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.
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.
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.
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)|
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.
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.
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
This year was an eventful one for the federal budget. To explain the year's events, CRFB wrote 427 blogs, 17 papers, and created more than a hundred charts. Below are some of our favorite charts that represent the budget events of 2014.
1. Debt scheduled to reach record levels only seen around WWII within 25 years
Our long-term debt problem remains unsolved, despite some commentators' claims that the debt is not worth worrying about. For instance, economist Paul Krugman said not to worry because the debt in 25 years will only reach the levels we had in World War II. In Actually, Paul, the Debt is Still a Problem, we showed how returning to World War II levels of debt is actually quite alarming. Not only will debt levels be too high, but they are projected to keep rising upwards, without a sharp decline like the 1950s.
2. 2014 deficit decreased by 66%, but only after an 800% rise
September marked the end of the 2014 fiscal year, and saw year-end deficits fall to their lowest level since the Great Recession. Some claimed victory over the debt and urged moving onto other issues. In our report, Deficit Falls to $483 Billion, but Debt Continues to Rise, we showed that these low deficits are nothing to celebrate. In dollar terms, the deficit may have decreased by 66 percent, but that was after it had risen by almost 800 percent during the Great Recession. Moreover, debt remains at a post-WWII record high, and trillion-dollar deficits are likely to return within a decade.
3. Debt is worse if Congress does not pay for changes
These debt projections assume that Congress will be fiscally responsible and pay for all new legislation. However, if they stick to the all-too-common practice of continuing various policies or enacting new ones without offsetting the cost, the debt situation could be almost 10 percent of GDP worse, as this animated chart from Everything You Need to Know About Budget Gimmicks shows.
With the 2014 midterm elections mostly in the books, the current Congress will return from weeks of campaigning to finish some remaining items before the end of the year and the swearing in of the new Congress. This year's lame duck session will likely to be less busy than some years, but there are still a few key things to get done before the 114th Congress begins.
The current continuing resolution funding the government will expire on December 11, so policymakers will have to either extend it, enact appropriations bills, or cause a shutdown. This is the most important to-do list item for the lame duck Congress. Prior to the recess, appropriators indicated they wanted to get an omnibus appropriations bill done instead of a CR extending funding into the next Congress, and the chances of that look good -- thanks to the Murray-Ryan agreement setting defense and non-defense spending levels, House and Senate funding allocations are relatively close. Key questions that remain include whether lawmakers will provide supplemental funding for Ebola or ISIS and also what level of war spending they will provide (hopefully below the current level -- see "to-don't" list below).
For background on the appropriations process, see our Appropriations 101 document.
Pass Defense Authorization
Somewhat related to appropriations, lawmakers will also have to pass a defense authorization bill. For the budget world, this may be important to see if Congress will consider codifying a strict definition of war spending -- as the House budget resolution and an amendment to the House defense appropriations bill did -- or consider personnel savings policies that the Pentagon has long called for. Doing either of those things may help policymakers stay within the defense spending caps in the future and better ensure the integrity of those caps.
Year after year, Senator Tom Coburn (R-OK) refuses to simply give lip service to "wasteful government spending" and has instead called out controversial government spending by name. Today, his office published the fifth annual edition of his Wastebook, detailing 100 examples of what he describes as "stupid spending," totaling almost $25 billion. The Wastebook looks at little-used government programs, unusual research projects funded by government grants, and tax breaks given to companies to compile these examples.
As Senator Coburn explained,
This report, the fifth annual Wastebook, gives a snapshot of just a fraction of the countless frivolous projects the government funded in the past twelve months with borrowed money and your tax dollars. Every year taxpayers, regardless of their personal political leanings, raise their eyebrows and shake their heads in disbelief at how billions of dollars that could be been better spent—or not spent at all—were squandered. Then they ask, “but what are you doing about it?”
Some of the spending examples highlighted in his report are:
- Paid vacations for bureaucrats gone wild—$19 million: Many situations that would cause private-sector employers to fire their employees instead results in federal employees going on “administrative leave.” Most of these situations can be described as personnel matters such as criminal investigations, misconduct and security concerns. GAO estimates that the paid leave costs the government about $19 million.
- Pentagon to spend $1 billion to destroy $16 billion in unneeded ammunition—$1 billion: The Pentagon is spending a billion dollars to destroy $16 billion in excessive purchases of military-grade ammunition. The amount of surplus ammunition is now so large that the cost of destroying it will equal the full years’ salary for over 54,000 Army privates. How the military came to purchase so much ammunition it didn’t need was uncovered in a 2014 Government Accountability Office (GAO) investigation.
- FAA upgrades low traffic airport serving high-end ski resort—$18 million: The Federal Aviation Administration awarded $18 million dollars for a construction project at an airport that serves a ski and golf resort in Idaho. There are on average four daily commercial flights leaving the airport. Construction was to include “comfortable chairs and a fireplace.”
- DOD sends 16 planes to the scrap heap for $32,000—$468 million: After spending over $468 million on a fleet of 20 planes that were supposed to be the backbone of the Afghan Air Force’s air transport mission, the Defense Department scrapped 16 of those planes as opposed to selling or dispatching them for their purpose.
- Watching grass grow—$10,000: The Interior Department's U.S. Fish and Wildlife Service is spending $10,000 to watch how fast grass grows in Florida after its been pulled out plug by plug and “painstakingly document how fast it returns."
- Spouses stab voodoo dolls more often when “hangry”—$331,000: A National Science Foundation grant provided money to research the phenomenon of being “hangry,” in which a subject is angered because of a lack of food. Spouses with lower levels of blood sugar were more likely to harm the voodoo doll representing their significant other.