The Bottom Line

January 30, 2015
Compensation Commission Releases Long-Awaited Report

After a more than a year-long process, the Military Compensation and Retirement Modernization Commission released its final report yesterday, recommending changes to military pay, pensions, health benefits, and other benefits. The report is highly anticipated because of the Pentagon's repeated insistence that personnel costs need to be addressed to avoid other areas from getting squeezed by the defense caps. Lawmakers so far have often ignored or only partially implemented their policies. Since the Pentagon spends some of its current budget paying for future retirement and health benefits in addition to current costs, the longer policymakers hold off, the tighter the defense budget gets.

The report includes fifteen specific recommendations in the three areas of Pay and Retirement, Health Benefits, and Quality of Life programs. The Commission was prohibited from recommending changes to the benefits of existing servicemembers (who could still opt into the new retirement system), so these changes generally only apply to new troops. Using policies that only apply to new servicemembers, as policymakers did for the Murray-Ryan cost-of-living adjustment change, has trade-offs: it reduces upfront savings and creates disparities in benefits among new and old servicemembers, but it also makes changes more politically palatable and ensures that servicemembers can still claim the benefits they were promised, while ultimately achieving similar savings in the long run. Importantly, the report indicates that servicemembers would prefer the new benefit structures by wide margins.

The Commission's recommendations are:

January 30, 2015

On Monday, the President is scheduled to release his FY 2016 Budget. Based on press reports, we know some rough outlines of what he will be proposing. Here are some other things to look for.

Will it put debt on declining path? 

Our long-term fiscal challenge is addressing the unsustainable growth in the national debt. Thus, all of this year's budgets, including the President's, should put debt as a percent of GDP on a declining path over the next ten years and beyond. After CBO’s baseline release this week indicated that debt will start to rise after 2018, we calculated that $2.4 trillion in deficit reduction will be needed to put the debt on a clear downward path. The budget somewhat hit this goal last year, when OMB projected that the FY 2015 budget would put debt on a declining path, but CBO's re-estimate projected that debt would continue to grow as a percent of GDP. CBO has generally, though not always, projected higher debt when it re-estimates the budget due to different economic and technical assumptions and not counting some gimmicks, so we may have to wait for that score. The President has said his budget will place debt on a declining path, but will it hold up to scrutiny?

January 30, 2015

After we sent out our weekly Bottom Line weekly email with the subject line, "All About that CBO Baseline," we started getting requests for the full lyrics. For a lighter look at CBO's report, here's a song that borrows the tune of Meghan Trainor's "All About that Bass."

If you want a more serious look, sign up for our weekly emails or read our report on CBO's January 2015 Budget and Economic Outlook.

 

January 29, 2015

CBO's official budget estimates rely on general adherence to current law, meaning that no new laws are passed other than to keep the government functioning basically as is. This means that temporary tax cuts or spending increases are expected to expire as scheduled, and legislated spending cuts and tax increases go into effect as scheduled. Of course, that assumption has had mixed success in recent years, and we've pointed out that if lawmakers don't stick adhere to current law, debt would go from bad to worse.

To illustrate that, we first construct a "PAYGO baseline," which is CBO's current law projections plus an assumed drawdown of war spending, as scheduled. Since CBO's baseline assumes war spending will grow with inflation from its current level of $74 billion, lawmakers can achieve "savings" of $455 billion simply by reflecting the withdrawal from Afghanistan and spending $30 billion per year on Overseas Contingency Operations. This does not represent real savings, since the drawdown is already in place, but it would preclude the possibility of the war designation becoming a permanent slush fund. Under this baseline, debt would grow from 74 percent in 2020 to 77 percent by 2025.

Building off the PAYGO baseline, we then create a "No Offset" baseline, in which lawmakers take fiscally irresponsible stances on a series of decision points, many of which are Fiscal Speed Bumps this year. These decisions include:

    • Permanently extending the "tax extenders" that expired at the end of 2014 ($737 billion)
    • Enacting a permanent "doc fix" to prevent a 21 percent Medicare physician payment cut in April ($137 billion)
    • Permanently repealing the sequester starting in 2016 ($1.01 trillion)
    • Permanently extending refundable tax credit expansions beyond 2017 ($203 billion)
January 29, 2015
Obama Must Put Some Muscle Behind Gasoline-tax Increase

George V. Voinovich is a former senator and governor of Ohio and a member of the Committee for a Responsible Federal Budget. He wrote a commentary today that appeared in The Columbus Dispatch. It is reposted below.

As the 114th Congress heats up and the legislative priorities for the new session are espoused, it is time to pass a gasoline-tax increase as part of a robust, multiyear transportation package that would respond to the growing crisis in highway and transit infrastructure, create jobs, improve highway safety, reduce greenhouse-gas emissions and provide safe and affordable transit and rail alternatives to the many people who need them.

The federal gasoline tax has not been increased since President Bill Clinton led the charge in 1993, and since then it has lost more than 40 percent of its value because of inflation. For over 20 years, Congress has resisted increasing the gasoline tax and has been committing what Sen. Bob Corker, R-Tenn., has called “generational theft,” by borrowing money from the General Revenue Fund to shore up the Highway Trust Fund to the tune of more than $56 billion in the past six years. This number will continue to rise as the value of the current gasoline tax evaporates.

January 28, 2015

In addition to updating budget projections, CBO's baseline also looks at the state of various government trust funds over the next ten years. Two of the trust funds – the Highway Trust Fund (HTF) and Social Security Disability Insurance (DI) will have to be dealt with this year or next. The other two with later exhaustion dates – Social Security Old Age and Survivors' Insurance (OASI) and Medicare Hospital Insurance (HI) – have both seen a drop in the size of reserves. Here's a rundown of each of these four trust funds.

Highway Trust Fund

The last time lawmakers dealt with highway financing, they intended that the expiration of the highway bill and the exhaustion of the HTF both happen at the end of May. Now, it looks like there may be a little time between the two as the general revenue transfer to the HTF may last longer.

Previously, CBO expected there to be a $2 billion shortfall in FY 2015, but that gap has been wiped out in the newest projections by two developments: slightly higher gas tax revenue (from lower gas prices increasing demand) and slightly lower spending from lawmakers freezing spending in 2015 rather than letting it grow with inflation. These developments mean that lawmakers may be able to wait until the summer to deal with the HTF, thus theoretically allowing them to write a new highway bill without dealing with the financing gap for a little bit. These two developments also make a long-term solution slightly easier, reducing the trust fund shortfall by about $10 billion.

 

Disability Insurance Trust Fund

January 28, 2015

CBO's budget outlook, little changed since its last update, shows the same story it has for a few years: the debt picture will stabilize through about the end of the decade, but then will grow by nearly 5 percentage points of GDP between 2020 and 2025 from 74 to 79 percent of GDP.

Simply stabilizing the debt at current levels would require $1.3 trillion of deficit reduction over a decade, while putting debt on a downward path as a share of GDP -- a minimum standard of sustainability  -- would require $2.4 trillion of savings.

In previous iterations of CBO's baseline, we showed an illustrative savings path that would leave debt clearly declining as a percent of GDP. For example, in May 2013, we showed that it would take $2.2 trillion of savings over ten years compared to our realistic baseline to put debt on a downward path to 67 percent by 2023. We used this level because the downward path proved robust to having more frontloaded savings, worsening economic projections, and lawmakers enacting deficit-increasing policies.

However, two years have now passed and CBO's projections worsened in the meantime, so the target could be somewhat more lax but require higher savings. Getting debt to 70 percent of GDP by 2025 would take $2.4 trillion of savings compared to CBO's baseline. We estimate that a reasonably backloaded plan of this magnitude would put the trajectory of debt on a clear downward path, and leave deficits in a consistent decline to about 2 percent of GDP by 2025 (instead of deficits increasing as a percent of GDP after 2016 under current law). Of course, actual plans may vary and the extent to which they would ensure long-term sustainability depends greatly on the types of policies included.

January 27, 2015

Yesterday, CRFB published an analysis of CBO’s latest Budget and Economic Outlook. The six-page document summarizes the forecasts and emphasizes the return of trillion-dollar deficits over the next ten years. Although CBO projects slightly decreasing deficits over the next two years, there will be a jump from a 2016 low of $467 billion to a $1.09 trillion by 2025.

January 26, 2015

Trillion-dollar deficits are coming back in 2025. That's one of the many stories told by the new budget update released today by the Congressional Budget Office. The deficit, which had fallen to a post-recession low of $483 billion (2.8 percent of GDP) last year, is projected to fall slightly more this year to $468 billion (2.6 percent of GDP), but increase to reach $1.09 trillion (4.0 percent of GDP) by 2025.

Debt will also grow substantially in nominal dollars, from $13 trillion today to $21.6 trillion by 2025. As a percent of GDP, debt will remain stable near its current post-war record of around 74 percent of GDP through 2020, but then it too will start rising quickly, reaching nearly 79 percent of GDP by 2025 and continuing to grow thereafter. As CBO explains, this continuing long-term growth would not be sustainable:

Such large and growing federal debt would have serious negative consequences, including increasing federal spending for interest payments; restraining economic growth in the long term; giving policymakers less flexibility to respond to unexpected challenges; and eventually heightening the risk of a fiscal crisis.


 

January 23, 2015

Today CRFB released a new paper as part of our Better Budget Process Initiative titled "Improving Focus on the Long Term."

The budget process focuses on the short term, often at the expense of longer-term considerations (like how our long-term debt problem is far from being solved). This distortion allows policies to be crafted in ways that mask their true costs and contributes to results that downplay looming fiscal challenges.

The short-term focus contributes to many poor outcomes, such as emphasis on short-term deficit reduction (with little improvement in the long-term fiscal outlook), the use of “timing gimmicks” designed to obscure the budgetary impact of policy choices, and the reliance on one-time savings to ensure “deficit-neutrality” within the budget window but deficit increases beyond it. It also often causes policymakers to undervalue policies which achieve modest savings over the ten-year window but much greater savings after that to help "bend the debt curve" over the long term. (For more on looking beyond the ten-year window, see our prior paper on the subject)

In addition, the short-term focus has made it conducive for many in Washington to brag that the fiscal situation is under control based on a short-term improvement in the deficit, despite the fact that the debt is projected to grow faster than the economy for the medium and long term.

January 23, 2015
Brookings Event Discusses Effect of the Sequester

The biggest piece of deficit reduction that lawmakers have accomplished so far is the series of caps on annually appropriated discretionary spending through 2021. The Budget Control Act specified spending caps that would reduce spending by more than $750 billion over ten years. It also put in place a sequester which would further reduce those caps by roughly $90 billion per year if the Super Committee did not agree on $1.2 trillion of deficit reduction. The Super Committee did indeed fail, and the sequester went into effect in March 2013. After partial sequester relief in 2014 and 2015, the discretionary cuts will return in full force in fiscal year (FY) 2016. As a result, discretionary spending will fall to a record low share of GDP in ten years.

With the sequester hanging over the appropriations process, the Brookings Institution held an event last week discussing the sustainability of these caps. The event brought together a panel of four experts with different perspectives on the caps, including:

    • Robert Hale, Former Under Secretary for Defense (Comptroller) and Senior Fellow at Booz Allen Hamilton
    • Ron Haskins, Senior Fellow of Economic Studies at Brookings
    • Michael O' Hanlon, Foreign Policy Director of Research at Brookings
    • Alice Rivlin, former Congressional Budget Office (CBO) and Office of Management and Budget (OMB) director and Senior Fellow of Economic Studies at Brookings
January 22, 2015

The House Energy and Commerce (E&C) Health Subcommittee yesterday held the first of two hearings on the Sustainable Growth Rate (SGR) formula for Medicare physician payments. Set to cut those payments by 21 percent in April 2015 when the latest "doc fix" runs out, the SGR will be one of the first "Fiscal Speed Bumps" the new Congress will confront this year. Fixing it permanently could cost at least $140 billion through 2025.

Yesterday's hearing focused on replacing the formula as well as whether and how to pay for the cost, featuring health care policy experts and policymakers. The session today featured representatives from various provider groups.

The witnesses at yesterday's hearing were:

    • Former Senator Joe Lieberman (D/I-CT)
    • Former OMB and CBO Director and current director of Brookings's Engelberg Center for Health Reform Alice Rivlin
    • American Institutes of Research Institute Fellow Marilyn Moon

In their opening statements, both E&C Chairman Fred Upton (R-MI) and Health Subcommittee Chairman Joe Pitts (R-PA) encouragingly stated that repealing the SGR must be paid for, with Pitts citing CRFB's finding that doc fixes have been paid for 98 percent of the time since 2004.

Both noted that there exist numerous options with bipartisan support to pay for a replacement. Upton went further, calling on lawmakers to not just fix the SGR but make Medicare sustainable.

January 22, 2015
CRFB Releases Budget Resolution Principles

Yesterday, the Committee for a Responsible Federal Budget released a one-page list of principles to help guide policymakers in crafting a budget resolution this spring. CRFB called on Congress to follow regular order by agreeing to a budget resolution conference report that lays out a framework for pursuing priorities and addressing issues in a fiscally responsible manner before making major decisions on spending or revenues. The principles include four primary criteria for a responsible budget resolution:

  • Put the debt on a downward path - The budget should include realistic, gimmick-free tax and spending levels sufficient to reduce the debt as a share of the economy in the medium and long term. You can learn about the unsustainable path of federal debt by reading our Report: Deficit Falls to $483 Billion, but Debt Continues to Rise.
  • Responsibly address upcoming "Fiscal Speed Bumps" - These are the upcoming budget-related deadlines -- such as the impending cuts required by the Medicare Sustainable Growth Rate, depletion of the Highway Trust Fund, and reinstatement of the debt limit -- that present lawmakers with an opportunity to add up to $3 trillion to the debt, or take the more fiscally responsible route. You can read more about them in our paper Fiscal Speed Bumps: Challenges, Risks, and Opportunities.
January 22, 2015
Fix the Debt and Concord Coalition Launch First Budget Initiative

Today, Fix the Debt and the Concord Coalition launched First Budget – an effort to engage voters and candidates in a discussion about the nation’s unsustainable budget during the 2016 presidential campaign.

First Budget's mission is to ensure that “the first budget that the next president submits to Congress must chart a more sustainable course that strengthens the nation, encourages growth and protects coming generations from excessive government debt.” Read the full press release here.

With a long history of advocating for fiscal responsibility, these two organizations hope to raise public awareness about the growing national debt and encourage candidates to make fiscal responsibility a top priority and put forward plans to deal with our long-term fiscal imbalance. With these goals in mind, First Budget will engage voters and mobilize volunteers, starting with the early primary states of Iowa and New Hampshire, to ask candidates directly about the debt and start a public discussion on the campaign trail.

January 21, 2015
President Obama’s Middle-Class Tax Message in the State of the Union

Dr. Eugene (Gene) Steuerle is the Richard B. Fisher chair and Institute Fellow at the Urban Institute and a member of the Committee for a Responsible Federal Budget.  He wrote a column today on his blog - The Government We Deserve. It is reposted below. 

President Obama’s tax proposals for the middle class were a key element of his State of the Union address. But they represent only relatively modest efforts to create subsidies through the tax code rather than through other departments of government. Looked at broadly, many only tinker around the edges of tax policy and count on an overloaded and troubled agency, the IRS, to administer them.

January 20, 2015

Tonight at 9:00 PM, President Obama will address Congress and the nation in the State of the Union address. As he lays out his agenda for this year, CRFB will be following along and providing analysis of the budget-related policies he mentions. We hope the President will address our long-term debt problem in his remarks and set the stage for a bipartisan deficit reduction effort.

January 20, 2015

President Obama's State of the Union address is tonight at 9 p.m. In preparation of his speech, we've brought back our great State of the Union fiscal bingo game - DEBT-O!

Play with your friends and keep track of budget-related words and terms used by the President. Although the speech will cover many issues, President Obama should still address the nation's fiscal issues in his speech, and perhaps talk about how to handle the upcoming Fiscal Speed Bumps. Click here for a printable PDF of eight different boards.

January 20, 2015
A Big Bang on Tax Reform?

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

There is a growing consensus that one of the more fertile fields for possible bipartisan action between President Obama and this new Congress is tax reform.

This is logical.  

January 15, 2015

With tax reform heating up, House Ways and Means member Rep. Devin Nunes (R-CA) has gotten the ball rolling with a business tax reform plan called the American Business Competitiveness Act. The draft would dramatically overhaul and simplify the corporate tax code, broadening the tax base in many areas while lowering tax rates on businesses.

Nunes's draft would change business taxation to be a cash-flow tax, making it more closely related to businesses' actual inflows and outflows. Nunes has said that the plan would be deficit-neutral over ten years using conventional scoring, although he has not made the estimate publicly available. The main elements of the plan include:

  • Reducing the top tax rate to 25 percent for both corporate and non-corporate businesses, phased in over ten years
  • Allowing businesses to write off the full cost of investments immediately (known as expensing) rather than writing them off over the life of the investment (see here for background on depreciation rules)
  • Repealing deductions for interest expenses while reducing taxes on interest income to the dividend rate (20 percent)
  • Eliminating other business deductions and credits
  • Changing the international tax system to a territorial system, where U.S. companies' income earned outside the country is not taxed by the federal government
  • Repealing the corporate Alternative Minimum Tax (AMT)

One of the most unique aspects of the proposal is the move to full expensing and the repeal of interest deductions.

January 14, 2015

Stronger economic growth is one possible way to reduce deficits, but it is often difficult to identify which policies produce the strongest growth because advocates for any policy will contend that their approach is best. However, one way to encourage economic growth is by supporting policies that encourage the formation of startup companies. The University of Virginia's Miller Center released a report today with ideas to do just that, entitled Can Startups Save the American Dream?. The report was the product of the Milstein Commission on Entrepreneurship and Middle-Class Jobs, a part of the five-year Milstein Symposium initiative to advance innovative, nonpartisan, action-oriented ideas to help rebuild the American Dream. CRFB President Maya MacGuineas is a member of the Commission.

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