Budget Process and Rules
Now that the Senate and House have passed their respective budget resolutions, a budget conference committee is right around the corner. One aspect of the competing resolutions that will have to be dealt with are provisions related to the budget process. Both budgets include provisions to address issues with the budget process that our Better Budget Process Initiative (BBPI) has identified. While we have previously written on both budgets' treatments of reconciliation instructions, below we’ll go further and highlight some of the other budget process provisions.
The House’s resolution embraces both the dynamic scoring rules put into place at the start of the 114th Congress as well as the rules prohibiting a general fund transfer from the Social Security Old Age and Survivors' Insurance (OASI) trust fund to the Disability Insurance (DI) trust fund that does not also improve overall solvency. In addition, the House’s budget scores general fund transfers to the Highway Trust Fund as new spending. This is significant given the impending insolvency of the Highway Trust Fund on May 31, one of the upcoming fiscal speed bumps.
We have advocated that the budget process should better focus on the long term. The House budget partially addresses this by including a long-term spending point of order.
The House budget also adds rules regarding so called fair-value estimates of government credit programs. Specifically it provides for supplemental analysis from the Congressional Budget Office (CBO) at the request of the Chair or Ranking Member of the Budget Committee. Further, it allows the Chair of the Budget Committee to use this supplemental estimate as the official score for budget enforcement.
Although the numbers in the budget resolution draw a lot of attention, one of the most impactful parts of the resolution deals with budget process, setting up the parameters for legislation later in the year. A key part of this process is reconciliation instructions, which help turn the assumptions in the resolution into reality. Additionally, it provides a bill prepared by a committee filibuster-proof consideration on the floor. This legislation would need to be signed by the President and have the force of law, while the budget resolution does not. Both the Senate and House Budgets provide reconciliation instructions, starting this potentially powerful legislative process.
But what are reconciliation instructions?
Reconciliation instructions are directions to a committee to report legislation that changes existing law to bring spending, revenues, or the debt limit in line with the budget resolution. Reconciliation specifies the committee or committees, the nominal dollar savings needed, and sometimes a deadline for legislation to be reported. A reconciliation bill that comes to the floor cannot be filibustered in the Senate – meaning it does not need 60 votes – and has a 20-hour debate clock in both chambers (unless waived by rule or unanimous consent). Reconciliation's special privileges are important because they are intended to ease the passage of politically difficult (usually) deficit reduction legislation.
The federal government will reach its second Fiscal Speed Bump today, as the debt ceiling will be reinstated after having been suspended since last February. The Treasury Department will be able to push back the actual day of reckoning until the fall with "extraordinary measures," but lawmakers will have to lift it later this year to avoid a default on the debt. At times, raising the debt ceiling has involved unnecessary brinkmanship, but it has often been used as a catalyst to make important fiscal reforms. To further the latter and minimize the former, the Better Budget Process Initiative has proposed ten options to change the debt ceiling to make it a more effective tool for fiscal responsibility while improving financial stability in a new paper entitled "Improving the Debt Limit".
The paper divides the changes into four broad categories: linking debt limit changes to achieving fiscal targets, incorporating the debt limit into Congress's decision making, applying the debt limit to more meaningful measures, and replacing the debt limit with a limit on future obligations. The ten options are below:
Link changes in the debt limit to achieving responsible fiscal targets
1) Presidential authority to increase the debt limit if fiscal targets are met
2) Presidential authority to increase the debt limit if accompanied by a plan to put debt on a declining path as a share of GDP
3) Suspend the debt limit automatically if fiscal targets are met
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.
The recently adopted House rules for the 114th Congress are getting attention in the budget world mostly for their requirement that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) take into account macroeconomic effects when scoring budget legislation, a process known as dynamic scoring. But that requirement isn't the only new rule with fiscal implications.
The House approved last night a deficit-increasing one-year tax extenders package. After a correction by the Joint Committee on Taxation, the updated cost of the bill is $41.6 billion over 10 years. Notably, this cost violates various budget rules, or points of order, which the House waived. More significantly, the legislation included language excluding costs from statutory pay-as-you-go (PAYGO).
Furthermore, tax extenders are intentionally made temporary to hide their costs when they are repeatedly extended year after year. If the extenders in this bill were extended for the next 10 years, debt as a share of the economy would be 3 percentage points higher by 2024, an increase of $850 billion.
Because the legislation had over $40 billion in costs that were not offset, it violates several budget enforcement provisions. First, it reduces tax revenue below the current law levels called for in the Ryan-Murray agreement serving as this year's budget. Section 115(b)(3) of the Ryan-Murray budget agreement set revenue levels for the next ten years at the levels in CBO's most recent baseline. The bill violates Section 311 of the Congressional Budget Act, which enforces the budget resolution's totals, because CBO's baseline assumes that those temporary tax breaks remain expired. While the Ryan-Murray agreement did not call for increased revenues as the Senate's FY 2014 budget resolution did, it maintained revenues at current law levels as the House-passed FY 2014 budget did, effectively assuming expired tax breaks would be paid for if renewed.
If Republicans win a majority in the U.S. Senate this November, they may push to have the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) use dynamic estimates in official scoring of legislation, according to press reports. Dynamic estimates, which include the economic effects of proposed legislation, would provide useful information to lawmakers. Trying to determine these effects, however, is an uncertain science.
Analysis of the potential dynamic effects of legislation could provide policymakers with useful information in evaluating legislation. However, incorporating dynamic analysis into official budgetary scores of legislation could be problematic for a variety of reasons and could lead to Congress enacting legislation that increases the deficit. While such analysis could be beneficial to understanding the full implications of legislation, it should only be provided as supplementary information and not part of the official score.
In brief, dynamic estimates incorporate the effect that legislation would have on macroeconomic variables such as Gross Domestic Product, employment, and inflation. Current scoring conventions only include microeconomic changes. To learn more about dynamic scoring, read our report: Understanding Dynamic Scoring.
A new paper by Donald Marron of the Urban Institute brings a new idea to the table in the debate over accounting methods for federal lending programs. The paper proposes an approach Marron argues corrects the downsides he describes in both current Federal Credit Reform Act (FCRA) budget accounting standards and fair-value accounting. His approach is called "expected returns," and it is a third way that maintains some of the benefits of both approaches.
Simply put, expected returns accounting calculates a yearly expected value on a loan by comparing the government's returns net of defaults to its borrowing costs (interest on the new federal debt that funds the loan). This method, the paper argues, is a more accurate picture of the actual fiscal effects of the loan over many years in contrast to showing the lifetime effect of a loan in one year as FCRA and fair-value do. This presentation allows for the accounting of any taxpayer subsidies over market rates, an important point made by fair-value. Expected returns accounting departs from both approaches by spreading the score over time when net returns or losses are expected.
Below is an example of a $1,000 dollar loan at below market interest rates from the paper. The government loses $35 in the first year because the loan is below market rates, but it gains money in later years as its returns exceed borrowing costs.
Few topics elicit more yawns than a deep dive into accounting standards. Yet, there may be good reasons to grab a cup of coffee and pay attention to the way our government does its bookkeeping. As a National Affairs article by Jason Delisle and Jason Richwine and a Congressional Budget Office (CBO) report on federal mortgage guarantees remind us, accounting methods can make a big difference for budget projections.
According to the official method for evaluating credit programs spelled out in the Federal Credit Reform Act (FCRA) of 1990, the federal government earns healthy profits from its federal student loan portfolio and the single-family loan guarantee program, to the tune of $184 billion and $63 billion respectively. But as we have explained before, there are different methods to evaluate the budgetary impact of federal programs. Using a different accounting method, known as fair-value accounting, CBO projects that these programs could actually cost the government $95 billion and $2 billion respectively. (Click here to read more about fair-value accounting.)
The use of supplemental appropriations got some press last month as the Obama Administration requested $4.3 billion to address the Central American migrant crisis and fight wildfires. Although neither funding measure passed, it showed the role that supplementals continue to play in the appropriations process. Lawmakers use supplemental appropriations to respond to needs that they did not foresee when they passed government funding measures. To see how much activity has taken place outside of the "regular" process, CBO has helpfully recapped in a new report total supplemental appropriations since 2000 (see the data in Excel here). They break down spending by year and type, showing both the amounts that have been requested and what ultimately was passed into law.
Overall, Presidential administrations have requested $1 trillion over the past 15 fiscal years, and Congress has enacted $1.1 trillion of appropriations ($1.15 trillion of gross spending net of $50 billion in rescissions of past authorized spending). The enacted amount is equal to 0.5 percent of GDP over that period, and it peaked at 1.3 percent ($191 billion) in 2009 when war spending was near its peak; by contrast, there was no supplemental spending in 2011 and 2012 and only $225 million so far in 2014. Including interest brings total spending to $1.4 trillion, or 0.7 percent of GDP.