The Bottom Line
December 22, 2010
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 |
$3,408.5 |
| Other Liabilities* | $7,296.6 | $6,541.1 | $3,349.1 |
| Assets | -$2,883.8 | -$2,667.9 | -$991.5 |
| Total Liabilities | $13,472.8 | $11,455.9 | $5,846.1 |
| 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.
December 21, 2010
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.
December 20, 2010
This morning, Senators Saxby Chambliss (R-GA) and Mark Warner (D-VA) announced that they will introduce as legislation the Fiscal Commission’s recommendations in early January.
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.
December 20, 2010
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.
December 20, 2010
Deck the Halls with Bills of Folly – On Friday President Obama signed the $858 billion tax cut package that Congress passed earlier in the week, deeming it a great bipartisan achievement. The great “compromise” greatly compromises our fiscal outlook and makes it more imperative that fundamental tax reform and a comprehensive debt reduction plan be enacted next year. The challenge next year will be finding bipartisan agreement on reducing the debt, not adding to it. There are plenty of good ideas out there. Check out our table comparing many of the deficit reduction plans here.
It’s Beginning to Look a Lot Like CRistmas – The omnibus broke down last week as the Senate gave up on a catch-all federal government spending bill for Fiscal Year 2011. Senators faced increasing pressure over spending levels and billions in pork attached to the measure. [We assume that we can kiss that multi-million dollar earmark to fund a comprehensive study of fiscal irresponsibility in Washington goodbye.] Instead, the Senate approved the third stopgap Continuing Resolution (CR) that will continue to fund government operations at 2010 levels until Tuesday. By then lawmakers are expected to adopt yet another CR that will last until March 4, which will boost funding for some programs, including Pell Grants, and will freeze federal civilian pay for two years. That means that Congress will have to complete 2011 appropriations at around the same time it considers the President’s budget request for FY 2012. Congress finds itself in this mess because it was unable to approve of a Budget Resolution or any of the 12 spending bills this year. Suffice it to say, the budget and appropriations process is broken. Reforms like those recommended recently by the Peterson-Pew Commission on Budget Reform would prevent budgeting disasters like this one and likely improve Congress’ record low approval rating.
Appropriators in 2011 Will Be Scrooge, Not Santa – The incoming chairman of the House Appropriations Committee signaled last week that the focus on his committee next year will be cutting spending, not doling out financial goodies as in years past. Representative Harold Rogers (R-KY) said that each Appropriations subcommittee will be given spending cut targets to reach towards the ultimate goal of reducing federal government spending to the FY 2008 level of $1.028 trillion.
Incoming House Leadership Wrapping Up Rules Changes – Republicans who will control the House of Representatives next year are putting the finishing touches on rules for the new Congress that they hope will prove their sincerity in reducing spending. The draft rules to be posted this week will include a new “cut-go” rule requiring that the cost of any proposed new program must be offset by equal or greater cuts in other programs. Another rule may be a new “deficit reduction lockbox” that ensures that spending cuts to appropriations bills made on the House floor will go towards deficit reduction and not to spending elsewhere. Some are also pushing for the creation of a joint Senate-House committee that will consider possible changes to the 1974 Budget Act that governs the budgeting process. Solid recommendations for reforming the budget process to help get the country on the right fiscal track are in the recent report, Getting Back in the Black.
Fiscally Responsible Policymakers Will Find Something Under the Tree – New awards were announced last week to recognize and promote fiscal responsibility among our leaders. The inaugural Fi$cy Awards will be presented to Indiana Governor Mitch Daniels (R), Senator Kent Conrad (D-ND), and Representative Paul Ryan (R-WI) on January 5. CRFB President Maya MacGuineas was one of the judges for the prize.
Happy Holidays from everyone at the Committee for a Responsible Federal Budget. Enjoy the season responsibly.
December 17, 2010
With a real lack of fiscal sanity running around Washington lately, it's truly refreshing and encouraging to see someone break from party lines, special interests, and all other shackles to make decisions about what's best for our country's fiscal health down the road. Senator Tom Coburn (R-OK) has been doing just that.
Earlier this month as a member of the President's Fiscal Commission, Senator Coburn showed true political courage in supporting the final plan of the Commission. The plan would bring real control to long-term deficits by identifying over $4 trillion in spending cuts and tax increases this decade alone, protecting the most vulnerable in society and leaving no rock unturned in the search for savings and efficiencies.
Additionally, Senator Coburn has continued making the case for fiscal responsibility in the past two weeks. Last week, Senator Coburn made a terrific speech on the Senate floor, presenting what we have labeled "a call to arms" for lawmakers to tackle our fiscal challenges head on. Senator Coburn even added an amendment to the $858 billion tax cut bill to offset $156 billion of it over the next few years. Unfortunately, the amendment was voted down. While the total costs would still have greatly increased deficits this decade even if the amendment had passed, it represented a notable effort. Senator Coburn should also be recognized for voting against the tax cut bill, which is now on its way to the President for his signature.
Our fiscal challenges won't go away by themselves. It is quickly becoming more imperative that Congress and the White House act to stem the tide of rising debt. At least there are lawmakers like Senator Coburn who are forcefully making the case for fiscal responsibility and a deficit reduction plan with both words and actions.
Congratulations, Senator. We wish you all the best next Congress in fighting for the economic future of the country.
December 16, 2010
From Congress to Spain: the Growth Play versus the Risk Play
Nearing the end of the week, markets are still wrestling with the same cross-currents they faced last week, but with a new wrinkle - Spain.
The growth play: With most forecasters sticking to their stronger near-term growth forecasts since the tax cut deal was announced, traders have continued to rebalance portfolios away from bonds and into stocks. Still, growth is not expected to be strong and data has continued to be mixed.
The risk play: Demand for U.S. Treasury bonds has continued to be affected by yo-yo safe haven effects tied to the ebb and flow of confidence in the eurozone’s ability to manage its fiscal woes. In the past week, safe haven demand for Treasuries eased as markets seemed reassured that Ireland was getting its fiscal and financial troubles under control with the support of the IMF-EU rescue package and the ECB. However, new news about Spanish bank weaknesses could bring back the safe haven story.
With the growth play dominating, mortgage rates on 30-year bonds had climbed to just below 5 percent by early afternoon Thursday, their highest point since May and up from record lows in November (closer to 4 percent). Trends have been similar for the benchmark 10-year note. However, interest rates have since reversed course and headed down a little as investors looking for return increased purchases of Treasuries at what were considered attractive (higher) yields.
For the longer term, the prospect of U.S. fiscal deterioration (even worse if the tax cut deal goes through) continues to hang over financial markets, although so far they have digested it in their stride. With no fiscal offset proposed in the medium-run for the tax cut package deal and little evidence that one will be agreed in the near future, the credit ratings agency Moody's warned several days ago that it may downgrade the Aaa rating of U.S. sovereign debt if the rising debt trend continued unchecked over the next few years. In an interview today, the head of the International Monetary Fund (IMF) called the tax cut deal positive on balance for near-term growth and noted the importance of supporting growth now for the US - as well as for the rest of the world. He however also warned that over the medium run, the U.S. will need to cut its deficit through a fiscal consolidation plan. In that regard, he noted, the recent Fiscal (Bowles-Simpson) Commission recommendations “make sense”.
December 16, 2010
Update 12/17: The House approved of the tax cut package late Thursday on a 277-148 vote. The bill now goes to the White House for the president's signature. The Senate pulled the omnibus package from consideration and now plans another short-term Continuing Resolution.
The Senate voted overwhelmingly on Wednesday to approve of the $858 billion tax cut package and the House may pass it Thursday if a dispute over amendments can be worked out. Coupled with the $1.108 trillion omnibus spending package that the Senate is considering, it is obvious that even in the era of hyperpartisanship that pork and tax giveaways can still bring Republicans and Democrats together. This does not bode well for getting our fiscal house in order, yet there are signs that the tide may be turning.
The tax cut deal gives “compromise” a bad name. It represents the type of inside deal-making that has put us on a fiscally unsustainable course and has left Congress with the lowest approval rating ever recorded. The type of bipartisan cooperation required to overcome our fiscal challenges will look more like that of the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson) than the high-level horse trading that produced the tax cut package. Policymakers will have to make some tough decisions and convince skeptical Americans that they are working in the national interest. They will also have to stick together against withering attacks from powerful interests across the political spectrum.
Fortunately, we are seeing the foundations forming for the type of leadership and collaboration that will be required, but the attitude and culture in Washington will have to change. A bipartisan group of Senators sponsored an amendment to the tax cut bill that would express the sense of the Senate that next year it should produce a comprehensive plan for addressing deficits and debt, including tax reform. Even though the amendment was a non-binding resolution, no vote was allowed. Likewise, an amendment from Senators Bob Corker (R-TN) and Claire McCaskill (D-MO) to establish a binding federal spending cap as a percentage of U.S. GDP also was denied a vote. An amendment from Senator Tom Coburn (R-OK) that would offset some of the cost of the package was given a vote, but the 67 vote threshold required was high, even by today’s standards when 60 votes are usually needed to agree to anything.
In the House, Congressman Peter Welch (D-VT) organized a letter with 53 of his Democratic colleagues opposing the tax deal because it is “fiscally irresponsible.” Conservative members such as Floyd Flake (R-AZ), Mike Pence (R-IN) and Jason Chaffetz (R-UT) have also publicly come out against the measure.
Next year Washington will have to be serious about fiscal responsibility. The tax deal will make tax reform and creating a debt reduction plan more imperative. The failures of the budget and appropriations process also put in stark relief the need for budget process reform.
December 16, 2010
An old cliche says that there are two things you should not watch being made--sausage and legislation. But right now, people should be watching the end-of-year process being used to allow the federal government to pay its bills. Then they'll know why we are in such a fiscal mess. Here's the current state of play:
- The House has passed a hybrid bill that would fund the federal government at its current level of $1.09 trillion, $46 billion less than President Obama's budget request. The bill is a hybrid because Continuing Resolutions, which most often fund the government at last year's levels, usually don't rejigger funds. This bill, which the House narrowly passed, 212-206, increases funding for select programs.
- The Senate, on the other hand, has pending a $1.1 trillion omnibus spending bill that is higher than the House bill and rejiggers funding for more programs. However, the Senate bill also includes some $8 billion in earmarks for projects for specific Senators, according to Taxpayers for Common Sense. Many of those projects are for Senators who recently went on record as favoring a ban on earmarks. Clearly, leaders of the Senate Appropriations Committee have put those Senators in a pickle. Some have gone so far as to say they will vote against the bill--essentially voting against projects in their home states.
- Whatever happens, the House and Senate still will have to reconcile differences between their bills.
Meanwhile, as Congress fiddles, the current Continuing Resolution funding the federal government expires Dec. 18, so the House and Senate may have to pass another short-term resolution.
As we've said before, this is no way for Congress and the President to fund the federal government. Is it any wonder that we are so far in debt. The Peterson-Pew Commission on Budget Reform recently called on policymakers to adopt a new process that would make budget-writing far more rational. It may not solve the debt problem overnight, but at least it would make the sausage-making more Kosher.
December 15, 2010
Update: The Senate passed the tax cut legislation on a 81-19 vote. It now moves to the House, which may act Wednesday or Thursday.
With the Senate voting today on the nearly $900 billion in increased government borrowing to finance the tax deal, we at CRFB have been dismayed by the fact that there has been no attempt to offset the impact the package will have on the national debt. We were very pleased that a bipartisan group of senators promised on the Senate floor Tuesday to push for deficit reduction in the coming year. It is also encouraging that Senator Tom Coburn (R-OK), one of the "aye" voters on the Fiscal Commission, proposed an amendment to partially offset some of the costs of the tax deal. Unfortunately, this amendment was just recently voted down.
His amendment, S.Amdt. 4765, would have, by Senator Coburn's estimate, saved $46 billion in the coming fiscal year and $156 billion over the next five (CBO has not done an estimate). The amendment consists of many spending cut recommendations from President Obama's 2011 budget request and spending cuts from the Fiscal Commission.
While this hardly offsets the nearly $900 billion five year cost of the tax deal, it is a start. Overall, CRFB believes that if lawmakers are going to enact additional stimulative measures, they should focus on policies that will have more bang for the buck in aiding the economic recovery (see CBO's table of fiscal multipliers). Lawmakers should also be putting forth a plan to pay for this package, as well as a complete deficit reduction plan, over the longer-term.
December 14, 2010
The Senate is poised to pass a tax cut package that will add over $850 billion to our deficit. Meanwhile, a pork-laden $1.108 trillion omnibus spending bill was introduced in the very same chamber Tuesday in the latest chapter of the mockery that is the budget and appropriations process. Not good news by any means on the fiscal front. Yet there was a ray of hope as a bipartisan group of senators took to the floor serving notice that next year they will push for serious action on debt reduction and tax reform.
Senators Mark Warner (D-VA), Saxby Chambliss (R-GA), Amy Klobuchar (D-MN), Bob Corker (R-TN), Dianne Feinstein, (D-CA), Roger Wicker (R-MS), Jon Tester (D-MT), Mike Johanns (R-NE), Ron Wyden (D-OR), Mike Crapo (R-ID), Kay Hagan (D-NC), James Risch (R-ID), Mark Udall (D-CO), Lamar Alexander (R-TN), Michael Bennet (D-CO), Jeanne Shaheen, (D-NH), Bill Nelson (D-FL), and Mark Begich (D-AK) all gave brief speeches in succession in a coordinated effort to put the need to address our fiscal challenges front and center. There were some basic themes that all the remarks shared:
• our mounting debt is one of the most critical issues this country has faced;
• the work of the White House Fiscal Commission is an important effort and a good starting point for addressing our fiscal problems;
• bipartisan cooperation will be required;
• and action must occur now.
Warner bluntly said that it is time for the Senate “to put up or shut up” when it comes to federal budget deficits, debt, and tax reform. Chambliss remarked that the group will push for action early next year. Wyden noted that Congress too often puts off making tough decisions on important issues, and that the tax cut deal represented “a victory for the politics of procrastination.” Corker stated that the debt represents the gravest threat to our economy and sovereignty. Hagan observed that “our current path is unsustainable” and that the debt must be tackled in a “civil and bipartisan manner.”
The group has submitted a proposed amendment to the tax cut legislation that expresses the sense of the Senate that by the end of 2011 a “comprehensive plan for addressing the fiscal concerns facing our Nation should be considered by the United States Senate.” The non-binding resolution also states that the “fundamental cornerstones of this plan will be tax reform, spending restraint, and debt and deficit reduction” and that it should be crafted in a bipartisan manner. The group also will push for substantive deficit reduction and tax reform ahead of an expected vote to raise the debt ceiling next spring.
Combined with remarks Monday by the second-ranking Democrat in the House, you can call these developments green shoots (or maybe “black shoots” for getting our budget back in the black) for fiscal policy. In a speech at the National Press Club, Majority Leader Steny Hoyer (D-MD), also said that the next Congress must tackle deficits and reform the tax code. “No other issue calls so strongly for leaders who understand the importance of hard choices and hard truths,” he said.
Things may look bleak right now for fiscal sanity, but there appears to be some light at the end of the tunnel. Let’s hope more lawmakers heed the words of their colleagues.
December 14, 2010
With the Senate getting past a procedural vote in approving the tax deal, it appears more and more likely that this deal will soon become law. With the 10-year deficit projections of this deal ($858 billion) totaling close to the 2009 stimulus ($814 billion), with Administration estimates saying it will create or save 2.2 million new jobs (which our math says is about $390,000 per job) it appears that this deal may be short-term gain, unless it is put in the context of a credible medium-term plan to get our fiscal house in order it will worsen our growth and employment prospects down the road.
Moody's recently announced that if this deal becomes law, it increases the chance that the ratings agency could downgrade United States debt from its current Aaa rating (the highest possible)--given that the tax cut package does not yet include any offsets. If that happens, the United States will pay higher interest rates on its debt, which will mean growth and employment will be lower than otherwise (read how CBO has warned before that extending the tax cuts would be bad for the economy down the road). As a result, while this bill will likely create jobs in the short-term, the law may actually decrease economic activity in the long-term since it is not tied to any deficit reduction package or agreement.
As the ratings agency said:
"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth."
CRFB again calls for a deficit reduction plan to be included along with the tax cut compromise.
December 13, 2010
In a new paper, “Creating a Fiscal Turnaround in the United States,” CRFB President Maya MacGuineas discusses our current fiscal situation and offers viable solutions for turning it around. MacGuineas suggests that lawmakers need to agree on a fiscal target, commit to a credible fiscal consolidation plan and offer specific ideas on deficit reduction. Click here to read the paper.
December 13, 2010
Update: The White House recently stated that the tax cut deal would create or save 2.2 million jobs, which would bring the budgetary cost to $390,000 per job, right in the middle of the cost per job range we estimated below.
Over the last few days, politicians and pundits have been arguing over who got the better deal in the recently-forged tax cut agreement. A graph which the White House has been circulating around the hill (version below is via Ezra Klein) claims that the deal is a big Democratic victory. According to this argument, the Democratic "gets" -- the payroll tax holiday, unemployment benefits, refundable tax credits, etc -- have about twice the cost of the Republican "gets":
Others on the left have pointed out that, even though the pieces the Democrats wanted are larger, the Republican gets-- higher income rate cuts and estate tax cuts -- are far more likely to be permanent and therefore far more expensive. Moreover, many of the Democratic gets -- including corporate investment incentive and payroll tax cuts -- aren't all that offensive to Republicans in the first place.
Our view: this political analysis misses the point. Horse trading is the easiest form of political compromise. The agreement has something for everyone. Anyone who benefited from the Bush tax cuts before (which is almost everyone) will continue to benefit from them for the next couple years. All workers will receive a 2 percent cut in their payroll tax. The unemployed will receive another 13 months of unemployment benefits. Businesses will receive a new set of tax breaks. And the very wealthy get an estate tax cut, at least if they die in the next two years.
But if the objective is to end the uncertainty surrounding tax policy and keep rates low, it didn’t really do that since 24 months from now we go through this exercise again. And if it is to provide the economy with another round of stimulus, it didn’t do that particularly well. Surely the legislation will provide the economy with some measure of economic stimulus -- but the "bang for buck" is quite low relative to the alternatives. Using some of CBO’s multipliers, we estimate very roughly that the package could create between 1.5 and 4.3 million jobs. Given the astounding $858 billion price tag, that means we’d be paying between $200,000 and $550,000 per job created. (Note that excluding the 2001/2003 tax cuts, this would drop to between $100,000 and $250,000 per job).
| MEASURE | COST (billions) | JOBS (thousands) | |
| Low | High | ||
| Unemployment | $56 | 450 | 1,050 |
| Corporate Expensing | $22 | 50 | 200 |
| Payroll Tax Holiday | $112 | 350 | 1,000 |
| Refundable Tax Credits | $48 | 150 | 300 |
| 2001/2003 Tax Cuts, Etc | $620 | 500 | 1,750 |
| TOTAL | $858 | 1,500 | 4,300 |
| Cost per job: | $550,000 | $200,000 | |
Note: job creation calculated using CBO multipliers from table 1 and CBO estimates from table 4 of the following: http://www.cbo.gov/ftpdocs/118xx/doc11874/09-28-EconomicOutlook_Testimony.pdf. Table 1 multipliers were generated, originally, at the beginning of 2010 and will surely differ due to the time lapse. Moreover, estimates above do not account for any types of interactions and treat the "expensing" provision slightly differently than CBO would. All numbers are rounded.
In arguing against renewing the upper income tax cuts, only a month ago, President Obama proclaimed that making the upper income tax cuts permanent would "be digging ourselves into an even deeper fiscal hole and passing the burden on to our children." We agree with this concern, which is why we are so dismayed to see a plan which digs the hole much, much deeper, and is not combined with a gradual debt reduction plan.
Asking what the Democrats got and what the Republicans got is the wrong question. We should be asking what the American people and future generations got. The answer: more debt.
December 13, 2010
Washington Drops the Ball – To many federal budget watchers, the tax cut debate has been more frustrating than watching the Redskins play. The expiring 2001/2003 tax cuts presented an opportunity not only to remake the tax code, but to transform the fiscal discussion in Washington. Yet our leaders botched the snap and the compromise reached between the White House and Congress to extend the tax cuts for two years, continue expanded unemployment benefits for a year, impose a one-year payroll tax reduction, and reduce the estate tax represented the same type of political calculation and disregard for budget math that got us the mounting debt we currently face. The “deal” was especially exasperating to us in light of the just completed report of the president’s Fiscal Commission, which gave us hope that policymakers would face up to fiscal realities. It is ironic that the Fiscal Commission toiled for months to produce a solid blueprint for getting our fiscal house in order while it took politicians a few days to hammer out a deal that will severely set us back in our fiscal efforts. It is clearer than ever that the culture of Washington has to change in order to alter our unsustainable fiscal course. Our elected leaders will have to focus on the longer term, not the next election. As CRFB President Maya MacGuineas notes today at CNNMoney.com, we need a responsible budget framework
Tax Cut Bill Up for Votes – Legislation implementing the tax cut agreement will come up for votes this week. The Senate will vote Monday afternoon to proceed with debate on the measure with the vote on final passage expected Tuesday. The Senate is expected to produce the 60 votes necessary to approve of the package. Meanwhile, a bipartisan group of 20 senators, led by Mark Warner (D-VA) and Saxby Chambliss (R-GA), is attempting to attach [subscription required] to the legislation a non-binding resolution calling for a deficit reduction plan to be considered and approved next year. The House will consider the tax cut legislation after the Senate, where its fate is less clear.
Yes, We’re Still Talking About Appropriations – The slow-moving train wreck that is the Fiscal 2011 appropriations process continues to chug along. The House last week barely approved a measure that will fund government operations through September of next year at the Fiscal 2010 level of $1.09 trillion. Although technically a continuing resolution (CR), it goes beyond a traditional CR by moving around funding between agencies and programs. The Senate this week will try to substitute a $1.108 trillion omnibus spending package that will include earmarks. Neither measure may garner 60 votes in the Senate, which may result in the passage of another short-term CR, probably lasting until early next year. The current CR expires on December 18. Like the Metrodome’s roof, the budget process is sagging and tearing under a blizzard of problems. We need budget process reforms like those recommended in the report, Getting Back in the Black.
Ad Hoc COLA Fizzles in Congress – Last week both the House and Senate failed to achieve the supermajorities needed to provide Social Security beneficiaries with a $250 check in lieu of a cost-of-living adjustment (COLA). CRFB had denounced the ad hoc COLA as a fiscally irresponsible political ploy.
Tax Reform May See Action Next Year – Last week President Obama said that he is seriously considering an overhaul of the tax code early next year. Senator Ron Wyden (D-OR) asked the president to put it front and center in his upcoming State of the Union Address. The senator is also building a bipartisan coalition for fundamental tax reform in 2011.
Lineup of New House Committee Leaders Set – The chairs and ranking members of House committees were finalized last week. The leaders of House committees relevant to fiscal policy next year will be: Budget Committee Chair – Rep. Paul Ryan (R-WI); Budget Committee Ranking Member – Rep. Chris Van Hollen (D-MD); Appropriations Committee Chair – Rep. Hal Rogers (R-KY); Appropriations Committee Ranking Member – Rep. Norm Dicks (D-WA); Ways and Means Committee Chair – Rep. Dave Camp (R-MI); and Ways and Means Committee Ranking Member – Rep. Sander Levin (D-MI)
House Republicans Change the Rules – Some of the new policies being adopted by the House Republican caucus, which will control the chamber next year, will affect fiscal policy. House Republicans approved of a new rule, known as “cut-as-you-go”, requiring that any bill brought up under suspension of the rules – an expedited process for considering legislation – that creates a new program must specify a spending cut of equal value to offset the program’s cost. They also agreed to prohibit bringing up a suspension bill that increases authorizations, appropriations, or direct spending in any given year unless it is fully offset. House Speaker-in-waiting John Boehner (R-OH) also says that allowances for all members, and budgets for all committees and leadership positions will each be cut by 5 percent as a symbol that Congress will cut its own spending as it seeks much larger federal budget cuts.
Fiscal Commission Huddles with Administration – Members of the Fiscal Commission, including co-chairs Erksine Bowles and Alan Simpson, met with OMB Director Jack Lew and Treasury Secretary Tim Geithner. After the meeting the co-chairs issued a statement calling on President Obama to set out his ideas for reducing the deficit in his State of the Union address and to start negotiating with Congress early next year on a fiscal plan. Such a plan will be even more essential in light of the tax cut deal that will blow an even bigger hole in our debt.
“Doc Fix” Is In – Last week Congress approved of legislation that will delay steep cuts in Medicare reimbursement payments to doctors for a year. The issue has been a political football all year, with several short-term patches required because lawmakers could not agree on how to pay for the costly fix. This patch will be paid for by increasing the amounts that lower-income individuals and families will be required to pay back to the government if the federal subsidy they receive to purchase health care in the exchanges created by the new law turns out to be too generous. This is still only a short-term fix. Under the Sustainable Growth Rate (SGR) formula, the scheduled cut to physicians will only grow unless Congress finds a permanent fix.
New Poll Finds the Goal Post Moved Far Back – A recent poll from the Pew Research Center for the People & the Press finds that while Americans recognize in the abstract that the deficit must be addressed now and that doing so will require changes to spending and taxes, support for most specific solutions is low. Although respondents across all parties (including a slim majority of Tea Partiers) say that reducing the deficit will require a combination of cutting spending and increasing taxes, most of the proposals mentioned did not get majority support. The poll underscores that the knowledge gap on this issue must be closed before we can seriously can close the fiscal gap. A good tool for helping people understand the fiscal situation and the changes required is CRFB’s “Stabilize the Debt” online budget simulator.
December 13, 2010
In her latest commentary on CNN Money, CRFB President Maya MacGuineas discusses the challenges ahead with the recent deal on tax cuts and how lawmakers must come up with the specific spending changes and tax reforms that will improve the economy. Read it here.
"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.
December 10, 2010
The Congressional Budget Office made an unusual jump into the fiscal fray back in the summer, spelling out the specific harm that excessive long-term debt does to our economy. Today, they released a report that attempted to quantify the effects of waiting to act to stabilize the debt.
In its long-term outlook, CBO provided an alternate path for debt assuming that crowding out effects hurt growth significantly. But, this time, the analysts specifically quantified how much the economy would be impacted by a huge debt burden.
CBO calculates these effects by examining the effect on the 2050 economy if we waited until 2025 to stabilize our debt, as opposed to taking action in 2015. Then, CBO examined three different scenarios for stabilizing the debt: reducing government-funded benefits for all adults, reducing benefits for adults except those over the age of 60 at the time of implementation, and raising taxes. As you might expect, the damage to the economy increases as you go down the line of options.
| Effect of Waiting on Economic Variables in 2050 | ||||
| Capital Stock | Labor Supply | Output | Consumption | |
| Reducing Benefits | -7% | -0.5% | -2.5% | -1.5% |
| Reducing Benefits, Exempting Those Over 60 | -7% | -1% | -3% | -2% |
| Raising Taxes | -18% | -2% | -7% | -5.5% |
The report also raises concerns about intergenerational equity if the current generation of lawmakers fails to act. According to CBO, while delaying changes will make the current adults and elderly better off (relative to acting in 2015), it severely damages economic performance down the road for our children and especially for children soon to be born. They estimate that children born after 2015 could have as much as a three percent reduction in their lifetime consumption.
Of course, intergenerational equity is just one of the many concerns of delaying timely action. Among the others that we mention frequently: crowding out of private investment, increased risk of a fiscal crisis, loss of the ability to prioritize in budgeting, and loss of flexibility in responding to emergencies or recessions.
CBO's report only underscores the importance in acting sooner rather than later to remedy our long-run fiscal problems.
December 10, 2010
The Senate began debate late Thursday on the tax cut compromise hammered out by some lawmakers and President Obama. The debate began even as House Democrats vowed to prevent bringing the current version of the deal to the House floor. While the deal is still being negotiated, the main components would extend the 2001/2003 tax cuts for two years, offer a payroll tax holiday for one year, lower the estate tax, extend unemployment benefits, and offer a series of individual and business tax breaks. The plan now is estimated to cost $858 billion (including $56 billion for unemployment); none of it is offset by cuts elsewhere. By comparison, that figure is about the same as the 2009 stimulus law, which is projected to cost $814 billion over ten years as of August. The lack of offsets is particularly galling in light of last week's bipartisan Fiscal Commission report that laid out the bleak budget situation and offered a solid plan for improving the dire fiscal outlook. The tax compromise is a "deal" that doesn't deal with fiscal reality.
| Policy | 10-Year Cost (billions) |
| Two-year Tax Cut Extension | $408 |
| AMT Patch | $137 |
| Estate Tax | $68 |
| Investment Incentives | $22 |
| Payroll Tax Holiday | $112 |
| Expiring Tax Extenders | $55 |
| Unemployment Extension | $57 |
| Total | $858 |
What is actually even worse than not offsetting this package would be continuing into the future this package unoffset. CRFB has estimated what the 10 year costs of extending unemployment for an additional year on top of this package, a ten year--as opposed to a two year--extension of the 2001/2003 tax cuts, AMT patch and Estate Tax and a ten year--as opposed to a one year--payroll tax holiday at about $6 trillion. This would be an unconscionable amount of money and so we urge lawmakers to keep this extension temporary.
CRFB highlighted the dichotomy between the tax proposal and the Fiscal Commission plan in a release. In the statement we also called for the deal to be paired with a serious long-term deficit reduction plan. We are very encouraged by reports that a bipartisan group of 20 senators will attempt to attach a non-binding resolution to the tax bill that will call for negotiations next year on a deficit-reduction plan. While symbolic, this is a move the right direction.
We are also happy to hear reports that President Obama is planning a major tax reform push next year. The growing, bipartisan movement for tax reform that simplifies the tax code and broadens the base will be critical to confronting our debt (see our ideas for reforming tax expenditures here). A deficit plan and fundamental tax reform will be even more important if the tax cut deal is passed. A fiscal plan and comprehensive tax reform are real deals.
December 10, 2010
The Tax Cut Deal: Can We Escape Slow Growth Velocity without Hurting Our Fiscal Future?
Markets this week have been dominated by the White House announcement of a fiscal package deal with Republican Congressional leaders that would add over $800 billion in new measures over the next two years – mainly on the tax side – to support the economy.
The announcement of the deal at the beginning of the week improved market sentiment about U.S. growth prospects. After last week’s disappointing unemployment news (an upward move in the unemployment rate from 9.6 percent to 9.8 percent in November), markets had become more cautious (which typically favors bonds). Although a “double dip” scenario still wasn’t considered the most likely outcome, concern over the risk of being stuck in very slow growth without the velocity to escape increased. However, the tax deal sparked a positive shift about the growth outlook by taking away worries of sharp fiscal tightening on January 1st when the Bush tax cuts were set to expire, by adding measures that typically stimulate growth (unemployment insurance is thought to have a high multiplier effect on spending, for example), and by increasing potential savings at the high income end.
Following the announcement of the political tax deal, the shift in sentiment was reflected in the largest sell-off of Treasury bonds in two years and an initial boost to the stock market, as markets turned to a growth play and taking on increased risk – versus the caution and safe haven effects which had been driving the bond market. Interest rates on Treasury bonds jumped (the benchmark 10-year bond rose by over 30 basis points over two trading days, the largest rise since the Lehman Brothers collapse two years ago). The two day slide was partially reversed on Thursday when investors showed considerable interest in the government’s last debt auction (featuring 30-year bonds) for the week.
In the aftermath of the tax cut package announcement, worries related to U.S. sovereign debt management and its outlook also surfaced earlier this week (largely in the form of comments by a Moody’s analyst to the press and comments attributed to Fitch). Some market observers worried that the hike in yields reflected the return of the bond vigilantes (with a focus on debt implications down the road, if our debt ends up being over $800 billion higher in two years, as estimated). However, the more likely front seat driver of this week’s trends – at least initially – was improved growth sentiments. But, going forward, once (and if) the economy assumes a more stable upward path, focus will likely turn from how budget deficits help support the economy to how massive debt hurts growth. In fact, experience shows that the turn in focus can happen very quickly, so it may be prudent for our political leaders to soon start signaling their intentions for getting our fiscal house in order down the road. The signals now coming out of Washington (and, indeed throughout the country) are very mixed – and confusing.
Other recent market drivers have taken a back seat this week. Although not on front and center, the Fed is a constant presence in the Treasury instrument marketplace and its stepped up purchases of Treasury assets to support the economy (the so-called “QE2 or second round of “quantitative easing”) have continued. However, it has been difficult to sort out the impact of the Fed’s actions because strong pressures are coming from so many other directions. Also, safe haven effects from the spillover of the Irish fiscal crisis – which had been driving safe haven interest in US Treasury bonds and the dollar – have subsided (at least for the time being) as the EU, International Monetary Fund, and Ireland appear to have finally gotten down to business.
December 10, 2010
Last week, we reported the good news from the Congressional Budget Office that the Troubled Asset Relief Program (TARP) would cost $25 billion, significantly less than any previous estimates. Now, the Treasury has announced the sale of its remaining Citigroup stock for $10.5 billion, another bit of good news for taxpayers.
Here's some background. Citigroup has gotten assistance through various sections of TARP. Through the Targeted Investment Program (TIP), Citigroup got $20 billion in December 2008. About a year later, the company repaid the full amount. Through the Capital Purchase Program (CPP), Treasury invested $25 billion of equity in Citigroup in October 2008 (Citigroup was part of the first group to participate in CPP). This is the stock that Treasury currently is selling-- part of a bit-by-bit sell-off that the department has been conducting since May. Also, Citigroup took part in the Asset Guarantee Program (sorry, no acronym) with an initial guarantee of $5 billion. The Treasury got about $2 billion in proceeds and never had to fund the guarantee, so the program was pure profit for Treasury.
Overall, from that $45 billion investment in Citigroup came proceeds of about $57 billion for the Treasury, for a total profit of $12 billion. That is certainly great news for taxpayers. In fact, it is even better than CBO estimated just a week ago. In that report, CBO expected that assistance to Citigroup and Bank of America would yield a profit of $7 billion. Bank of America also received assistance through TIP and CPP and repaid both in full with a profit of about $1.5 billion. Thus, CBO's estimate of this category actually still underestimates the profit that Treasury received by about $6.5 billion. Assuming that no other estimates have changed, this would put TARP's deficit impact at more like $18 or $19 billion over ten years.
That's not the only good news that has come from some of TARP's biggest still-outstanding investments, though. Last month, Treasury sold almost half of its common stock held in GM, reducing its stake in the company from 60 percent to one-third in two separate offerings. It appears that CBO only took into account the first offering, but it's unclear how the second offering would affect their estimates (the first offering was more than ten times larger than the second). There is still $32 billion outstanding in GM investments from TARP.
Then there is AIG. Currently, the Treasury has a $70 billion outstanding investment in the company, but an "exit plan" was announced in September that would restructure the company and increase the return to taxpayers. The plan is somewhat complicated (for more on the plan, see this press release). AIG will take the proceeds from sales of two of its subsidiaries to pay off a loan extended by the New York Fed. Then, AIG will draw on its remaining TARP money to purchase interest in two New York Fed vehicles that are holding the two subsidiaries. After the restructuring, the Treasury will hold 92 percent of all AIG common stock, from which it will recoup at least some of its initial investment. CBO estimated a cost to the Treasury of $14 billion, but if the restructuring goes through as planned by the end of the 2011 first quarter, it's likely that the cost will be lower.
It would be really nice if that $25 billion estimate comes down again in January when CBO releases an updated Budget and Economic Outlook.
