The Bottom Line
The caps on discretionary spending were, of course, the concrete centerpiece of last week's budget deal. Considering the importance of the caps, CBO published a blog explaining how they work and what would happen to discretionary spending over the ten-year window.
First, they go into some background on the caps:
Because the Congress sets funding for discretionary programs each year, cutting spending through the regular appropriation process can ensure only short-term savings. An approach to try to ensure longer-term savings that has been used in the past and that is used again in the Budget Control Act of 2011 is to set overall limits on discretionary spending for future years.
Statutory caps on discretionary spending were imposed in 1990, and extended in 1993 and 1997, before expiring in 2002. Many observers agree that as long as a consensus remained to rein in budget deficits, the spending caps helped curb the growth of discretionary spending. Such spending increased at an average rate of only 1.6 percent a year during the 1990s. When budget deficits gave way to surpluses late in the decade, however, the caps were overridden in the appropriation process and later allowed to expire. Since 2001, discretionary spending has increased at an average annual rate of 8.2 percent.
Then, they detail specific information about how these caps would work:
The Budget Control Act of 2011 sets caps on appropriations of new discretionary budget authority that start at $1,043 billion in 2012 and $1,047 billion in 2013, and then grow by about 2 percent per year thereafter, reaching $1,234 billion in 2021. (Discretionary appropriations for 2011 totaled $1,067 billion; some provisions in the 2011 appropriation act affected mandatory spending, and the legislation was credited with $17 billion in reductions of budget authority for mandatory spending.) By 2021, under these caps, discretionary appropriations will be about 9 percent less than CBO’s baseline projections, which reflect an assumption that future appropriations will be the same as those provided for 2011 plus adjustments for inflation.
In addition, they show the discretionary spending path as a percentage of GDP compared to their March baseline. Discretionary spending would decline as a percentage of GDP under any CBO baseline, because it is assumed to grow with inflation which grows more slowly than GDP. However, under the new path, discretionary spending declines more quickly and more sharply, reaching levels comparable to the late 1990's.
Discretionary Spending (Percentage of GDP)
The discretionary caps are a good first step to reining in our budget deficits, but we need to do more on all aspects of the federal budget. Lawmakers need to continue the momentum that has been building for a comprehensive debt-reduction plan and must expand the goal of the special Joint Committee of twelve lawmakers to find more than $1.5 trillion in additional savings. We will need it if we are to succeed at reducing the debt as a share of the economy.
For more information about the discretionary spending caps in the Budget Control Act, check out CBO's full blog post here.
Downers – Markets were down last week on fears that the European debt crisis was spreading and that the U.S. recovery was slowing down. These losses added to those from the previous week as lawmakers went to the wire to approve a statutory debt limit increase to avoid a default. Then came word late Friday that Standard & Poor’s had downgraded U.S. credit for the first time ever because of concerns that the country is not adequately addressing its mounting national debt. The recent developments highlight the impact of fiscal policy on the economy. Will Washington now be up for creating a comprehensive fiscal plan that allays creditors’ fears by charting a clear path to reducing the debt, or will it continue to lay low?
S&P Lowers the Boom – In an unprecedented action, credit rating agency Standard & Poor’s has lowered the credit rating of the U.S. from the highest AAA rating to AA+. S&P said the downgrade was due to their opinion that “the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” S&P Managing Director John Chambers said that “the political gridlock in Washington leads us to conclude that policymakers don't have the ability to put the public finances of the U.S. on a sustainable footing.” He also said that the U.S. needs to stabilize its debt as a share of the economy and have it on a path to further decline to regain the AAA rating. Before the official announcement, the Treasury Department disputed the original numbers that S&P produced on the U.S. debt trajectory, with the firm changing its projections from the national debt reaching 93 percent of GDP to 85 percent in 2021. See the CRFB realistic baseline for our debt projections. In a statement, CRFB President Maya MacGuineas said the downgrade is “a heck of a wakeup call” and reiterated the need for a deficit reduction plan of at least $4 trillion.
Debt Ceiling Deal: Just Under the Wire and Way Below Expectations – On Tuesday, the last day the Treasury Department said it could stave off a national default without a debt limit increase, the Senate passed and the President signed legislation enacting a deal coupling a debt ceiling increase with deficit reduction. The total amount of deficit savings will depend on the results of a new bipartisan, bicameral Joint Select Committee on Deficit Reduction, which is charged with issuing recommendations to Congress that must be voted on without amendments by the end of the year. The Joint Committee is tasked with identifying $1.5 trillion in deficit reduction through 2021 in addition to the approximately $1 trillion is savings that will be achieved through spending caps over the next ten years. The $2.5 trillion total is far below the $4 trillion in deficit reduction that many economists and groups such as CRFB feel is necessary to put the country on a sustainable fiscal path. If the Joint Committee cannot agree on recommendations or if Congress does not approve of them, then automatic cuts from defense and domestic spending will be triggered. The Joint Committee will face intense scrutiny and pressure from interest groups to protect funding for favored programs and to possibly include policy riders not pertinent to budget policy because the Byrd Rule that normally bars such provisions will not apply to the recommendations produced by the Committee. The choices that congressional leaders soon will make as to who will sit on the Joint Committee (members must be named by August 16) will go a long ways in determining if the Committee will be able to come up with a broad plan with significant deficit reduction.
Appropriations Cannot Stay Below the Radar – The annual appropriations process had largely taken a back seat to the debt ceiling drama on Capitol Hill, with the House passing six of the twelve spending measures funding the federal government and the Senate passing just one. The new fiscal year begins on October 1 and all appropriations bills must be enacted by then or a continuing resolution agreed to in order to maintain government operations. The Senate has been hamstrung in its efforts because it never agreed on a budget resolution that set a top-line spending figure for the Appropriations Committee to work with. The spending caps set forth in the new debt limit deal do provide a guide for the Senate, but the spending limit specified by this year’s cap is below the top-line figure outlined by the budget resolution passed by the House earlier this year, which the House Appropriations Committee has been working from. When the House and Senate return from their current recess after Labor Day, they will have less than a month to complete all appropriations measures and reconcile their differences before the current fiscal year concludes at the end of September. Things are shaping up for potential stopgap measures and budget drama, a recurring theme in recent years as the budget and appropriations process has broken down. See the Peterson-Pew Commission on Budget Reform for some budget process reform ideas.
Congress Reaches New Lows – Congress is back home for its traditional August recess and according to recent polls, constituents won’t have many nice to say to their representatives. Surveys from CNN (84 percent) and the New York Times/CBS (82 percent) show that voter disapproval of Congress is higher than ever recorded before. These results come on the heels of the debt limit brinksmanship that brought the U.S. to the edge of default and the inability of legislators to address gaping federal budget deficits and national debt.
Presidential Campaign Starting Up in Earnest – With Congress away, focus is turning to the nascent 2012 presidential campaign. All the announced Republican candidates will participate in a debate in Iowa on Thursday and many will stay in the state with the first caucuses for the Ames Straw Poll on Saturday. Expect the debt limit deal, the S&P downgrade and ideas for addressing the debt while aiding the sluggish recovery to be high among the topics that the candidates must address.
Democrats Produce BBA Alternative – The debt limit deal also calls for both chambers of Congress to vote on a balanced budget amendment to the Constitution by the end of the year. Last week Senator Mark Udall (D-CO) introduced a version that will be the Senate Democrats’ preferred alternative to the proposal supported by Republicans. Unlike the Republican version, the Udall measure does not set a cap on federal spending as a percentage of GDP, nor does it require a supermajority vote to raise taxes. The Udall BBA does create a ‘lockbox’ protecting Social Security revenues and outlays from the balanced budget requirement and also prohibits Congress from providing income tax breaks to individuals earning over $1 million a year unless the budget is in surplus. See our Fiscal Toolbox that compares various budget process tools like balanced budget amendments.
Key Upcoming Dates
- Federal budget for July released by the Treasury Department.
- Iowa debate for 2012 Republican presidential candidates.
- Ames, Iowa straw poll for 2012 Republican presidential candidates.
- The Speaker of the House, House Minority Leader, Senate Majority Leader and Senate Minority Leader each must select three members to serve on the new Joint Select Committee on Deficit Reduction by this date.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.
- The Joint Committee must hold its first meeting by this date.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- Congressional committees must submit any recommendations to the new Joint Select Committee on Deficit Reduction by this time.
- The Joint Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Joint Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Joint Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Joint Committee by this date. No amendments are allowed.
In two recent commentaries, written for CNN and CNN Money, CRFB president Maya MacGuineas talks about S&P's recent downgrade of the U.S. credit rating and what it means for Washington going forward. (Click here for CRFB's reaction to the downgrade.)
In her commentary for CNN Money, MacGuineas lays out specifically what Washington must do to get our AAA credit rating back: pick a fiscal goal, put a multi-year plan in place, address the toughest areas of the budget, and enact real spending caps and triggers. She concludes:
If we do all of this, we'll win back the heart of Mr. AAA by the end of the year. I would bet my dwindling retirement account on it. If we don't, we will all pay a very steep price. And assuming we do get him back, we should never let him get away again.
Click here to read the full CNN Money commentary.
In her CNN commentary, MacGuineas writes that this unfortunate turn of events should urge Washington to refocus its efforts on "going big" and enacting a comprehensive fiscal reform package that would prevent future downgrades. She writes about the areas of the budget that must be reformed to meaningfully improve our fiscal outlook, like defense, Social Security, health care, and the tax code, and says:
Big deals are hard, but small deals are hard too. Might as well try to do something to solve as many problems as possible and hopefully bring more people to the table in support of going big. It would stave off the next downgrade.
Click here to read the full CNN commentary.
"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.
Yesterday, the Standard & Poor's rating agency downgraded the United States' long-term bond rating from AAA to AA+.
This downgrade is consistent with earlier warnings from the rating agency that a package closer to $4 trillion would be necessary, combined with the fact that the most recently enacted deficit reduction plan would be insufficient to even stabilize our debt. More fundamentally, S&P has expressed concern that Democrats and Republicans will not be able to agree to sufficient further deficit reduction -- particularly in the areas of revenue and major entitlement reforms. According to S&P
The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics... More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.
This morning, CRFB reacted with a press release. As it reads:
"This is a heck of a wake up call,” said Maya MacGuineas, President of the Committee for a Responsible Federal Budget. “It’s like when your alarm clock goes off too loud, and you can’t find the button to turn it off. We have been ignoring the slew of warnings from the major rating agencies and others from the IMF to the Fed, for way too long while failing to seriously address our debt challenges. Now we have this fiscal scarlet letter until we make the needed reforms to get our debt under control.”
“Between now and December policymakers will either be involved in a serious national discussion over how to bring our debt under control or else another round of theater and brinksmanship,” said MacGuineas. “We still have a real opportunity to enact serious entitlement changes, tax reform, and an economic growth strategy. But if we fail, I fear other ratingagencies will follow suit with S&P, with economically dangerous consequences.
Budget projections are a rather fickle thing, especially in the midst of great uncertainty about the strength of the economic recovery. By accident, CBO is providing a great demonstration of this fact in trying to get the numbers right for 2011.
In the January baseline, they projected that the deficit would jump from $1.29 trillion last year to $1.48 trillion this year, a new record over the $1.41 trillion shortfall recorded in 2009. It made sense, considering that there had been tax cuts beyond what was contained in the 2010 tax code (i.e. the payroll tax cut and the new estate tax parameters), and the economic outlook had not improved much.
However, they quickly revised their projection down to $1.40 trillion in their March baseline, attributing the $80 billion difference mostly to technical adjustments to other mandatory programs like TARP, loan programs, deposit insurance, and unemployment insurance. Still, the 2011 deficit was projected to be more than $100 billion higher than the 2010 deficit.
But, as CBO's Monthly Budget Review for July shows, even the March baseline may still be overstating this year's shortfall. According to the MBR, the deficit through July for this fiscal year is $1.1 trillion, which is actually $65 billion lower than the deficit through July of last year.
|Spending, Revenue, and Deficits Through July (billions)|
*These numbers are CBO projections ($1,399) and CRFB extrapolations ($1,210).
Much of this difference comes from individual income taxes. Revenue from the income tax has jumped almost 25 percent compared to last year, much higher than the 11 percent increase that CBO predicted in their earlier baselines. If that trend holds up, it would increase CBO's revenue count by almost $115 billion.
In fact, if you project forward full year numbers for 2011 based on the growth of spending and revenue from 2010 so far, it becomes apparent that this year's deficit may not only be below 2009's, but also 2010's shortfall. Using that extrapolation, the deficit would be "only" $1.21 trillion in 2011, $85 billion lower than last year. Of course, this number is dependent on those overall budget trends holding up.
Make no mistake -- the deficit for this year will be very large, either the second or third highest deficit in history. But, based on the way it's looking right now, don't be surprised if the final 2011 deficit comes in a bit lower than CBO originally predicted. Then again, it's also a statement on our fiscal policy when a $1.2 trillion deficit is good news.
CBO's latest Social Security projections bring no surprises to anyone familiar with the state of the program's finances. CBO projects the program to face a shortfall in the 2030s, with permanent cash flow deficits.
CBO is predicting that the Social Security Trust Fund will be exhausted in 2038 (two years later than the Social Security Administration projects), at which time beneficiaries would face a 19 percent benefit cut (slightly smaller than the cut SSA projects). The 75-year actuarial deficit is pegged at 1.58 percent of taxable payroll under the extended baseline and 2.00 percent under the Alternative Fiscal Scenario; the difference is accounted for by lower revenue from taxation of Social Security benefits due to the tax cuts. In both scenarios, CBO's projection of the shortfall is lower than the SSA projection (2.22 percent of taxable payroll under current law), mostly due to higher revenue under CBO's projections.
Still, even with CBO's slightly rosier outlook, Social Security still faces a huge shortfall. The graph below shows the growing disparity between Social Security revenue and outlays as a percent of GDP, according to CBO's projections.
Whether you look at CBO or SSA, the message is clear year after year: we need to reform Social Security to make it solvent. Beneficiaries face either a 19 percent cut in 2038 under CBO projections or a 23 percent cut in 2036 under SSA's if we do not act to shore up the system's finances. The only other option would be for us to shovel large amounts of general revenue into the Social Security system to keep it going at full strength. Neither of these scenarios is optimal and the sooner we begin implementing reforms, the slower those reforms can be phased in, allowing retirees to better prepare for changes in the system. With the state of policy as it is, the joint committee may be our last best chance to enact real reform that can be phased in over time. We continue to hope that this committee will exceed its mandate and implement a comprehensive reform plan that addresses the entire budget and puts us on a sound fiscal path.
The main savings feature that the debt deal (the Budget Control Act) contained--outside of the joint committee--is the discretionary spending caps. With that in mind, OMB director Jack Lew took to the OMBlog today to explain the distribution of those cuts between defense and non-defense spending (or security and non-security spending if you'd prefer).
Although the Budget Control Act only includes specific security and non-security spending caps for two years, projecting those caps to grow at the same rate over the remaining eight years of the budget window can give you ten year savings. So, how much would we save on the security/defense side?
The agreement just signed into law would achieve slightly more security savings than the President first proposed in April. Under baseline estimates, it would cut approximately $420 billion over 10 years. Assuming roughly proportional cuts, we project that of that $420 billion, $350 billion would be from the budget category of defense, and approximately $330 billion of that would be specifically from the Department of Defense. In sum, this agreement would be consistent with the President’s goal for security and Department of Defense savings as laid out in his fiscal framework in April.
Compared to the President's FY 2012 budget, the projected caps would save about $600 billion in security spending or $500 billion in defense spending, according to Lew. Of course, these numbers come with the disclaimer that none of these savings are set in stone, since after 2013, they will be determined annually by future lawmakers.
That isn't the end of the story, however. If the joint committee fails or comes up with less than $1.2 trillion in savings, then defense will have to make up half the difference. Defense Secretary Leon Panetta already has warned against the across-the-board cuts contained in the trigger, so it is no surprise that Lew came to the same conclusion.
Make no mistake: the sequester is not meant to be policy. Rather, it is meant to be an unpalatable option that all parties want to avoid. The Administration views these cuts in that way, and we imagine that both parties in Congress would as well.
We agree, but we also feel that there may be more room to smartly cut defense spending. The Sustainable Defense Task Force found close to $1 trilllion in defense savings last year and the Fiscal Commission cut about $900 billion in security savings in its plan. A closer look at defense spending, along with much needed changes to entitlements and the tax code, should be a part of a big deficit reduction plan, one that goes beyond the joint committee's mandate for savings.
The debt deal signed into law by President Obama on Tuesday has provoked all kinds of reactions from the media, the public, and lawmakers (click here for CRFB's reaction). Given the importance of the deal and the fact that CRFB's board is full of leading budget experts, it's no surprise that many of our board members have been called on to express their views about the deal and what lies ahead. While our "My View" blog series documents publications and other work from members of our board, so many have offered valuable insight that we thought it deserved a separate blog.
While every member of our board offers a different perspective, the consensus among CRFB board members seems to be that though the debt deal made some progress in the right direction, its not nearly enough to significantly improve our fiscal outlook and the truly difficult decisions still lie ahead.
Former fiscal commission co-chair Alan Simpson called the deal a “timid baby step” in a CNN op-ed on Wednesday, and urged the members of the special committee tasked with finding an additional $1.5 trillion in deficit reduction by November to address the problem in a comprehensive and bipartisan matter. He continued:
If the members of this committee are serious, they will look at the work of the Fiscal Commission that Erskine Bowles and I co-chaired, and they will look at the work of the brave souls in the Senate Gang of Six. They need to look at all parts of the budget and leave no sacred cows out on the range. If they leave out Medicare, Social Security solvency, Medicaid, defense and spending in the tax code -- the biggest drivers of the debt -- it won't fix one damn thing.
Alice Rivlin echoed these sentiments, calling for a bipartisan and comprehensive "grand bargain" on future deficit reduction in an op-ed for The Hill co-authored with former Sen. Pete Domenici. The authors laid out three elements they say are essential in putting the U.S. back on a sustainable fiscal path: slowing the future growth of Medicare and Medicaid and ensuring the solvency of Social Security, comprehensively reforming the tax code, and capping discretionary spending.
NPR’s All Things Considered hosted CRFB president Maya MacGuineas, who talked about the "trigger" in the debt deal that would enact across-the-board spending cuts in the event that the special committee fails to find or agree on sufficient deficit reduction. She spoke about triggers used in past legislation, lessons we could learn from those experiences and how the trigger in today’s debt deal compares. (See here for more on triggers and other budget enforcement mechanisms.)
Maya also spoke with MSNBC's Andrea Mitchell this week, where she was joined by board member David Walker. Both said that the debt deal fails to address the areas of our budget that need reform the most, such as entitlement spending and revenue. Mr. Walker did say that he was "cautiously optimistic" that the special committee would be able to come up with $1.2 to $1.5 trillion in deficit reduction, though he doubted the committee would be able to make the tough choices regarding entitlement and tax reform.
David Stockman expressed a slightly pessimistic view of the deal and our fiscal outlook Tuesday on CNN. He said that the deal simply kicks the can down the road and that our fiscal situation is "very grim." He concluded that "we're heading down a very bad path if this continues." Let's hope the special committee proves all the skeptics wrong and is willing to make the difficult political choices necessary to avert a fiscal crisis.
Last night on The Colbert Report, David Leonhardt of The New York Times talked about the debt deal recently signed into law and why it's not enough to restore our nation's fiscal health or save our credit rating.
Host Stephen Colbert also had some interesting comments about the deal -- we particularly enjoyed his observation that "we made the hard choice to make the hard cuts later".
Click here for the video or watch below.
|The Colbert Report||Mon - Thurs 11:30pm / 10:30c|
|Saving America's Credit Rating - David Leonhardt|
Update: Howard Gleckman of Tax Policy Center has blogged on their paper over at TaxVox.
With the chaos of the debt ceiling now over, it's time to take a calm, relaxed look at some of the policies that the "special committee" or other future deficit-reduction efforts can use. Today, we will look at a new paper from the Tax Policy Center that examines a few options for limiting tax expenditures for high-income earners.
The three policies that TPC uses in their analysis are the Obama Administration's proposed limitation on itemized deductions, a new "effective minimum tax", and a percentage of income limitation on tax expenditures. All of these policies would raise significant amounts of revenue relative to either a current law (tax cuts expired) or current policy (tax cuts extended) baseline. Additionaly, the impact of these policies would be almost completely confined to the top quintile of taxpayers--and especially the top five percent.
The first policy is one that President Obama has proposed in each of his three budget proposals: limiting itemized deductions to 28 percent. Since taxpayers in the two brackets would face rates of either 33 percent and 35 percent (current policy) or 36 percent and 39.6 percent (current law), they would have the value of their deductions reduced by the difference between those rates and 28 percent. While the Administration's intent was to use this to raise taxes only on people making over $250,000, people making over roughly $215,000 would be affected under current law or current policy.
The second policy would create a new effective minimum tax whose purpose, like the similarly named Alternative Minimum Tax (AMT), would be to ensure that taxpayers pay at least a certain percentage of their income in taxes. These percentages would be 27 and 21 percent under current law and current policy, respectively. The new minimum tax would exempt people making under $250,000 (a much higher exemption than the AMT) and would phase in gradually for income between $250,000 and $500,000. As a side note, TPC made the rates 27 and 21 percent so that the minimum tax would raise a similar amount of revenue to the itemized deduction limitation.
The final policy TPC looked at is a two percent of income limitation on tax expenditures, a variant on an earlier proposal by CRFB President Maya MacGuineas, former CEA chair Martin Feldstein, and NBER economist Daniel Feenberg. The difference is that this limitation would only apply to people making over $250,000, phasing in gradually for income above that amount. Although this proposal would affect fewer taxpayers, it would hit people at the top more than the other policies and would raise more than twice as much revenue relative to current law.
The table below sums up the revenue impact of all three policies under both baselines.
|Revenue Impact of Limiting Tax Expenditures (billions)|
|Policy||Current Law (2012-2021)||Current Policy (2012-2021)|
|28 Percent Limitation||$288||$164|
|Effective Minimum Tax||$258||$169|
|Two Percent Limitation||$592||$520|
We have also reproduced TPC's current policy distributional analysis below. As you can see, the two percent of AGI limitation on tax expenditures is the most progressive, followed by the minimum tax and then the 28 percent limitation.
|Percent Change in Income Under Each Policy|
|Income Group||28 Percent Limitation||Effective Minimum Tax||Two Percent Limitation|
|Top 1 Percent||-0.6%||-1.8%||-2.6%|
|Top 0.1 Percent||-0.8%||-2.4%||-3.2%|
As a matter of preference, we would prefer to see a comprehensive tax reform approach that raises revenue. However, if doing so proves to be too difficult politically, these across-the-board tax expenditure cuts are another way to go. The limitations reduce the distortions that tax expenditures cause and make the tax code more progressive, while raising the revenue we need to reduce our deficits and debt.
In an op-ed in today's New York Times, CRFB board members and former fiscal commission co-chairs Erskine Bowles and Sen. Alan Simpson offered their take on the debt-ceiling deal that was enacted into law yesterday.
While Bowles and Simpson are pleased that the nation did not default and that the plan offers some deficit reduction, they note that it is merely a step forward, not a solution. They write that the U.S. needs at least $4 trillion in deficit reduction this decade in order to avoid a fiscal crisis and that the "big ticket" items--such as Medicare, Medicaid, Social Security and tax reform--must also be addressed. They continue:
To do all this, the new committee must be bipartisan and bold. It must resist the temptation to simply recommend the bare minimum necessary to avert the next crisis instead of truly dealing with our long-term fiscal problem. The leaders of Congress must appoint members who will come to the committee with a willingness to reach a principled compromise that puts national interests ahead of partisan ones.
We were co-chairmen of a similar bipartisan group on debt reduction last year, and titled our final report “The Moment of Truth.” Of all our prescriptions, the most pertinent today is the one alluded to in the title: we must act now. If our government cannot address these terribly tough issues at a time when the public’s attention is fully on them, when will we ever be able to?
The committee must begin its work immediately. We can reform our budget gradually without disrupting a very fragile economic recovery, but reform it we must.
Click here to read the full commentary.
"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.
In her latest CNN commentary, CRFB president Maya MacGuineas stresses that Washington must do better than the debt deal recently approved by Congress. She writes that the deal saves only about half of what is needed and momentum that was building toward a "grand bargain" was sqandered by lawmakers' unwillingness to compromise and make difficult political choices.
She concludes by saying that her hopes now lie with the 12-member "special committee" that will be tasked with finding further deficit-reduction by November of this year, writing:
I am still holding out hope that the new special committee will exceed expectations and exceed its mandate. If these 12 members really steep themselves in the risks of inaction, or doing too little, and run through the options for coming up with the needed $4 trillion to $5 trillion, perhaps they will break out of their taking-things-off-the-table mentality, and starting putting things back on.
...Granted partisanship, the upcoming election and outside interest groups may all work against this. But we can avoid fixing the real problems for only so long, so maybe, just maybe, we can make this deal real.
Click here to read the full commentary.
"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.
Update: President Obama has signed the deal into law.
Washington took the debt limit to the edge as the Senate voted today, 74-26, to enact the agreement reached late Sunday to increase the statutory debt ceiling while also reducing the federal budget deficit. The House approved the measure Monday on a 269-161 vote. President Obama will sign the legislation later today, the day the Treasury Department said the current debt limit will be reached.
The deal will increase the debt limit by up to $2.4 trillion in three increments through 2012. It will also reduce the deficit by a similar amount over the next decade through discretionary spending caps and a joint committee tasked with finding at least $1.2 trillion in deficit reduction that Congress must vote on in a fast-track process. A trigger of automatic spending cuts will kick in if deficit reduction does not materialize from the joint committee. Read the summary here.
Throughout the process CRFB called for an agreement that coupled a debt limit increase with substantial deficit reduction and recently reiterated the recommendation. Unfortunately, this deficit reduction package does not go far enough to improve the fiscal outlook for the U.S.
Attention will now turn to the joint committee, which must report by the end of the year. We hope the committee will go beyond expectations and produce a comprehensive plan that will stabilize the national debt in the medium term and put us on the path to lower it further in the longer term. The committee will have solid examples to follow in the form of plans from the Gang of Six, the White House Fiscal Commission and many others (compare all the plans here).
This is not the end, only the latest step. The fiscal challenge facing the country is illustrated in a recent CRFB PowerPoint presentation. Try your own hand at meeting the challenge with our Stabilize the Debt online budget simulator.
In today's Washington Post, several contributors offered their thoughts on the recent debt deal reached by leaders in Washington to raise the debt ceiling. Among the contributors were CRFB board members Erskine Bowles and Alan Simpson and CRFB president Maya MacGuineas.
Erskine Bowles and Alan Simpson wrote that while they are glad the federal government will avoid default, this deal is not enough to restore our fiscal health and should be regarded as nothing more than a first step. They also shared some of the lessons they learned as co-chairs of the President's bipartisan fiscal commission, saying:
If there is one lesson from our commission’s work that should stand as the best guide for the work of the new committee, it is this: The more we put on the table, and the bigger, more far-reaching and more comprehensive we made our plan, the more support we received from our members. The only way politicians can make painful choices is if they know the other side is making painful choices as well and if they know they are solving the whole problem at once, so they don’t have to come back and do it all again.
There is a reason we named our final report “The Moment of Truth.” It’s time to go big or go home.
Maya MacGuineas also expressed relief that the government will avoid default, but added that there isn't much else to be happy about. An opportunity to enact comprehensive fiscal reform along the lines of Bowles-Simpson or the Gang of Six was missed, she wrote, and the deal we ended up with isn't nearly strong enough.
She concluded on a hopeful note, however, saying:
But all hope is not lost. Let’s hope the members of the super-committee are lawmakers who have sincere interest in addressing our fiscal challenges and a willingness to work across the aisle. Markets and outside institutions such as the Fed, the International Monetary Fund and the credit rating agencies are likely to maintain the pressure to do something real. It is conceivable that this committee could go for the brass ring, exceeding its mandate and expectations. If it does, we still have a chance to fix our fiscal problems with a package that can preserve the key priorities of both parties: pro-growth tax policies and protection of public investments and those who depend on government programs. If the committee doesn’t, this task will only get harder over time.
Click here to read the full list of commentaries.
We have a deal (pending votes, of course). (UPDATE: CRFB has a press release on this deal here)
Last night, the leaders from both parties announced a deal to raise our debt limit and avoid economic calamity, combined with some significant deficit reduction. The deal is modeled after plans released by Senate Majority Leader Harry Reid and Speaker of the House John Boehner last week. The deal includes upfront savings that match those in the Boehner plan, along with a three-tranche increase in the debt limit and a process for a new Joint Congressional Committee to find more savings, backed up by a trigger of automatic spending cuts if savings are not realized. In total, the plan lays out a process by which the debt limit will be raised between $2.1 and $2.4 trillion and the deficit will be reduced by at least $2.1 trillion.
*We assumed that other mandatory and discretionary spending change at the same level as the Fiscal Commission's.
As for upfront savings, the deal calls for the exact same discretionary spending caps as under the Boehner plan, with the exception that in 2012 and 2013, the caps specify levels for Security and Non-Security (under the White House definition of the categories) as opposed to ranges for Defense and Non-Defense. The caps, according to the CBO score, would reduce outlays by $756 billion from 2012-2021. The plan also matches the program integrity efforts and changes to Pell Grants to pay for increased funding by eliminating in-school interest subsidies for student loans. Including interest savings, this puts the plan at $917 billion in savings, ala Boehner's plan.
The deal includes an immediate increase in the debt limit equal to $400 billion, which Treasury estimates will give it enough room to borrow through September. Following that, a $500 billion increase to the debt limit would be subject to a resolution of disapproval from the Congress, which would be subject to a Presidential Veto.
Lastly, the deal calls for a special joint congressional called the Joint Select Committee on Deficit Reduction of six Democrats and six Republicans charged with finding deficit reduction equal to $1.2-1.5 trillion, off of its own baseline, in order to achieve an additional $1.5 trillion debt ceiling increase. The committee is guaranteed a fast-tracked vote on its recommendations before December 23.
If the joint congressional committee either fails to come to an agreement on a plan of at least $1.2 trillion in savings, or if a sufficient plan that it agrees on fails to become law, there will be an across-the-board sequester composed of 50 percent defense spending and 50 percent domestic spending with Social Security and low-income programs exempt and limiting Medicare cuts to 2 percent of the cuts.
The sequestration mechanism, similar to the one contained in the Balanced Budget and Emergency Deficit Control Act (Gramm-Rudman-Hollings), would not go into effect until the start of 2013--which coincides with the expiration of the 2001/2003/2010 tax cuts. The White House as also indicated that they will use the tax cuts as a trigger to ensure that revenue comes out of the special committee.
If the committee does come up with a deal totaling between $1.2 and $1.5 trillion in deficit reduction, the debt ceiling is increased equal to that same amount. If the committee comes up with a deal less than $1.2 trillion, the difference will be made up with sequestrations. The debt ceiling will therefore be increased by a minimum of $2.1 trillion and a maximum of $2.4 trillion, regardless of whether the committee meets its minimum goal of $1.2 trillion or exceeds $1.5 trillion in savings.
A final provision of the deal would guarantee a vote in both Houses on a balanced budget amendment, which would be expected to fail in the Senate.
Although the legislation could serve as a useful first step toward reducing the deficit, it would be insufficient to bring the debt under control. Based on realistic assumptions, debt could still grow to between 76% and 80% of GDP by the end of the decade (see the graph above), even if the commitee is successful in enacting a full $1.5 trillion cuts.
The joint committee should therefore tool to enact a far more ambitious deficit reduction plan - preferably closer to $3 trillion - and must make sure it is addressing long-term entitlement growth and comprehensive tax reform.
Breakthrough? – There were tough negotiations. Deals were made. Big names were moved. It wasn’t just the MLB and NFL that saw frenetic action ahead of deadlines. The approaching August 2 debt limit deadline has had policymakers scurrying to reach an agreement as nervous voters and markets watch. Yet, unlike Donovan McNabb and Albert Haynesworth, the debt ceiling remains a presence in DC as the deadline nears. However, a resolution to the legislative gridlock appears in sight as leaders moved towards each other over the weekend and agreed to a deal late Sunday. Votes are expected today on legislating the agreement.
The Deal – The deal includes raising the debt limit by up to $2.4 trillion in increments, which should last through 2012; 10-year discretionary spending caps split between security and domestic spending that will save about $1 trillion; creating a joint congressional committee to identify an additional $1.5 trillion in deficit reduction to be enacted via a fast-track process by the end of the year; establishing an enforcement mechanism triggering spending cuts evenly split between domestic and defense spending if the joint committee process fails to produce deficit reduction; and requiring both chambers of Congress to vote on a balanced budget amendment to the Constitution by the end of the year. Read the White House fact sheet and see the full text of the legislation implementing the deal.
The Committee – The joint committee formed by the deal, dubbed a “super committee” by some and officially titled the Joint Select Committee on Deficit Reduction, will consist of 12 lawmakers evenly divided by party and chosen by congressional leaders. It will be tasked with recommending deficit reduction of at least $1.5 trillion over the next decade. Entitlement and tax reform could be included in the joint committee’s recommendations. Each committee of Congress can submit recommendations to the joint committee by October 14, 2011. The joint committee is to vote on detailed recommendations by November 23, 2011 and submit a report and legislative language with the recommendations, approved by a majority of its members, by December 2. Congress must then vote up or down on the recommendations by December 23, 2011. The joint committee will become a focal point for deficit hawks looking for a comprehensive fiscal plan and special interests seeking to defend favored spending and tax breaks.
The Votes – Congress is expected today to take up legislation enacting the deal. The House is expected to go first with a floor vote later today. Finding enough votes in the House appears to be the biggest hurdle to enacting the deal.
Plans, Slams and Jams – House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) pushed competing plans last week as each side slammed the other’s plan and the Senate accused the House of trying to jam through its preferred approach. However, for all the posturing, the two plans had a great deal in common (see here for a comparison of the numbers and here for a side-by-side of provisions). The trigger mechanism to enforce deficit reduction if a plan did not emerge from the joint committee or was rejected by Congress was one of the final sticking points among negotiators. CRFB offered ideas for triggers that could ensure significant savings such as across-the-board spending reductions. The debt ceiling has to be raised for the sake of the economy, but politicians cannot lose sight of the need to develop a long-term comprehensive fiscal plan, as CRFB reminded them. CRFB all along called for a deal that couples a debt limit increase with substantial deficit reduction. Specifically, we recommended a significant down payment and a credible process to produce further savings. However, the $2.5 trillion deficit reduction goal falls short of the $4-5 trillion CRFB called for. We hope that the joint committee goes above and beyond the minimum $1.5 trillion in deficit savings in order to stabilize the debt at a reasonable level over the medium term while putting the country on a course to further reduce the debt over the longer term.
Beige Book Cites Red Ink – The Federal Reserve last week released its report of current economic conditions based on anecdotal evidence. The report cited uncertainty over the national debt and the U.S. fiscal outlook as one of the factors contributing to slower growth. CRFB’s “Announcement Effect Club” highlights those who contend that developing a credible fiscal plan will help boost the economy not just in the long run, but also in the shorter term.
IMF Wants US Fiscal Reform ASAP – The International Monetary Fund (IMF) issued a report last week stating that it is urgent that the US raise the debt limit while agreeing on a medium-term deficit-reduction plan. The plan should include entitlement reform and revenue increases and must begin in fiscal year 2012. The sentiment was largely backed up by new IMF Managing Director Christine Lagarde, who said the US must raise the debt limit and also develop a credible fiscal plan to reduce the national debt.
Business Titans Weigh in on Tax Reform – At a Senate Finance Committee hearing last week on CEO perspectives on tax reform, the heads of Wal-Mart and Kimberly-Clark both testified that they would accept elimination of some tax breaks in exchange for lower corporate tax rates. That is essentially the Zero Plan for tax reform proposed by the Fiscal Commission, which reduces or eliminates tax expenditures in exchange for lower tax rates (see here for more tax expenditure reform ideas).
Fiscal Rules Examined – A hearing of the Joint Economic Committee last week looked at how fiscal rules could help improve the budget outlook. Budget process tools like spending caps, debt triggers and balanced budget amendments have received a great deal of attention lately as potential ways to put the country on a sustainable fiscal course. The Peterson-Pew Commission on Budget Reform has maintained that budget process reform can play a key role in reducing the deficit, offering a detailed blueprint in Getting Back in the Black -- though process is not a substitute for a comprehensive fiscal plan with specific deficit-reduction policies. The Commission also provided a Fiscal Toolbox summarizing and comparing various fiscal tools, which is a part of its one-stop budget process resource.
Key Upcoming Dates
- Treasury Secretary Geithner says that the U.S. will default on its obligations by August 2 if the statutory debt ceiling is not increased before then.
- Senate Finance Committee hearing on Medicare-Medicaid dual eligibles and lowering health care costs at 10 am.
- Fiscal Year 2012 begins for the federal government.
Update: CBO has just released its own comparison table of the Reid and Boehner plans, where it now breaks out the war and non-war interest savings under Reid's plan. This blog has been updated from its original posting to reflect the new numbers.
With the August 2 deadline approaching, Speaker Boehner's (R-OH) and Senate Majority Leader Reid's (D-NV) plans--or some variant--seem like the last ticket out of town. CBO has recently scored both plans (Boehner's and Reid's), showing that they save slightly less than the two had been claiming.
In this sense, neither leader should be accused of using a sleight of hand. The reason for the smaller savings is that they were unable to incorporate the effects of the final CR into the baseline they were measuring against. That alone knocks out about $200 billion of their savings from the discretionary spending caps.
Since the bills are easily comparable, we have presented the savings from sections of the bill side-by-side in the table below. Additionally, we have also separated out the savings that Reid gets from the war drawdown.
|Ten Year Savings Under Boehner and Reid Plans (billions)|
|Provision||Boehner Savings||Reid Savings|
|Discretionary Spending Caps||-$756||-$752|
|Cap Adjustments for Program Integrity||$15||$51|
|Subtotal, Discretionary Caps||-$741||-$701|
|Program Integrity Savings||-$16||-$18|
|Revenues (Program Integrity)*||$0||$43|
|Total Including War||-$917||-$2,194|
*Reid program integrity includes $14 billion above the baseline for IRS efforts aimed at increasing tax compliance. Savings from this score as increased revenues of $43 billion.
On an apples-to-apples basis in which you ignore war savings, the plans would save $917 billion (Boehner) or $927 billion (Reid).
(Note: The outlay caps were in the original Boehner plan. The revised plan does not include outlay caps, which increases the savings from the discretionary spending cap total by $46 billion. In the original Reid bill, language on tax compliance was unclear, causing CBO not to score an increase in revenue. The updated Reid plan fixed the language, yielding $43 billion in added revenue from the IRS program integrity efforts. The below analysis on the two problems was written in reference to the original plans.)
There are a couple of interesting things that those savings numbers show. First, CBO scores outlays in 2012 and 2013 as $44 billion lower in the Reid plan than in the Boehner plan, despite nearly identical budget authority totals (and actually $2 billion higher for Reid). That is what causes Reid's discretionary caps to score higher savings. Why? Because the Boehner plan has explicit outlay caps in 2012 and 2013 to accompany his caps on budget authority -- outlay caps which are higher than the levels CBO would project outlays to be for those years under just the budget authority caps. So by setting outlay caps on top of his budget authority caps (which one might think would reinforce savings), Boehner actually loses $44 billion in scored savings. The assumption CBO is likely making is that appropriators will hit the outlay caps, even if it means having a different mix of appropriations than they otherwise would have.
Second, Reid's plan includes $20 billion in increased outlays for program integrity efforts at the IRS for activities to improve tax compliance. In theory, this $20 billion would help the IRS increase collections by reducing the tax gap, but CBO hasn't included any increased revenue as savings. CBO writes that "even if the base amounts specified in the bill are appropriated, there is no assurance that the amounts available for enforcement activities would be at least equal to the amounts projected in CBO's baseline." This basically means the Reid bill doesn't have scored savings from increased tax enforcement because there is no assurance that the bill even includes increased tax enforcement. CBO does assert that if the right accounts do receive increased funds as the Reid plan intends, there would be increased revenue as a result -- they just can't score it as it currently stands. For frame of reference on what savings could look like if done correctly, the President's proposal to spend $13 billion over the next decade on program integrity efforts to improve tax compliance was scored by CBO as saving $42 billion through 2021.
As the CBO scores of the plans show, the Reid and Boehner proposals as they currently stand are closer in savings than reports and especially talking points would have you believe. We suspect there will be an updated Boehner plan soon, since he has apparently started working on a new bill that would keep his promise of cutting more than he raises the debt ceiling (since his savings estimate came back lower than he expected). But for now, this is our best measure of the two fiscal plans that will likely form the framework for agreement on a debt limit increase -- and the fact that they seem on the same page in terms of savings suggests that a compromise proposal isn't far off.
CNN recently invited several former Washington leaders to offer their thoughts on Washington's debt-ceiling gridlock, and we are proud to say that three out of seven are CRFB board members: Alan Simpson, David Stockman, and CRFB co-chair Bill Frenzel. All three had interesting perspectives on the debt standoff.
Sen. Simpson wrote about his frustation that no meaningful action has been taken to stabilize and reduce our debt. He highlighted the importance of the Gang of Six proposal, saying:
As soon as the Gang of Six came out with its plan, the slings and arrows started zooming in from both sides. Yet that is the strength of the plan. Everyone would have "skin in the game." The best fiscal plan -- a plan of the magnitude necessary to right our fiscal ship and of the balance necessary to draw enough bipartisan support to actually be enacted -- is the one that offends the most folks on both sides.
So regardless of what happens in the coming days with the debt limit, I ask all of you who care so much about our nation's future; I say, just pray for the Gang of Six!
David Stockman pointed out that raising the debt ceiling is not the critical issue, our debt is:
The crisis lies in the debt, not the ceiling. Kicking the can with a six-month ceiling increase is the worst possible alternative because it allows the politicians of both parties to continue making the Big Fiscal Lie...In the meanwhile, both the Boehner plan and the Reid plan are just big numbers flimflam. Their 10-year discretionary caps can't be enforced, and the debt crisis is right now. In the next two years, where it really counts, each would save only $60 billion, or 1%, of the baseline spending of $7.5 trillion. That's a pathetic joke.
We are borrowing $6 billion per day with no end in sight and rolling the dice in the hope that apparently clueless bond fund managers will continue to buy the debt of a quasi-bankrupt country. One day soon, they won't. But then it will be too late.
Bill Frenzel expressed hope that even though comprehensive fiscal reform has been put off for now, it might still be possible. He concluded:
A debt ceiling bill is still a long way from home, but hopefully at least a temporary end to the game of chicken is in sight. The "Grand Bargain" is deferred but hopefully not abandoned.
There is hope that Congress will act responsibly and bring the nation back from the brink of economic chaos.
Click here to read the complete list of commentaries.
During the debt ceiling debate, what the credit ratings agencies have said can get lost in the shuffle. So, a summation of what each of the three major agencies has said about the debt ceiling and the enactment of a fiscal plan:
S&P's warning a few weeks ago is the most prominent one, because it not only warns about the disastrous effects of the government breaking the debt ceiling, it also warns of a downgrade on the long-term situation, even if the debt ceiling is raised. Specifically, they said:
We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
Their definition of a "credible solution" is one that reduces deficits by $4 trillion over the next ten years. The plans from Speaker Boehner and Leader Reid don't quite reach that threshold in their current form.
Moody's latest statement, which came in mid-July, came just before S&P's. Moody's announced it was putting the US's credit rating on review because of increased prospects for Washington failing to reach a solution. They did not specifically call for a comprehensive deficit reduction plan like S&P, placing more emphasis on what they would do in the event of a technical default.
The review of the U.S. government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.
Finally, Fitch has been less aggressive than the other two ratings agencies in sounding off on the debt ceiling debacle, although their latest statement is the most recent of any from the ratings agencies, coming just this past Monday. Like Moody's, they emphasized the shorter-term default issues, rather than the long-term debt path. Fitch said that technically defaulting on the debt would cause them to lower the rating on Treasuries from Aaa to B-plus as soon as August 4 -- a 13-grade drop.
Bottom line: a default would be bad, likely causing downgrades on U.S. debt from each of the major ratings agencies, so in the immediate future, we have to increase the debt ceiling. However, not using this opportunity to take a big bite out of our deficits and debt would likely get us in hot water with the rating agencies down the road as well, so we should also be looking to enact a strong down payment of deficit reduction now with a credible process to achieve the rest of the $4+ trillion we're going to need to stabilize and reduce the debt in the medium- and long-term.
With the Bureau of Economic Analysis releasing tepid GDP numbers of only 1.3 percent growth and last night's failure of the House of Representatives to bring up Speaker Boehner's (R-OH) debt limit proposal, the markets opened down. Already a poor market showing this week, with the Dow Jones down 440 points through Thursday, today's news only highlights what is becoming an urgent need for policymakers to come to a deal and pass a debt ceiling increase as well as some sort of strong deficit reduction measure to send a signal to markets.
The House Rules Committee is scheduled to vote on a re-draft of the re-draft of Boehner's proposal at 11am this morning, which means that this bill may move to the floor soon. However, with the Senate saying this plan is dead on arrival, more negotiating between the two sides is needed.
With all of this in mind, President Obama is scheduled to speak at 10:20am this morning, addressing the current debt limit debates and how he plans to move forward. We plan on tuning in to see what he says, and let's hope something can be done to help end the stalemate.