overcome with 60 votes. However, an amendment in the committee markup increased war spending by $38 billion so that total defense plus war spending would match the President's budget, with the difference being that the President's budget provided $38 billion of sequester relief in 2016 and paid for it.

For background, the Budget Control Act established statutory caps on discretionary spending which have subsequently been reduced by sequestration, with any spending above the caps offset by an across-the-board cut in spending. For FY 2016, the limit on defense discretionary spending set by sequester is $523 billion, an increase of just $2 billion above the FY 2015 level. However, any spending designated as being for “Overseas Contingency Operations” is effectively exempt from those spending limits, creating temptation to use the OCO designation as a way to circumvent spending limits. The budget resolutions reported by the House and Senate legitimize this gimmick by setting defense spending levels that purport to comply with the spending limits under sequestration but blatantly create a slush fund by providing for substantially higher spending levels for OCO than the President requested.

The amendment offered in committee increased the amount of OCO spending in the Senate budget resolution, but it did not remove the point of order against the amount of spending that could be designated as OCO funding exempt from the statutory budget caps created by the Budget Control Act. This meant that an appropriations bill which used the $38 billion slush fund for "war spending" above the President's request could not exempt that extra spending from the BCA spending caps without 60 votes to get around the point of order. Otherwise, lawmakers would have to increase the normal defense spending caps by $38 billion and offset that spending or simply live within the current spending cap and $58 billion of war spending.

March 26, 2015

Despite official estimates tabbing the Medicare Sustainable Growth Rate (SGR) formula replacement bill at a cost of $141 billion this decade and implying it would add upwards of $500 billion to the debt over 20 years, lawmakers have taken to fuzzy math – or simply ignoring math altogether – in order to pretend that the bill is fiscally responsible.

Needless to say, applying that label requires some generous assumptions. Take, for example, a press release from the House Energy and Commerce Committee, which deserves a point-by-point refutation:

March 26, 2015

The Congressional Progressive Caucus (CPC) threw their hat into the budget ring last week with the release of their “People’s Budget”. This is the fifth time the CPC has released an alternative to the official House budget. The progressive budget offers a more liberal alternative than that proposed by either party or the President.

The CPC's budget proposes both higher taxes and greater spending in most areas. The budget calls for $7.4 trillion of savings via revenue and spending changes and $5.1 trillion in investments over ten years, resulting in $2.3 trillion of deficit reduction over the next decade, including interest savings. This deficit reduction would be sufficient to put debt on a downward path from 74 percent of GDP today to 66 percent of GDP in 2025. By contrast, CBO estimated that debt under the President's budget would be 73 percent, or about where it is today.

March 26, 2015

The House Ways & Means Committee on Wednesday approved the “Death Tax Repeal Act of 2015,” which would permanently repeal the estate tax that applies to inheritances over $5.43 million. Repealing this tax would cost almost $270 billion over the next ten years, according to the Joint Committee on Taxation, or about $320 billion with interest. Since the bill does not include any offsetting revenue increases or spending cuts, the cost would be added to the national debt.

The bill repeals the estate tax on inheritances and its close cousin – the generation-skipping transfer tax.  The top rate on the gift tax, imposed on gifts of over $14,000 per person, is reduced from 40 percent to 35 percent. Since 99.8 percent of estates are worth less than the exemption amount, the $270 billion tax break would go to the wealthiest 0.2 percent of estates.

March 26, 2015

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

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

March 25, 2015

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


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

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

March 25, 2015

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

 

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

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

But what are reconciliation instructions?

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

March 24, 2015
House to Vote on Two Competing Frameworks

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

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

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

March 24, 2015

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

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

March 23, 2015

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

March 20, 2015

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

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

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

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

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

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

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

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

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

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

March 18, 2015

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

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

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

March 18, 2015

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

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

 

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

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