Domestic Spending

Senate Funding Bill Would Rely on OCO Gimmick

The Senate Appropriations Committee earlier this week posted a draft bill that would extend government funding until December 11 and avert a government shutdown. Unfortunately, it also uses the war spending account as a budget gimmick to provide a backdoor increase in defense spending above budget caps. There are no offsets for the additional spending.

The draft did contain language removing funding from Planned Parenthood, which drew a veto threat from the President, but that version did not receive the 60 votes necessary to proceed in the Senate. Press reports indicate that the same continuing resolution (CR) without the section defunding Planned Parenthood will be voted on Monday.

Regardless of the politics on Planned Parenthood, the bill sets regular discretionary levels at the previously-approved levels of $1.017 trillion. It does so by taking the spending levels for Fiscal Year (FY) 2015, which totaled $1.022 trillion after certain one-time savings in the FY 2015 appropriations bills are excluded, and applied a reduction of 0.5 percent (of which about 0.2 percent was an across-the-board reduction and the remaining is from net reductions fromcuts reffered to as "anomalies"). Colloquially, "the sequester" is back in full effect; the sequester refers to the reduced discretionary spending caps mandated after the 2011 "Super Committee" failed to produce savings.

How to Get This Year's Budget Process Back on Track

On October 1, lawmakers will have to pass new appropriations or a continuing resolution, or the government will shut down for the second time in two years. This is one part of the four-part "gathering storm" that lawmakers face over the remainder of the year. One of the sticking points in funding the government is the return of the sequester-level spending caps, which will essentially hold FY 2016 spending to the previous year's level. Both parties have proposed higher spending levels, but have done so in different ways. To show a way around the impasse, CRFB has released the Sequester Offset Solutions (SOS) plan, which provides $300 billion of sequester relief that is fully offset.

The SOS plan consists of four parts:

  • Sequester Relief: The plan repeals about half of the sequester over the next two years, then allows the spending caps to grow with inflation after 2017. This provides $300 billion of sequester relief in total with smaller amounts of relief over time.
  • Offsets for Two-Year Relief: To offset the $90 billion cost of the two-year sequester relief, the plan outlines $110 billion of savings split roughly equally between policies that build off the 2013 Ryan-Murray deal and targeted mandatory program savings and receipts from the President's budget. The savings are slightly higher than the cost to account for the interest costs associated with the upfront relief.

Congress Might Gladly Pay You in 2022 for Sequester Relief Today

A recent press report (paywall) indicates that Republicans may be looking to pay for increased defense spending next year by promising defense cuts starting in 2022. This type of approach to sequester-level cap replacement is at best disingenuous and at worst a blatant gimmick.

The report suggests the possibility of sequester relief in Fiscal Years 2016 and 2017 paid for with extended and lowered caps from 2022 to 2025. Although the press report didn’t specify how this sort of trade off would work, there are three basic possibilities:

The first would be to offset cap increases in 2016 and 2017 by extending the spending caps beyond 2021 below the level the Congressional Budget Office (CBO) assumes (the 2021 cap adjusted for inflation). While this could be technically argued as a legitimate offset, there is little reason to believe that Congress would reduce discretionary spending below an extension of the sequester-level caps in future years when they want to raise those sequester-level caps today. This would be the budgetary version of Wimpy's “I’ll gladly pay you Tuesday for a hamburger today.”

The other two possibilities would rely on an even more blatant gimmick by claiming savings relative to an artificially-inflated baseline. One of these approaches would involve using the President’s budget assumption that discretionary spending bounces back to pre-sequester levels after 2021 and claim savings relative to that baseline.

CBO Forecasts Costs of Climate Change

The Congressional Budget Office (CBO) has released new estimates of the cost of climate change, specifically as it relates to hurricanes. The report forecasts hurricane damage in 2075 to cost an expected $156 billion in today's dollars, more than five times larger than costs under current climate conditions. Hurricane damage in 2075 is forecasted to cost between $104 billion and $226 billion annually, four to eight times larger than under current conditions.

The increased costs that CBO projects reflect two factors, which are captured in two different scenarios:

  • Rising sea levels and increased hurricane frequency and intensity as a result of climate change.
  • Greater coastal development, which increases the value of property at risk from hurricanes.
Expected Annual Cost of Hurricane Damage (Billions, 2015 Dollars)
  2025 2075
Under current conditions (baseline) $29 $29
Scenario with climate change only $32 $60
Scenario with climate change and increased coastal development $37 $156

Source: CBO

Four Takeaways from the Solutions Initiative Plans

The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.

Consensus on the Gas Tax

Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.

No One Likes the Sequester

The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.

Discretionary Spending and the Sequester in the Final Budget Conference

The budget resolution conference agreement has passed both the House and Senate. While we previously wrote about the conference's deficit reduction and budget process issues, a likely flash point between Congress and the President will be how the Congressional budget handles discretionary spending and the sequester. While the budget resolution does not call for changes in the discretionary spending limits set under sequestration, the discretionary spending levels in the budget directly and indirectly deviate from the Budget Control Act (BCA).

The conference agreement does this by cutting both non-defense discretionary (NDD) spending below sequester levels and using Overseas Contingency Operations (OCO) funding to allow the defense budget to go above the sequester levels. For FY 2016, the conference agreement would keep spending at the levels set by the sequester. In addition the conference agreement leaves open a mechanism for sequester replacement in a fiscally responsible way, though this may still lead to conflicts between the House, Senate, and White House.

Discretionary spending in FY 2016

For the FY 2016 appropriations season, which we will continue to update on The Bottom Line as bills develop, the agreement abides by the sequester levels for non-war spending, although it would also effectively raise defense spending by creating a $38 billion slush fund in war spending. In effect, this takes the congressional budget to the total defense request in the President's budget, which instead provided sequester relief through the normal defense channel offset with other savings. The President’s budget also provided NDD funding above the sequester with offsets.

164 Ways to Reduce the Deficit

CRFB has released a new compendium of over 150 options to reduce mandatory spending and raise revenue. Despite declining in deficits in recent years, the debt is still projected to rise substantially over the long term. In addition, a series of upcoming Fiscal Speed Bumps will force lawmakers to make decisions about spending and revenue that could require large amounts of offsets, or potentially add almost $2 trillion to the debt.

Click here to see the full list of options.

Our list of options is meant to assist in finding fiscally responsible Speed Bump solutions, achieve some of the unspecified savings in the budget resolution, and help make the country's fiscal situation sustainable.

This paper updates and expands a health care and revenue options report released during the fiscal cliff discussions in late 2012. The new list also focuses on revenue and health care but also includes options for other mandatory (non-health, non-Social Security) spending that may be useful in the months ahead.

Sharpening the Axe: How the House and Senate Budgets Handle the Sequester

With the Murray-Ryan deal expiring at the end of September, the sequester will once again be a hot topic as lawmakers will be prompted to deal with the discretionary spending reductions it prescribes. Despite the House and Senate being controlled by the same party, their budgets take very different approaches to the sequester. The two budgets have large differences in the amount of defense and non-defense discretionary spending and slight differences in their approach to war spending. Although both only get a small portion of their deficit reduction from discretionary spending, the two budgets get there in different ways. In addition, the Senate budget provides a more realistic method for a future sequester relief deal, by establishing a deficit-neutral reserve fund for that purpose.

Both budgets abide by the sequester levels for non-war spending for FY 2016, although they would also effectively raise defense spending by creating a $38 billion slush fund in war spending so that their total defense requests equal the President's budget, which instead provides sequester relief through the normal channel, offset with other savings. After 2016, the budgets would remove the slush fund and make changes to the cap themselves.

 Changes in Discretionary Spending in the House and Senate Budgets (billions)
 Budget 2016 2017
2019 2020 2021
House NDD $0 -$44 -$63 -$71 -$79 -$84 -$92 -$100 -$108 -$117 -$759
Defense $0 +$38 +$50 +$49 +$47 +$45 +$43 +$41 +$38 +$36 +$387
Senate NDD $0 -$9 -$12 -$15 -$17 -$19 -$28 -$37 -$46 -$55 -$236
Defense $0 $0 $0 $0 $0 $0 -$14 -$14 -$14 -$14 -$56

Heritage Foundation Publishes Budget Book of Proposed Spending Cuts

Last week, the Heritage Foundation released the Budget Book, a catalog of 106 ways to cut the budget or reduce the size of government totaling roughly $3.9 trillion in ten-year savings. (However, Heritage notes that the total does not include interactions from enacting multiple proposals.) Here are a few highlights:

  • 65 percent of the cuts proposed are from a single item – capping spending on means-tested programs at 110 percent of pre-recession levels and growing that amount with inflation. Heritage estimates that this could save $2.7 trillion over the next decade. Heritage does not provide any details about which programs to cut, leaving it up to "policymakers to direct welfare spending to the areas of greatest priority."
  • Limiting Highway Trust Fund spending to existing revenue would result in about $180 billion in savings. Since transportation spending would be reduced, "states or private sector [could] take over the other activities if they value them."
  • Repealing the Davis-Bacon Act would reduce spending by $86 billion over the next ten years, by Heritage's estimate. The Act requires federally funded construction projects to pay "prevailing wages" based on the project's location. However, the Congressional Budget Office estimated that this would save less than $12 billion. We mentioned this as an option to reduce highway spending in our paper last year, Trust or Bust: Fixing the Highway Trust Fund.
  • Ending Supplementary Security Income (SSI) benefits for children would save $125 billion. Heritage would instead direct SSI toward disabled adults and seniors, and only keep the children's payments for medical expenses that Medicaid does not cover.
  • Other proposals would end Head Start, higher education programs, and job training programs, resulting in $170 billion in education and training services cuts.

The Case for "Mindful Austerity"

In a commentary published on Monday, the Wall Street Journal’s Greg Ip wrote about President Obama’s budget and the declaration that it is moving away from “mindless austerity.” He approached the question of when, if ever, is a good time to implement austerity measures when deficits get too large.

Ip explains that there are two aspects of deficit spending – “structural” and “cyclical” – with the former referring to long-term differences between revenues and outlays and the latter to weak economic conditions that push up spending and lower revenue automatically.

The President's budget predicts the economy to be back at full capacity by 2017, meaning the cyclical portion of the deficit should be at or near zero. Ip points out this would be the best time to address the structural portion and put debt on a declining path. Although the President’s FY 2016 budget stabilizes debt as a share of GDP,  the debt is barely declining under its projections.

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