The Bottom Line

August 1, 2011

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.

August 1, 2011
A Weekly Update on Fiscal Policy Developments

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

August 2

  • 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.

August 3

  • Senate Finance Committee hearing on Medicare-Medicaid dual eligibles and lowering health care costs at 10 am.

October 1

  • Fiscal Year 2012 begins for the federal government.
July 30, 2011

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
Pell Grants $17 $18
Other Education -$22 -$18
Agriculture Programs $0 -$11
Subtotal, Mandatory -$20 -$29
     
Revenues (Program Integrity)* $0 $43
     
Interest Savings -$156 -$153
Total -$917 -$927
     
War Savings $0 -$1,044
Interest Savings $0 -$223
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.


July 29, 2011
Listen Up Washington; We've Been There

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.

 

"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.

July 29, 2011

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.

 

July 29, 2011

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.

July 28, 2011
And don’t take credit for policies already in place

As CRFB has certainly been making clear, we would prefer a "big deal" that dealt with all areas of the budget and reduced debt as a share of the economy. But given the time constraints and the need to raise the debt ceiling, we’ve also argued that a two-step process with strong enforcement mechanisms could be the next best way to achieve a sustainable debt path. If lawmakers go with the two-step process that requires and enforces certain savings, how you measure those savings matters.

The Boehner proposal calls for $1.8 trillion in deficit reduction to come out of a joint congressional committee made up of 12 members -- but there has been some confusion about what the savings in Speaker Boehner’s proposal would be judged against, given that the legislation doesn’t specify which baseline it uses. However, by remaining silent and directing CBO to estimate the savings that come out of the joint committee’s recommendations under normal procedures, the Boehner proposal appears to require the committee’s recommendations be scored against CBO's current law baseline, which assumes expiration of all the 2001/2003/2010 tax cuts as well as no AMT patches or “doc fixes.”

As a result, a potential tax reform proposal which could result in $800 billion more revenues than a current policy baseline (in which all tax cuts are extended, and which was reportedly agreed to in the Obama and Boehner negotiations that broke down) would not count as deficit reduction. In fact, CBO would score such a proposal as increasing the deficit given that revenues would be lower than under current law.

However, targeted tax changes that do not address the expiring tax cuts one way or another, such as elimination of specific tax preferences or new taxes, would count as deficit reduction. Using a current law baseline for measuring savings would also allow the committee to claim savings from limits on OCO spending that take credit for the troop drawdown already in place, which CRFB has already described as a gimmick.

Reid's proposal would avoid the question of baselines and what savings would be counted by giving the joint committee the goal of reducing the deficit to 3 percent of GDP. However, the Reid proposal does not say when that goal would be achieved. It is also unclear whether the committee could achieve that goal by remaining silent on items such as the AMT, the “doc fix”, and by taking credit for the additional revenues and spending reductions assumed in the baseline, even though Congress would still need to deal with those issues.

In order to get beyond the baseline confusion and the potential for gimmicks to artificially inflate savings, CRFB supports debt-to-GDP targets and corresponding savings targets to ensure that legislation actually achieves the goal of reducing our debt as a share of the economy.

In the past, we have recommended that lawmakers institute a debt-to-GDP target of 60 percent by the end of the decade. The very minimum goal of any debt plan should be to stabilize the debt and put debt on a declining path by the end of the decade, as the National Commission on Fiscal Responsibility and Reform recommended. In addition, the plan should either be required to explicitly address expiring provisions or achieve the debt targets assuming they are extended in their current form.

July 28, 2011

Many of the fiscal plans produced over the last several months -- including the Gang of Six plan and the President’s budget -- propose selling excess federal property to help reduce our nation’s debt (see CRFB’s Comparison Tool to compare all the different fiscal plans). While agencies have the ability to sell off unwanted property under current law, many recent debt reduction proposals would expedite the process.

Supporters of this policy option assert that selling federal property would be a good way to increase federal receipts without having to increase taxes. However, in a testimony before the House Committee on Oversight and Government Reform, CBO noted that “legal, practical, and political obstacles to the sale of such property” would prevent this proposal from generating significant proceeds over the next decade.

Financial incentives, for instance, would be needed to encourage agencies to part with unneeded property. Any incentive scheme, such as one that would let agencies keep a portion of the proceeds, would mean reduced savings for deficit reduction. Under current law, some federal agencies retain and spend 100 percent of the proceeds from property sales. Under the President’s proposal, agencies would only be allowed to keep 40 percent of the net proceeds, which would unlikely be sufficient to incentivize increased federal property sales. In addition, there is a limited amount of surplus government property with significant market value. Properties with smaller values would not justify the costs of marketing and sales transactions.

CBO’s analysis also identified ways the government could increase proceeds from future federal property sales, including:

  • Creating a clear incentive to maximize proceeds: Many proposals only create incentives to dispose of excess property, rather than requiring valuable properties be auctioned to the highest bidder.
  • Exempting sales of property from existing laws: Current law limits the amount of federal property that can be sold. Proceeds could be boosted if future sales were exempted from laws that slow the disposal process or require agencies to offer properties at reduced prices to local and state governments or nonprofits.
  • Specifying in law which properties are to be sold: Rather than allowing agencies or a commission to determine which properties to sell, legislation could specify a definitive list of properties to be sold.

Selling excess federal property has popped up with quite a bit of frequency in all the deficit reduction plans, but what seemed like an easy way to achieve some savings has turned out to be not so clear-cut. Hopefully, CBO's latest report can help inform the discussion over excess property to help reduce future deficits and improve the efficiencies of federal agencies.

July 28, 2011

Fed’s latest Beige Book, released yesterday, pointed to slowing growth (but still positive growth) across many economic sectors and regions. On a region by region basis, the Fed found that Fed districts nearest the Atlantic seaboard were most affected by the economic slowdown while other districts such as the Atlanta District and the Dallas District felt their growth less impeded.

The report did find a recent boost in manufacturing activity, lending, and commercial real estate. However, other industries experienced a flattening effect. Although falling gasoline prices have encouraged more shopping trips and an overall pickup in consumption, price pressure from supplier inputs such as energy, cotton, and food has continued to reduce retail margins. Auto sales have shown little improvement, residential real estate sales remain stagnant, and labor market conditions have stayed soft.

The weather patterns of the last month have also adversely affected agricultural sectors. Drought has lowered crop yields in the Atlanta, Dallas, San Francisco, and Kansas City Districts while flooding has forced millions of acres to go unplanted in the Minneapolis and Chicago Districts.

While the economy continues to grow, this past month has seen that growth abated. While most factors are out of the control of policymakers, one of the hindrances of growth certainly is not: uncertainty over the debt ceiling and our fiscal future. One way to jump start investment and continue our path to a full economic recovery is for Washington’s leaders to raise the debt ceiling and adopt a credible comprehensive fiscal plan that reduces debt as a share of the economy. Such a plan would boost global confidence in our nation’s economic health and vibrancy, and would create substantial budgetary and economic benefits down the road. With the August 2nd deadline getting nearer by the hour, and with markets paying close attention to it, the time for a deal is now. With an economy that is already experiencing a slowdown, defaulting or delaying a debt deal merely exacerbates the problem.

July 27, 2011

Speaker of the House John Boehner has released an updated version of his debt ceiling proposal which, according to a new CBO score, achieves an extra $66 billion in deficit reduction, totaling $917 billion in savings. The difference comes from $46 billion more savings from his discretionary caps -- achieved by removing the outlay caps originally included in the plan for FY 2012 and 2013 -- and from $20 billion more in interest savings as a result of the increased discretionary savings.

As we pointed out in our blog earlier today, the outlay levels projected by CBO for FY 2012 and 2013 in its scoring of the Boehner plan were equal to the outlay caps included in the plan. However, CBO's score of the plan produced by Senate Majority Leader Harry Reid -- which includes nearly identical budget authority caps in FY 2012 and 2013 as those in the Boehner plan but which did not include outlay caps for those years as Boehner did -- included lower outlay levels for FY 2012 and 2013 (and therefore higher savings) than those scored for the Boehner plan, seemingly as a result of not having outlay caps. This may seem counter intuitive, since one would assume outlay caps on top of budget authority caps would only reinforce savings -- not decrease savings. As we suggested earlier, CBO seems to have assumed that appropriators would likely hit the outlay cap even if it meant having a different mix of appropriations than they otherwise would have under a no-outlay-cap scenario.

So to increase his savings total, Boehner simply removed the outlay caps in his plan, increasing discretionary savings by $46 billion and his interest savings by $20 billion (a high amount, since the discretionary savings are in the early years of the ten-year period).

Here is an updated version of the chart we posted earlier, including the scores for the updated Boehner plan:

Ten Year Savings Under Updated Boehner and Reid Plans (billions)
Provision Updated 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
Pell Grants $17 $18
Other Education -$22 -$18
Agriculture Programs $0 -$11
Subtotal, Mandatory -$20 -$29
     
Revenues (Program Integrity)* $0 $43
     
Interest Savings -$156 -$153
Total -$917 -$927
     
War Savings $0 -$1,044
Interest Savings $0 -$223
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. 

Note: This blog has been updated to reflect CBO's comparison table of the two plans, which has slightly differen interest projections for war and non-war under Reid's plan.

July 27, 2011

As the debt-ceiling proposals from Rep. Boehner and Sen. Reid continue to be debated, support for the comprehensive, balanced proposal offered by the Senate's Gang of Six early last week continues to build.

In a letter to the editor of Illinois' State-Journal Register, fiscal commission co-chair Erskine Bowles praised Gang of Six member Dick Durbin (D-IL) for his willingness to compromise for the good of the country while at the same time sticking to his principles of protecting the truly disadvantaged. He writes:

I, for one, am encouraged that instead of playing politics with our economy, Durbin has been working hard with the Gang of Six and in meetings at the White House to come up with a serious, bipartisan deficit reduction proposal that reflects the principles of fairness and balance that were in the Fiscal Commission. He understands that in order to move our country forward, both political parties have to be willing to find a middle ground. It takes a lot of guts to put your name on a compromise proposal that your traditional supporters may not love. But that’s what principled compromise is, and that’s what America needs right now.

Another piece, an op-ed in the Idaho Statesman written by former Rep. Walt Minnick (D-ID), urges lawmakers not to further delay needed comprehensive fiscal reforms by enacting "a weak smoke-and-mirrors solution to the debt ceiling impasse, like those fallback plans now being discussed, which kowtow to the extremes but once again fail to solve the growing deficit problem." He continues:

Instead, let’s use the crisis to adopt a tough-minded debt control compromise like that hammered out by “The Gang of Six,” a group of three Republican and three Democratic senators led by our own Mike Crapo, after nearly a year of difficult give-and-take negotiation between senators representing every part of the political spectrum.

...Yes, we must raise the debt ceiling so we can pay our existing bills, but let’s do so by enacting fundamental reform like that advocated by the Gang of Six, which sets the nation on a fiscally responsible course for less federal government debt and renewed private sector growth. Demand all of our members in Congress agree to compromise their differences, work with the president and stop acting like children.

July 27, 2011

A recent report from the Associated Press Global Economy Tracker found that the U.S. national debt (as a percentage of GDP) is the fifth largest among the world's major economies. According to the Tracker, which analyzes financial and economic data from thirty of the world's largest economies, U.S. debt in the first three months of the year equaled 95 percent of GDP. The only countries listed as having a higher debt as a percentage of GDP were Japan, Greece, Thailand, and Italy**.

As if we needed another indicator or reason to get our fiscal house in order, the AP just gave us another.

 

**India is also ranked above the U.S., but ranking is based on data from the fourth quarter of 2010 rather than the first quarter of 2011.

July 27, 2011

Earlier this week, the International Monetary Fund (IMF) released its annual report The United States: 2011 Article IV Consultation, highlighting the need for the United States to enact a comprehensive fiscal reform plan that would stabilize and reduce our debt. The report states that “fiscal consolidation needs to proceed as debt dynamics are unsustainable and losing fiscal credibility would be extremely damaging for the United States and for the rest of the world,” while offering thoughts on what the United States' fiscal, financial, and monetary policies should look like going forward.

More specifically, the report offers many recommendations on how the U.S. should look to craft a framework for fiscal reform. Among the broader points:

  • The most important priority of fiscal policy should be to stabilize the debt by mid-decade and then gradually reduce it
  • Congress should explicitly endorse the medium-term fiscal objectives of any deficit-reduction framework
  • Any deficit-reduction plan should include spending cuts, entitlement reforms and revenue increases
  • More savings than what President Obama proposed in his February budget and April deficit-reduction framework will be necessary
  • A debt “failsafe” mechanism could help keep fiscal consolidation on track, but should not be overly relied on (see here and here for more about debt enforcement mechanisms)
  • Fiscal consolidation would have long-term benefits for the US and global economy, but should be carefully balanced to avoid disrupting a fragile recovery

The IMF is the latest group to voice support for a comprehensive approach: "A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization."  As leaders in Washington debate raising the debt ceiling and reducing deficits, they must look to find a plan that would stabilize and then reduce our debt.

July 26, 2011

In a new op-ed published in Investor's Business Daily, CRFB co-chairs Tim Penny and Bill Frenzel offer insight into how Democrats and Republicans in Washington can come together in the debt negotiations to avoid economic disaster, suggesting that the way out is by coming to "the type of principled compromise in which both parties are willing to accept things they don't like for the good of the nation."

"Much is at stake with a fiscal cliff fast approaching. Our nation's leaders need to find a way to compromise without compromising their principles, just as President Reagan and Democrats did in the 1980s."

Click here to read the full op-ed.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

July 26, 2011
Common Ground and Subtle Differences

If you take a look at House Speaker John Boehner's proposal and Senate Majority Leader Harry Reid's proposal -- both of which increase the debt limit and enact deficit reduction in a two-part process -- you'll see that they are more similar than they are different (see below for a comparison table of elements within the proposals). Boehner has been promoting his proposal as one that would reduce deficits by $3 trillion, with $1.2 trillion in discretionary cuts upfront and $1.8 trillion to come out of a special process this fall. Reid's proposal would enact roughly the same $1.2 trillion in discretionary cuts upfront (more on that here), $70 billion in other mandatory savings, limit war spending to a total of $450 billion over 2013-2021, and put in place a similar special process to recommend additional savings by year's end.

You can see the similarities. A two-step process isn't perfect (read our release from last night on ways to make the process and enforcement as credible as possible), but it could help us raise the debt ceiling and start to set us on the right course.

Assuming that a two-part process seems to be where the consensus is, let's focus on the second part -- the joint committee, which would achieve real deficit reduction. As CRFB president Maya MacGuineas said yesterday:

"Promises of future savings are only as good as the intentions behind them, but if policymakers are serious in their understanding of the need to tackle entitlement reform and tax reform, these frameworks could do the trick.”

Subtle Differences

The proposals differ in how the promise of future savings from the joint committee would be enforced. The Boehner proposal would make the President's ability to request (subject to Congressional disapproval) a further increase in the debt limit contingent on enactment of committee recommendations under an expedited process. The Reid proposal would also require a vote on the committee recommendations under an expedited process, but does not provide enforcement to ensure that the savings are achieved. A strong enforcement mechanism to ensure savings materialize should be considered a necessity. Enforcement levers from the Gang of Six could be used to strenghten either framework. In addition, the Peterson-Pew Commission's paper on how to construct targets and triggers provides several ideas for strengthening enforcement rules, as well as PPC's fiscal toolbox which outlines some of the enforcement mechanisms present in other plans.

There is also a difference in the goals for the Committee.

Rather than offering a savings target, the Reid proposal sets a goal of reducing the deficit to 3 percent of GDP -- but does not specify when that goal should be achieved. It could be a year-in goal -- perhaps 2015, as with the President's Fiscal Commission. It could be a 10-year average deficit. No one knows.

The Boehner proposal instead calls for $1.8 trillion in deficit reduction -- but does not define what baseline that would be scored off of. It's difficult to evaluate the savings if the baseline is not specified. By remaining silent on the baseline but requiring the plans be scored by CBO under existing procedures, the Boehner proposal appears to require the Committee recommendations be scored against CBO's current law baseline, which assumes expiration of all the 2001/2003/2010 tax cuts as well as no AMT patch or “doc fix.”

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In order to get beyond the baseline confusion and potential for gimmicks to artificially inflate savings, CRFB has recommended using specific debt-to-GDP levels and corresponding savings targets to ensure that legislation actually achieves the goal of stabilizing and reducing our debt.

As they currently stand, there is a lot of uncertainty with both the Reid and Boehner proposals. Perhaps that is by design, with the intent being to reconcile the two plans and find a consensus. Let's hope -- the debt limit must be raised as soon as possible, and it is time policymakers find common ground in order to make a deal. While these proposals have their differences, as can be seen below, there is much overlap.

 

 Reid Proposal 
Boehner Proposal
Debt Ceiling Increases        
  • Raises debt ceiling by $2.7 trillion immediately, which would last until 2013
  • Allows President to request $900 billion increase in debt ceiling, $400 billion immediately and rest subject to vote of disapproval
  • If more than $1.6 trillion additional savings from special committee enacted, President authorized to request $1.6 trillion debt ceiling increase, subject to vote of disapproval
Discretionary Spending       
  • $1.2 trillion in savings over 10 years from discretionary caps
  • Caps grow roughly with inflation
  • Firewall between security and non-security spending for FY 2012 and FY 2013
  • Limits war spending to $450 billion over the 2013-2021 period
  • Enforcement: 60-vote point-of-order on bill that would cause spending to exceed caps or to increase caps AND automatic, across-the-board cuts if caps are exceeded
  • $1.2 trillion in savings over 10 years from discretionary caps
  • Caps grow roughly with inflation
  • Details range for defense spending in FY 2012 and FY 2013
  • Enforcement: Automatic, across-the-board cuts if caps not met
Specified Other Mandatory Savings        
  • $70 billion in other mandatory savings (savings other than from Social Security and federal health programs)
    • $40 billion from program integrity to achieve savings from waste, fraud, abuse
    • $15 billion from spectrum sales
    • $10 - $15 billion from agricultural reforms
    • Higher education reforms whose savings go to Pell Grants
  • $16 billion from program integrity to achieve savings from waste, fraud, abuse
  • $13 billion from higher education reforms to go to Pell Grants
Special Committee to Identify Additional Savings       
  • Joint, bipartisan committee of 12 lawmakers to "present options for future deficit reduction"
  • Goal: Reduce deficit to below 3% GDP
  • Mandate: Make recommendations to meaningfully improve short and long term fiscal imbalance, may include tax reform, shall consider bipartisan plans
  • Recommendations guaranteed to receive up or down Senate vote under expedited process by the end of the year
  • Joint, bipartisan committee of 12 lawmakers to report deficit reduction legislation by November 23
  • Goal: $1.8 trillion in deficit reduction
  • Mandate: Make recommendations to meaningfully improve short and long-term fiscal imbalance
  • Enforcement: Second $1.6 trillion debt ceiling increase not authorized without enactment of at least $1.6 trillion additional savings
  • Recommendations considered under expedited process
Balanced Budget Amendment (BBA)       
  • None
 
  • Requires vote on BBA in House, and subsequent vote in Senate if BBA passes House

 

Note: This blog has been updated since its original posting.

July 26, 2011

Update: CBO has scored Boehner's legislation, showing it to reduce deficits by a total of $850 billion from 2012-2021. The discretionary caps are $1.1 trillion below CBO's March baseline over ten years, but only $840 billion below a baseline that incorporates the final CR.

House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV) both released "dueling" debt plans yesterday, which actually have a lot of similarities (more on that later). We will compare the broader provisions of the two proposals later here on The Bottom Line, but first, we will look at the discretionary spending caps that each proposal calls for.

Just like other parts of their plan, these caps are very similar, reflecting a supposed agreement that was made in this area. Both plans have around $1.045 trillion in budget authority for 2012, about a $20 billion drop from this year's spending levels. After remaining roughly frozen for 2013, the caps grow with inflation thereafter. Overall, by their estimates, the caps would save $1.2 trillion over ten years. The numbers are not exactly the same, because it appears Boehner could be relying on the CPI while Reid uses the GDP deflator to adjust the caps after 2014 (the CPI is estimated to grow slightly faster during those years). 

The graph below compares Boehner and Reid's caps, along with the Fiscal Commission's discretionary caps and the CBO March baseline.

 


 

While the discretionary caps are overall quite similar in their amounts, there are a few technical differences between the two sets of caps. In Boehner's caps, separate limits for defense and nondefense spending apply for 2012 and 2013, although they are given as ranges--$535-$569 billion for defense in 2012, $537-$571 billion in 2013--not exact numbers. Reid's caps provide these limits, but for security and nonsecurity spending (defense plus veterans spending) and he gives exact numbers instead of ranges.

Still, the technical differences are vastly overshadowed by the great similarities. It seems that there is agreement on the level of discretionary spending cuts. That's a start to getting an overall deficit reduction agreement tied to a debt ceiling increase.

 

July 25, 2011

The state of play in the debt negotiations has been an ever-evolving spectacle over the last several weeks. First the Biden group negotiations, then talks between Congressional leaders and the White House, then negotiations between the President and Speaker of the House John Boehner, then the Reid-McConnell proposal, then the Gang of Six proposal, then additional negotiations between the President and the Speaker--just to mention a few. Well, there's been another twist in all this ever since talks broke down again on Friday evening.

Speaker Boehner and Senate Majority Leader Harry Reid are now advancing proposals on their own on how to raise the debt ceiling and begin tackling future debt. First, some details on the specifics of what each plan calls for:

Boehner's Proposal

  • $1.2 trillion in savings from 10-year discretionary caps
  • $1 trillion increase in the debt ceiling now
  • Requirement that Congress votes on a balanced budget amendment after Oct. 1 but before the end of the year
  • Create a 12-member commitee of lawmakers to report legislation by Nov. 23 on how to reduce deficits by another $1.8 trillion
  • If the $1.8 trillion in savings is enacted, authorize the President to increase the debt ceiling by another $1.6 trillion

Reid's Proposal

  • Raises debt ceiling through 2012 now
  • $1.2 trillion in savings from 10-year discretionary caps
  • $100 billion in other mandatory savings (excluding Medicare, Medicaid, and Social Security)
    • $40 billion from waste, fraud, and abuse
    • $30 billion from Fannie Mae/Freddie Mac reforms
    • $15 billion in spectrum sales
    • $10-$15 billion in agricultural reforms
    • Higher education reforms to strengthen Pell Grants
  • $1 trillion in savings from winding down wars in Iraq and Afghanistan
  • $400 billion from interest savings
  • Establish 12-member committee of lawmakers to find additional savings

CRFB is happy to see both plans rely on upfront savings in a down payment on future debt reduction, as well as kicking off a special process to identify additional deficit reduction. These approaches correctly recognize the need to raise the debt ceiling as soon as possible, but also that the type of structural reforms that will be necessary to stabilize and reduce our debt take time and that forcing lawmakers to continue working on bipartisan solutions can keep the ball moving forward.

These proposals aren't perfect, though. But they're much much better than the status quo and could provide a framework for a responsible path forward. As the process unfolds in the coming days lawmakers should push for the largest possible down payment without resorting to phony savings and work to ensure that there is a credible process for achieving additional savings with all parts of the budget on the table and an enforcement mechanisms to ensure the savings materialize.

Lawmakers have a real opportunity here to begin tackling our fiscal challenges. Let's hope they take it.

July 25, 2011

Tonight, President Obama will address the nation at 9 PM EST about the current negotiations going on between him and Congress over how to raise the debt ceiling and begin to control rising federal debt. Let us hope this speech furthers the current impasse currently strangling Washington and helps lead towards a comprehensive and bipartisan deal. You can watch the address live at www.whitehouse.gov/live.

 

July 25, 2011

Although this idea isn't brand new, CBO director Doug Elmendorf has a blog post that concisely illustrates the trade-offs that must be made in order to get our fiscal policy back in line. In other words, we're going to have to make some choices about the size of government and the allocation of resources within that constraint. 

Given the aging of the population and the rising cost of health care, attaining a sustainable budget for the federal government will require the United States to deviate from the policies of the past 40 years in at least one of the following ways:

  • Raise federal revenues significantly above their average share of GDP;
  • Make major changes to the sorts of benefits we provide for older Americans;
  • Substantially reduce the role of the rest of the federal government—that is, defense (the largest single piece), Food Stamps, unemployment compensation, other income-security programs, veterans’ benefits, federal civilian and military retirement benefits, transportation, health research, education and training, and other programs—in our economy and society.

Any serious bipartisan deficit reduction plan would likely do a combination of all three that looks at each area of the budget for savings. Elmendorf presents three different scenarios for how we would get to fiscal sustainability. Scenario 1 involves keeping revenue at its historical average and reducing all non-interest spending. Scenario 2 maintains current law benefits for Social Security and health programs, but allows revenue to rise above its historical average and allows other spending to fall well below its historical average. Scenario 3 maintains "other spending" while cutting the major entitlements and allowing revenue to increase.

An illustrative example of these trade-offs in the graph below that originally appeared in the post. It shows primary (non-interest) spending and current law revenue levels for the House Republican budget (Scenario 1), current law projections (Scenario 2), and an illustrative option where the "other spending" category is maintained at its historical average, but Social Security and health programs are cut to get to primary balance (Scenario 3).

 

In CBO's long-term outlook, the default path is basically Scenario 2, or current law. Under that scenario, Social Security and health programs are projected to grow as under current law, rising with the growth in the economy, health care costs, and population aging. However, revenues rise way past its historical average--partially due to the expiration of the tax cuts and the AMT patch--and other spending falls well below its historical average. If we keep the government essentially on auto-pilot, the choice is already made. So, if lawmakers want to prevent discretionary and other mandatory spending from falling as it is scheduled to do, or prevent real bracket creep from pushing revenue way up, they will have to deviate from the current law path and prioritize accordingly. 

However, current law isn't exactly a great path to follow. Debt still remains elevated throughout the entire 75-year period, and would not stabilize until the 2040s. We need a true deficit reduction plan now that will get our debt onto a sustainable path this decade. Let's hope lawmakers can forge a bipartisan solution.

July 25, 2011

Elmer B. Staats, a Senior Advisor of the Committee for a Responsible Federal Budget and former comptroller general of the United States, died peacefully on July 23 in Washington, DC. Mr. Staats was 97 years old and died as a result of congestive heart failure.  During the Truman, Eisenhower, Kennedy, and Johnson administrations, Mr. Staats served as deputy director of the budget before becoming the comptroller general, where he served from 1966 through 1981. From 1984 to 1990, he was a member of the Governmental Accounting Standards Board and from 1990 to 1997, he was the first chairmen of the Federal Accounting Standards Advisory Board.

Most recently, Mr. Staats has been a trustee of the Committee for Economic Development and member and councilor of The Conference Board.

From everyone at CRFB, we would like to offer our condolences to the Staats family.

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