The Bottom Line
In her latest commentary on CNN Money, CRFB President Maya MacGuineas says that despite the rhetoric on reducing the deficit, some of the high-profile priorities of the new Congress may make the fiscal situation worse.
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.
On Friday, Austan Goolsbee, the Chairman of the President's Council of Economic Advisors, gave some preliminary remarks on the Administration's priorities for the coming year. He signaled that the focus will be on "recovery and [to] raise the growth rate" by spurring job creation. He also indicated that fiscal policy will be given increased attention in the coming months.
“The long-run fiscal challenges facing the country remain there. We have known that. And when [the President] comes out with his budget, I don’t think there will be any question that he’s ready to make medium- to long-run fiscal consolidation.”
We look forward to seeing concrete steps in the President's budget to stabilize the debt.
There has been an increasing amount of talk this week concerning calls for repeal of the health care reform legislation, as the 112th Congress convened for the first time this Wednesday. The House is scheduled to vote on a bill calling for a full repeal of the legislation this coming Wednesday.
CBO released a preliminary analysis of the costs of repealing the health reform legislation, estimating that a full repeal would add $230 billion to the deficit over the next ten years. Why is this number different than the $143 billion CBO estimated that health reform would reduce the deficit this decade? It's now a different 10-year outlook. CBO has estimated that health reform will save $143 billion over the 2011-2020 period. The ten-year outlook now looks at 2012-2021, increasing the amount of deficit reduction (or increasing the costs if repealed) after 2020 given that the savings are expected to grow over time.
Republicans have been downplaying CBO's estimates, however, pointing to an analysis from the House Budget Committee that estimates the health reform legislation will actually increase deficits by over $700 billion this decade. The House Budget Committee, including chairman Paul Ryan (R-WI), argues that the bill double counts $521 billion, does not incorporate $115 billion in estimated increases in discretionary resources, and ignores the costs of the doc fix.
We have commented on the validity of some of these issues and others budget gimmicks previously. The health reform legislation completely punted on addressing the costs of the doc fix, but that isn't quite the same as saying that repealing the bill actually costs less than how CBO scored based on something that neither the original bill nor the repeal legislation addresses. Secondly, the bill does authorize another $115 billion in discretionary spending authority, but Congress must pass appropriate funds for these items before any money is spent and to the extent funds are appropriated for items authorized in the health care bill discretionary spending will need to be reduced elsewhere to keep total discretionary spending within budget limits. In terms of double-counting, there are issues with lawmakers trying to use the savings from Medicare cuts for health subsidies while also claiming they've extended Medicare's solvency, but the fact remains that repealing those Medicare cuts will result in higher spending and higher deficits than would otherwise be the case. There is justification for excluding the costs of repealing the CLASS Act, the new long-term care insurance program which reduces the deficit in the near term as premiums are collected but increases long term deficits as benefits are paid out.
So is fully repealing the legislation the best idea for deficit reduction? Probably not. Instead of starting from scratch on health reform, which is still the number one driver of long-term spending and deficits, let's build on the cost-containment measures in the bill. This past July, we argued that one of the ways to help ensure that health reform actually reduces the deficit was for lawmakers to stick to their guns, maintaining the cost-saving measures in the bill for as long as possible. Voting for a repeal of the entire legislation right out of the gates is exactly the opposite approach.
Although the sustainability of health reform is certainly questionable over the longer-term as public and private reimbursement rates for health care continue to diverge, lawmakers should hold to cost-saving provisions as long as possible. Commenting on the sustainability, CBO notes that:
"current law now includes a number of policies that might be difficult to sustain over a long period of time. If those policies or other key aspects of the original legislation would have been subsequently modified or implemented incompletely, then the budgetary effects of repealing [the health-care law]...could be quite different."
Also troubling is the fact that the new House rules passed Wednesday (see our recent policy paper providing more analysis here) exempts the costs arising from any repeal of health reform from having to be paid for. We argue that:
'We also oppose the explicit exemption for the repeal of the health reform legislation; if CBO estimates that repeal of health care reform will increase spending or deficits, either in the short or long-term, those costs should be offset."
Today, President Obama named Gene Sterling as the new director of the National Economic Council. Mr. Sperling, who will succeed outgoing director Larry Summers, held this same position under President Clinton's term from 1997 to 2000 and acted as deputy director from 1993 to 1996. Most recently, Mr. Sperling was a senior adviser to Secretary of the Treasury Tim Geithner.
The Senate Budget Committee heard testimony today from Ben Bernanke, chairman of the Federal Reserve. Opening remarks were made by committee chairman Sen. Kent Conrad (D-ND) – a member of the President’s Fiscal Policy Commission – and new ranking member Sen. Jeff Sessions (R-AL). Senator Sessions echoed Senator Conrad’s points saying that our current fiscal path is “unsustainable.” He said the American people “want us to do something now” to address the deficit problem. And there was agreement among the two that a fiscal plan is needed sooner rather than later. This may signal a new bipartisan pairing to help guide deficit reduction measures through the closely divided Senate.
Chairman Bernanke spoke about the economy, the budget deficit, and the long-term debt problem. He began with cautious optimism, saying, “Overall, the pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010.” But, he went on to say, “At this rate of improvement, it could take four to five more years for the job market to normalize fully.” He said the Federal Reserve has the tools it needs to address the issue of economic growth, referring to the second round of quantitative easing it announced in November, as well as the tools for the Fed to unwind its commitments as growth rebounds.
The final portion of Bernanke’s prepared testimony focused on the federal deficit. He warned that:
“an important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal.”
This will require a concerted effort in the next few years to begin bringing revenues and outlays in line to stabilize our annual deficits. Under questioning from Senator Conrad, Chairman Bernanke said stabilizing our debt/GDP ratio should be our top priority.
Looking ahead to the overall debt picture, Bernanke called attention to the need for holistic reform. He stated:
“I hope that, in addressing our long-term fiscal challenges, the Congress will seek reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit but also to enhance the long-term growth potential of our economy--for example, by encouraging investment in physical and human capital, by promoting research and development, by providing necessary public infrastructure, and by reducing disincentives to work and to save.”
Senator Ron Wyden (D-OR) devoted much of his question time to the importance of fundamental tax reform in improving our fiscal situation. Bernanke agreed that the December tax cut deal should not be the long-term model for tax policy, and that reform is needed that lowers tax rates and deals with the tax exclusions, credits and breaks known as tax expenditures. Wyden is a sponsor of a major tax reform bill. See CRFB's suggestions for reforming tax expenditures here.
Bernanke also lauded the work of the White House Fiscal Commisison and other groups for highlighting the issue of mounting debt and offering ideas to combat it.
"Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation about our medium- and long-term fiscal situation. Although these various proposals differ on many details, each gives a sobering perspective on the size of the problem and offers some potential solutions."
See our table comparing the plans here. Senator Mark Warner (D-VA) noted that he is a part of a bipartisan goup of senators that plans to soon offer a debt reduction plan based on the commission report.
In concluding, Bernanke remarked:
“Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.”
Looks like Bernanke just reaffirmed his membership in the Announcement Effect Club. There are a growing number of federal agencies (including the Fed and CBO) and the countless organizations who keep noting that the longer we wait to reform federal spending and taxation, the more we put our economy in jeopardy and the harder it will make fiscal adjustment.
Under questioning over what could cause markets to cease giving the U.S. a pass regarding our mounting debt, Bernanke said that markets are watching for a demonstration of political will on the part of our leaders to tackle the debt. He warned that markets could turn quickly if they didn't see such will.
We commend Chairman Bernanke for using his position to encourage long-term fiscal sustainability, and we applaud senators Conrad and Sessions for hosting the hearing. Strengthening the economy and improving our fiscal outlook are two critical (and intertwined) issues facing Washington, and they both must be addressed.
To get a feel for the tough choices that will be required and to devise a plan of your own, check out our "Stabilize the Debt" simulator.
Defense Secretary Robert Gates announced today the specifics for how the Defense Department will reduce spending by $178 over the next five years compared to its 5-year defense plan released last year, above the original $100 billion target that Secretary Gates announced in June. The extra $78 billion in recommended savings is a welcome step from the Administration, and we hope they continue searching for savings in not only the Defense Department but throughout the federal budget.
The savings would be realized over the FY 2012-2016 period. The original $100 billion in savings will be identified through changes such as reducing service contractors by 10 percent a year for three years, freezing the number of certain command and senior civilian positions for a few years, considering consolidations of bases and facilities where appropriate, and consolidating the Department's IT systems to realize economies of scale, among other changes. See the full details here.
The additional $78 billion will stem from cuts to weapons systems and troop level changes. Identified cuts include the Marine Expeditionary Fighting Vehicle (a cut that has been embraced by several independent defense reports), the Slamraam missile, delayed production of the Marine F-35 jet, and small reductions in the size of the active duty members of the Army and Marine Corp starting in FY 2015.
|(Numbers in Billions)||Actual FY 2009||Actual FY 2010||FY 2011||FY 2012|
|DOD Base Budget (President's FY 2011 Budget)||$513||$531||$549||$566|
|DOD Base Budget (2010 CR)||$531 (first half of year)|
|DOD Base Budget (Revised Proposal)||$513||$531||>$531||$553|
Note: Base budget excludes costs of wars.
Secretary Gates also noted that he does not want to continue the rest of FY 2011 at FY 2010 levels, as under the current CR until it expires in March. Gates also stated in his speech that proposed FY 2012 spending levels are now $553 billion -- down $13 billion from last year's proposal for 2012 in the 2011 budget. But this $13 billion in savings will just be the beginning as savings build up on each other through 2016.
The additional $78 billion in cuts was absolutely a welcomed bit of news. However, DOD still intends to direct the $100 billion in savings from improved efficiencies toward other priorities within DOD instead of toward deficit reduction. While preventing topline defense spending from swelling in coming years is important, it is even more critical to actually reduce spending throughout the budget. Several independent groups and commissions -- including the Sustainable Defense Task Force (SDTF), the Fiscal Commission, and the Debt Reduction Task Force -- have called for defense cuts totaling in the hundreds of billions over the coming decade. Defense experts on the SDTF recommended nearly $1 trillion in defense cuts this decade "without compromising the essential security of the United States” and, for many recommended cuts, “without any arguable impact on our national security.”
Secretary Gates should be commended for identifying efficiencies and significant budgetary savings. There is growing consensus that defense spending should not be off the table in considering our debt reduction options. The savings targeted today will contribute significantly to the discussion.
The 112th Congress has moved quickly to signal a new focus on fiscal responsibility and attention to our ballooning national debt. As Congress convened this week the new leadership of the House of Representatives used some of its first actions to implement some of the changes they promised in the election in an attempt to convince voters that they are, quite literally, getting their fiscal house in order.
In their first move after new leaders were chosen Wednesday, the House adopted a number of changes to the rules which govern the body. Many of these new rules will directly impact the budget and appropriations process. We released a policy paper yesterday analyzing these changes. There are several positive steps, such as the long-term spending point of order, spending reduction accounts, and eliminating the Gephardt Rule. However, the focus solely on spending and not on deficit reduction is problematic.
Replacing the two‐ sided PAYGO rule with a one‐sided CUTGO rule will not only make it harder to offset legislation, but also exempt potentially budget‐busting tax cuts from any discipline...
We have a similar concern with the new budget reconciliation rules, which will no longer allow budget reconciliation to increase spending but will permit it to be used for tax cuts which increase the deficit. This is a step backward that would allow for a return to the process that was used to enact the tax cuts in 2001 and 2003 that continue to contribute to our fiscal problems...
Changes to statutory PAYGO (which differs from PAYGO rules both in substance and legal authority) also are disappointing. Although internal budget rules cannot change the PAYGO law directly, they are able to indirectly weaken the implementation of the law by allowing the Chairman of the Budget Committee to exclude the costs of certain policies from the cost estimates for statutory PAYGO.
Read the paper here for full analysis. Substantial reform of the budget process, along the lines recommended by the Peterson-Pew Commission on Budget Reform in the recent report, Getting Back in the Black, will be required.
Today, the second measure passed by the House took the first steps in reducing spending. Lawmakers voted overwhelmingly in a 410-13 vote to reduce House operating costs. The measure reduces the member's office allowance, staff salaries and expenses for leadership offices, and committee budgets each by 5 percent from 2010 levels. It reduces salaries and expenses for the House Appropriations Committeee by 9 percent. Republicans claim the changes will save an estimated $35 million this year.
While reducing the House’s operating costs will not make a significant dent in reducing the debt, it is a good symbolic step showing that legislators are willing to share in the sacrifies they will impose upon others as they embark upon substantial deficit reduction, such as plans to reduce the overall national budget back to 2008 levels.
The next piece of legislation for the House will be repeal of the Patient Protection and Affordable Care Act - the health care reform law that President Obama signed into law in March 2010. Repealing the law is a priority for Republicans. In response to moves to repeal the law, CBO Director Douglas Elmendorf sent a letter to Speaker of the House John Boehner (R-OH), saying in part, "we expect that repealing that legislation would increase budget deficits." The preliminary analysis from CBO estimates that repeal will add about $230 billion to the deficit over a ten year period.
The first actions on Capitol Hill leave little doubt that fiscal policy will be center stage in 2011. We will continue to track developments and examine how they will impact the fiscal outlook.
In its annual report to Congress Wednesday, the National Taxpayer Advocate stated unequivocally that "the most serious problem facing taxpayers - and the IRS - is the complexity of the Internal Revenue Code". The report goes on to list the sources of the tax code's complexity, the consequences of such complexity, and obstacles to tax-code simplification.
According to the report, the tax code's massive compliance burden is glaring evidence of the need for tax reform. The code's length, the constant changes made to it (4,428 in the past decade - an average of more than one a day), and the difficulty of complying with it correctly creates a serious lack of transparency. This leads to confusion, benefits only those who can afford expensive tax advice while burdening all others, and fosters cynicism among many who are forced to comply with it.
After pointing out abundant evidence of this lack of transparency and the unfairness of our tax code, the report asks the simple question: "Since there is general sentiment that the system is broken, why isn't it being fixed?" One potential explanation is, to quote the report:
There is a widespread belief that the influence of “special interests” is the biggest roadblock to comprehensive tax reform. There is no doubt that many provisions in the tax code benefit narrow groups of taxpayers, including several described above. But the dirty little secret is that the largest special interests are us – the vast majority of U.S. taxpayers. Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits (collectively known as “tax expenditures”).
The report lists the most expensive tax expenditures (e.g. exclusions for employee contributions to health care, exclusions for contributions to retirement savings, the mortgage interest deduction, the earned-income tax credit) and argues that collectively they benefit a large portion of taxpayers and promote generally desirable objectives, like home-ownership, charitable giving, health-care coverage, and saving for retirement.
The threat of losing these tax breaks raises widespread and immediate concern among the public, even though the loss could be accompanied by lower rates across the board. Compared to the perceived threat of losing valued tax breaks or credits, the general promise of lower rates seems "speculative and distant" to many people. Thus, the report stresses that taxpayers will need substantial assurance that lower rates will indeed accompany any loss in their tax breaks.
CRFB has been very vocal about the need for fundamental tax reform as a key part of efforts to put the country on a sustainable fiscal course. We need a tax system that is broader-based, simpler, and more efficient. Click here to read CRFB's paper on Tax Expenditures as part of our Let's Get Specific series.
TV stars have the Emmys, athletes have the ESPYs, now budget wonks have a major award to call their own.
Wednesday night was a big night for the fiscal policy crowd as the inaugural FI$CY Awards brought together DC A-listers like former Federal Reserve Chairman Alan Greenspan at Washington’s beautiful Newseum to honor a bipartisan group of policymakers who led on confronting our fiscal challenges last year. While the gala won’t be confused with the Oscars, it provided an opportunity for those battling in the budget trenches to celebrate the prominence of the issue and the hope that real action can occur this year.
Governor Mitch Daniels (R-IN), Senator Kent Conrad (D-ND), and Representative Paul Ryan (R-WI) were the night’s honorees. In presenting the award to Senator Conrad, CRFB President Maya MacGuineas stated that the awards are meant to recognize those who are willing to get specific about how to improve our fiscal outlook and work in a bipartisan way.
In their acceptance speeches the awardees discussed the importance of the issue and of acting soon. Conrad noted that everyone is for deficit reduction until you actually start doing it and that a lot of people still don’t think that tough decisions will be required, which is why bipartisan collaboration will be necessary. He praised the work of the Bowles-Simpson Fiscal Commission, of which he was a member, saying that it showed that long-term deficit reduction need not thwart economic recovery in the short term. He also mentioned the need for tax reform and that Social Security reform will be required to ensure its long-term solvency. Conrad also said that those who criticize the commission for threatening entitlements are themselves endangering the programs by not helping to ensure their sustainability.
Governor Daniels stressed that economic growth must complement fiscal discipline. He noted that he could support a tax system that generates more revenue, stating that he was “for almost anything that makes the math work” but that we must be careful not to constrain growth. Daniels also said that Americans will have the courage to support required actions if leaders have the courage to recommend them, noting that most Americans are now being more responsible with their own budgets.
Congressman Ryan said he hoped that someday the award would be irrelevant because the fiscal problems will be solved.
In a panel discussion after the awards were presented (remember this is a DC awards ceremony, instead of glitzy after parties we do panel discussions) budget and finance experts remarked on the financial landscape. John Burbank, founder and chief investment officer of Passport Capital LLC, imagined a challenging scenario where oil prices and interest rates rose. Combined with the aging of America, those circumstances could trigger a financial crisis. Former U.S. Comptroller General David Walker said we need reforms along the lines of those recommended by the Peterson-Pew Commission on Budget Reform. And Maya MacGuineas contended that the impending vote to raise the debt ceiling should spur action to devise a fiscal plan in advance.
The event and award highlight the importance of fiscal responsibility and the need for leadership. Here’s hoping we can celebrate some big achievements next year.
In the Pledge to America released this past fall, House Republicans called for "[rolling] back government spending to pre-stimulus, prebailout levels, saving us at least $100 billion in the first year alone and putting us on a path to balance the budget and pay down the debt."
That original estimate of $100 billion was based on 2011 projections as shown in the President's budget, since lawmakers failed to pass a budget resolution this year. Additionally, Congress has not passed any of the 12 appropriations bills needed to fund government this fiscal year, forcing lawmakers to rely on Continuing Resolutions (CRs) to provide temporary funding for discretionary programs at last year's levels. Since we're already several months into FY 2011 and the current CR is set to expire on March 4th, bringing discretionary spending levels back down to 2008 levels for the remainder of the fiscal year won't save as much as Republicans initially projected.
If House Repubicans succeed in enacting discretionary funding at the 2008 levels for the remainder of FY 2011, overall spending would fall roughly in between the 2008 and 2010 levels. Instead of saving about $100 billion when compared to the President's budget, savings would total somewhere around $60 billion compared to the President's budget. The numbers in the table below are rough estimates and are in line with press accounts reporting that savings would now be down to "perhaps $50 or $60 billion".
It appears that since Republicans are sticking to the $1,029 billion level threshold from 2008 instead of the $100 billion in savings relative to the President's budget, they will also work to keep discretionary spending at the FY 2008 levels for FY 2012 as well. Here's a quote from a congressional Appropriations aide:
"The goal of FY11 is to get as close as we can to FY08 spending, given that the year is half done. Going forward, we are headed to FY08 in the FY12 spending bills."
| FY 2011 Spending Level
||Budget Authority (Billions)||Savings (compared to President's proposed FY2011 level)||Savings (compared to FY2011 CR level)|
|2008 Discretionary Level (House Republican Target)||$1,029||$101||$69|
|2010 Discretionary Level for 1st Half of Year, followed by 2008 Discretionary Level for Remaining Months||$1,064||$66||$34|
|2010 Discretionary Level (CR Level)||$1,098||$32||$0|
|Proposed 2011 Level in President's Budget||$1,130||$0||-$32|
Note: Estimates in the table for budget authority and savings are rough approximations, given other small adjustments to budget authority levels throughout the year and that spending over a year is not exactly linear.
Republicans could have either stuck with the "$100 billion in savings" approach, which House Republican leaders stated in their pledge and as recently as December, or they could have worked to enact spending levels for the remainder of FY2011 (after the CR expires) at 2008 levels. The first approach would have required cutting twice as much non-security discretionary spending in the second half of this year to achieve the $100 billion target. As stated above, they are embracing the second option.
Exercising spending constraint (including discretionary restraint) is absolutely critical for the long-term fiscal health of the country, and we applaud these efforts by House Republicans to seriously examine non-security spending. However, if we are to truly gain control of long-term spending, other areas of the budget must receive the same scrutiny, including defense spending and all mandatory spending programs; non-security spending constitutes only about 15 percent of all federal spending. With future deficits reaching as far as the eye can see, any serious attempt to control our massive debt will require close examination of other areas of the budget as well.
Last night, the House Republican conference approved a new set of rules -- making some big changes to several budgetary rules currently in place. The rules package will go before the full House of Representatives this afternoon, and is expected to be easily adopted.
Most notably, the new rules would replace the current "pay-as-you-go" requirements with a new "cut-as-you-go" approach. The new rules would not apply to new tax cuts and would require any new mandatory spending to be completely offset by spending cuts alone, as opposed to the current PAYGO rules that also allow tax increases to pay for increased spending. We examined some of these proposed rules in an earlier blog.
There are many more rule changes that will impact the budget over the coming year, so make sure to check back soon as CRFB will be providing a more in-depth analysis shortly.
Sen. Coburn stated that the United States will face "apocalyptic pain" if our fiscal house is not brought into order and predicted that the unemployment rate could reach 15-18 percent, devastating the middle class. He also said that all Americans must sacrifice in order to achieve true austerity, and remarked that "printing money" in order to pay for our debt is not the answer.
Qualifying Sen. Coburn for membership in the Announcement Effect Club was the following quote (when asked "How bleak do you think our financial and economic picture in this country will be over the next decade if we don't get serious about cutting spending?"):
I think you'll see a 15 to 18 percent unemployment rate. I think you will see an 8 to 9 percent decline in GDP. I think you'll see the middle class just destroyed if we don't do this. And the people that it will harm the most will be the poorest of the poor, because we'll print money to try to debase our currency and get out of it and what you will see is hyperinflation.So we don't have a lot of options other than living within our means and sending the signal that creates confidence that we can repay our debt and that we're not going to debase our currency to do it.
Sen. Coburn believes that printing money to increase inflation is the wrong way to go about repaying our debt, and we agree. The United States desperately needs a fiscal plan. Here's hoping that the upcoming Congress can come up with one.
Happy New Year, and what a year we've had!
In just the last 12 months, we've seen the passage of health care reform legislation that will begin to regain some budgetary control over health care spending, debate in Washington shift from whether or not our country even needs a fiscal plan to what policies should be in such a plan, and a great deficit reduction proposal from the Presidential Fiscal Commission -- a commission that garnered a bipartisan majority of 11 out of 18 possible votes of support for a realistic plan that would tackle our fiscal challenges head on.
Let's slow down for a second though. We still have no plan in place to control the projected tsunami of debt in coming decades. And we still have a budget process that's a complete mess (underscored by the lack of a budget or spending plan for the entire year!). Let's hope that 2011 is the year that changes everything and sets us back on a path to long-term prosperity.
To help show some of the key areas we've talked about over the past year, here is a word cloud (from Wordle) of The Bottom Line for the entire year of 2010. More commonly used words show up as larger elements in the picture. Go figure, "spending", "fiscal", "deficit", "cuts", "billions", and "tax" all stuck out as common mentions. Let's hope "Lawmakers enact a fiscal plan!" shows up in this coming year's Wordle. What? That's not a word? Well, maybe we can just hope for that being a headline then.
Lawmakers will have some difficult work ahead of them this year. But enacting a fiscal plan is absolutely critical for a healthy and productive future for our country. Let's get rolling...
Happy New Year – Washington is gearing up for what will be an interesting 2011. President Obama is back to work on Tuesday from his vacation and the new Congress, featuring a Republican majority in the House, will gavel into session on Wednesday. Key dates are taking shape – the White House will release its 2012 budget request on February 14 and the stopgap measure currently funding the government expires on March 4. Yet, what may be the most significant fiscal date is not quite clear – when Congress will have to vote on raising the debt ceiling. The federal government is expected to approach the limit by spring, and many lawmakers are threatening to refrain from approving an increase, which could result in a national default, unless action to reduce the debt is taken. So, 2011 is shaping up to be the year of key fiscal policy decisions. You can make your own budget decisions using CRFB’s “Stabilize the Debt” online budget simulator here.
New Year, New Rules – Decisions affecting fiscal policy will be made this week as the House will approve of its new rules when it first convenes on Wednesday. Many of the new rules proposed by the new Republican majority will affect budgeting. CRFB highlighted some of these proposed rules in a blog post, such as “Cut-go.” Proposed changes to budget reconciliation rules also deserve attention, as they will replace the rule prohibiting reconciliation instructions which increase the deficit with a prohibition on reconciliation instructions which increase spending, even if they are offset by a greater amount of revenue increases. This means that a tax cut that is not offset could be considered under reconciliation. That would represent a big step backward in budgetary controls and could result in increasing the deficit. The House GOP Conference will vote on the rules on Tuesday and the full House will vote the next day. While Congress is pondering how it does business, it should consider significant changes to the budget and appropriations process. The Peterson-Pew Commission on Budget Reform offered comprehensive recommendations in the recent report, Getting Back in the Black.
Daniels May Enter Presidential Lions Den – Mitch Daniels (R), Indiana Governor and OMB Director under George W. Bush, says his decision on whether to run for president in 2012 will hinge on whether any of the candidates deal “openly and honestly” with the “debt iceberg” that is approaching. Daniels will be one the honorees on Wednesday evening at the inaugural FI$CY Awards, along with Senate Budget Committee Chairman Kent Conrad (D-ND) and incoming House Budget Committee Chairman Paul Ryan (R-WI). CRFB serves on the Awards Committee. More info on the big event can be found here.
Incoming House Republicans set to take control of the House of Representatives next month have proposed new rules for the 112th Congress. The House GOP Conference will vote on the rules on January 4 and may amend them. They will be formally approved by the House when it convenes on January 5.
Several proposed rules will have a significant impact on budget and fiscal matters.
- An elimination of the so-called "Gephardt Rule". This would remove the rule which allowed the House to automatically pass a debt limit increase upon adoption of a conference report on the budget. Now, in order to increase the debt limit, the House would have to vote for it specifically.
- A new rule dubbed "Cut-go" will require any new mandatory spending to be offset with spending cuts elsewhere. Unlike the "Pay-go" rule it will replace, increases in taxes will not be allowed to offset new spending and tax reductions will be exempt from this provision.
- In each appropriations bill a "spending reduction account" will be created. The intent is to create a "lockbox" in which any spending in the bill that is cut through the amendments process will go towards deficit reduction, and not to offset new spending elsewhere.
- In addition to the traditional 1, 5 and 10-year budget projections for legislation, projections will be required for four additional 10-year budget windows and any bill that increases mandatory spending by more than $5 billion within any of those windows cannot be considered.
- A bill to reduce the House of Representatives' operating costs will be brought to the floor on January 6th.
Eliminating the Gephardt Rule shortcut and forcing an on-the-record vote on increasing the debt limit will compel members of the House to be accountable for what will be a very contentious vote when the time comes next year. Hopefully, this will motivate lawmakers to agree on a fiscal plan in advance of that point in order to make the vote more palatable.
The Cut-go rule is really a weakening of Pay-go. Taxes should absolutely not be left out of the equation, an omission that encourages the use of tax expenditures and the proliferation of back-door spending through manipulation of the tax code. We would be better off with a two-sided Pay-go that does not contain the enormous loopholes in the present version, and treats spending and revenues more symmetrically. History has shown that Pay-go coupled with discretionary spending caps is very effective in promoting fiscal discipline.
CRFB supports requiring longer-term projections of the budgetary impact of legislation. While it may be difficult to estimate 40-year costs with anything close to complete accuracy, it will prevent legislation with huge costs in later years from slipping through without the long-term costs being accounted for.
Finally, reducing operations costs in Congress is a good symbolic step. While it won't make much of a dent in the deficit, it will show Americans that Washington is willing to put its money where its mouth is regarding fiscal responsibility.
In general, the focus on promoting fiscal discipline in House rules is welcome--though the backward step to Cut-go is problematic. However, no rule will be effective if not enforced. In the past, fiscal rules have been routinely waived when they conflicted with legislative expediency. Any new rules must come with a commitment from leadership to enforce them.
And while Congress is considering changes in how it does business, at the top of the list must be reforming the dysfunctional budget and appropriations process. The drama over stopgap funding measures and the complete lack of a budget or any spending bills this year underscores the need for fundamental change. CRFB urges a complete reform of the system and hopes that all policymakers consider the recommendations in the Peterson-Pew Commission's most recent report, Getting Back in the Black.
With the holiday season in full force, the White House made some news in announcing on Twitter that the President will focus on the federal budget and national debt in his State of the Union speech in January.
The news is welcome in light of the recent report of the Fiscal Commission that lays out the dire fiscal situation and the tax cut deal which will add significantly to the deficit. The State of the Union provides an excellent venue for President Obama to advance the needed adult conversation and offer solid ideas to avoid a fiscal catastrophe. The President will have to lead on this issue and the State of the Union, along with the release of his budget proposal in February, will offer the opportunity to set the tone in confronting our fiscal challenges.
As underscored by our handy comparison chart, there are plenty of ideas out there for stabilizing our debt. Additionally, there is growing support in Congress for substantive action, as underscored by the lawmakers who voted to approve the Fiscal Commission report and the bipartisan group lead by Senators Saxby Chambliss (R-GA) and Mark Warner (D-VA) that has pledged to make our deficit a priority.
While the tax deal was a lump of coal for our fiscal outlook, the prospect of President Obama leading on this issue and being supported by a bipartisan core in Congress is a nice gift that gives us hope for 2011.
P.S. If you are looking for some family fun over the holidays and you've had enough Yahtzee, try our "Stabilize the Debt" online budget simulator at http://crfb.org/stabilizethedebt/.
The Treasury Department released Tuesday its annual Financial Report of the U.S Government. The report highlights the nation's budget deficit, net operating costs, debt projections, and all government liabilities on an accrual accounting basis. To sum it up, the report shows us how big of a hole we're truly in.
While the President's Budget describes how government plans to spend public funds and tax over the coming years -- comparing receipts with outlays on a cash basis -- the Financial Report describes the net cost of government operations using accrual accounting methods, which show costs as they arise and not just when they come due. Furthermore, this report shows how large our future liabilities are and how much we will owe when it all comes due.
The Financial Report also includes details of what future government liabilities will look like. This mainly stems from Social Security and Medicare. Using accrual accounting methods, the reports shows the present value of projected revenues and expenditures of benefits from social insurance programs over the next 75 years. Comparing this to government assets -- including cash and monetary assets, accounts receivable, loans receivable, taxes receivable, property, etc. -- our financial future looks quite bleak on its present course.
Presenting complementary snapshots of the current fiscal standing of the federal government are the deficit and net operating costs. Net operating costs show not only what the federal government does owe (the deficit), but also what it will owe, accounting for changes in how much we will owe to benefit and retirement funds as well as any "anticipated future investments" in agencies such as the GSEs (mainly Fannie Mae and Freddie Mac). As can be seen, the net operating cost of the government in 2010 skyrocketed, whereas the deficit actually fell.
Using accrual accounting methods, the report shows the present value of projected revenues and expenditures of benefits from social insurance programs over the next 75 years. Comparing our assets held to our current and future liabilities (debt held by the public and other liabilities) paints a grim picture.
|U.S. Government Assets and Liabilities (billions)|
|FY 2010||FY 2009||FY 2000|
|Debt Held by the Public||$9,060.0||$7,582.7||
|Net Liabilities of Social Security||$7,947||$7,685||$3,945|
|Net Liabilities of Medicare^||$22,910||$38,129||$9,093|
|Total Social Insurance Liabilities||$30,857||$45,814||$13,038|
|Total Net Liabilities||$44,329.8||$57,269.9||$18,884.1|
*Includes liabilities of federal employee benefits, veterans benefits, and other liabilities.
^Includes liabilities for all Medicare programs, in addition to Railroad Retirement benefits.
Our financial outlook has drastically deteriorated since 2000. But we see that things have improved since last year, to which the report almost entirely attributes to lower projected Medicare spending and higher revenues as a result of the health care reform legislation. However, the report notes (as we and many others have also called attention to) that there is great uncertainty whether all of the cost-containment provisions in the legislation will fully materialize. The report notes that under the health reform package, excess cost growth (or the rate at which health care costs grow faster than the overall economy) is "essentially zero because of the productivity adjustments to [Medicare] payment rates." At some point, the divergence between public payments to doctors and private reimbursements would likely become unsustainable.
This report is certainly no Christmas gift. Just like last year's report, Social Security's and Medicare's unfunded liabilities still remain staggering and public debt continues to rise. How many more wake up calls do we need? Our federal finances are in tatters. With $44 trillion in unfunded liabilities ahead of us, lawmakers must see this report as another urgent call to reform our federal finances. If we fail to get our finances in order, then our creditors will force changes on us--and that's never a fun thing to go through.
Once again, CRFB calls upon policymakers to address our fiscal challenges and tackle them head on. There is only so much time that our creditors will give us to keep kicking the can down the road on fiscal reform. Luckily, we've got a group of lawmakers starting to take these warnings seriously.
On Tuesday the Senate passed a Continuing Resolution (CR) keeping the federal government funded until March 4; the House is expected to pass it later in the day. This bill maintains discretionary funding for FY2011 at FY 2010 levels until March 4th--setting up yet another budget fight in a few short months. The total cost of the bill is $250 billion.
With government funding ending at midnight tonight, this CR was vital, but underscores how absurd the current budget process is. Through nearly half of the fiscal year, Congress has passed no appropriations bills and the government will continue to be funded at last year's levels. Clearly, the process needs some long-due reform. The Peterson-Pew Commission on Budget Reform gives policymakers a series of sound reform options in its recent report, Getting Back in the Black. The current process once again has failed lawmakers and the American public and is inadequate to most effectively enable lawmakers to tackle our long-term budget challenges.
Taking up where the Fiscal Commission left off, the two Senators—along in all likelihood with a number of their colleagues—will continue the national discussion about how to get the national deficit and debt under control before the unappealing scenario where credit markets force us to.
The Commission recommendations received 11 votes of support out of the 18 Commission members--a majority but not the supermajority of 14 votes needed to send the plan directly to Congress for an up or down vote. Senators Warner and Chambliss have praised the Commission's members, including their Senate colleagues Senators Coburn, Durbin, Crapo, Conrad, and Gregg for their courage and hard work in forging a consensus among 11 of the members. In following their lead, Senator Chambliss even noted the other day on the Senate floor that:
"While these recommendations may not reflect the beliefs of all the members of this body, I commend the commission’s members for having the courage and the open minds to tackle the problem. At very least, their recommendations can serve as a starting point for a serious debate on how we can ensure a better life for our children and our grandchildren."
Already, the two Senate leaders have organized a Senate floor anti-debt-fest. Now, they are really moving the ball forward with this announcement. With so little to cheer about in past years on the fiscal front, we are thrilled the Senators Chambliss, Warner, and many of their colleagues will be demonstrating the kind of leadership necessary to change course. Our list of fiscal heroes seems to be growing.
Over the past few weeks, several other think tanks, lawmakers, and experts have proposed their own plans for deficit reduction. We've update our comparison table of all the deficit reduction plans to give people a better sense of all the existing plans. The table is a great resource for comparing how each plan would strengthen Social Security's solvency or reform other spending and revenue programs, including domestic discretionary programs, defense, health care spending, other mandatory programs, tax expenditures, tax reform, and budget process reform. We've also included projections for how much several of the plans would reduce our debt-GDP ratio, as estimated by each plan where applicable.
Recent additions include the Center for American Progress 50/50 plan, Andy Stern's plan, the Americans for Tax Reform's Plan, and the "Our Fiscal Security" project's plan (a plan supported by the Economic Policy Institute, Demos, and the Century Foundation).
CRFB will continue to update the table as additional plans are proposed.