FY 2014 Budget

Happy Halloween From CRFB

Happy Halloween! For the spookiest day of the year (though some might argue that's April 15th), CRFB is thinking about scary costumes and wondering what budget polices they represent.

Frankenstein—What could be more fitting than comparing our nation’s tax code to a monster cobbled together by a mad scientist?  Comprehensive tax reform should be an essential part of the next Congress' agenda.  Its spark of life is just what this country and the economy needs.

Zombies—The undead rising from the grave is just like one of the more pressing issues in the upcoming lame duck Congress. More than 50 tax cuts known as "tax extenders" lapsed at the end of 2013, yet Congress is considering retroactively bringing them back from the dead for 2014. If a two-year extension (2014 and 2015) passes Congress after the election, the impact is a trick, not a treat, of about $85 billion added to the national debt over ten years.  But of course there could be an even scarier deal

Vampires—Interest on our national debt will suck the life out of our budget, leaving little room for important spending. Right now, interest rates are low and we pay relatively little. But Dracula is hovering above us: Interest payments are projected to nearly quadruple in nominal dollars by the end of the decade (increasing as a share of the economy from 1.3 percent in 2014 to 3.0 percent in 2024). At the same time, discretionary outlays will shrink from 6.8 percent to 5.2 percent of GDP in 2024.  The essential roles of government are being bled dry by interest on our national debt.

The More the Budget Changes, the More Things Stay the Same

With FY 2014 officially in the book, it’s time to look back at how spending and revenues have changed since the FY 2009’s highest nominal deficit of all time (and 5th highest as a percentage of GDP since 1930).  

The FY2014 budget deficit totaled $483 billion with $3.02 trillion of revenue and $3.50 trillion of spending. This deficit was nearly 30 percent below the FY2013 deficit and 66 percent below its 2009 peak. In FY 2009, the budget deficit was $1.41 trillion with $2.11 trillion in revenue and $3.52 trillion of spending.

Annual deficits have fallen substantially over the past five years, largely due to rapid increases in revenue (mostly from the economic recovery), the reversal of one-time spending during the financial crisis, small decreases in defense spending, and slow growth in other areas. This temporary improvement in our nation's short-term finances, while likely too quick for the struggling economy, comes as nominal spending is only about $15 billion lower (though it has declined sizably as a percent of GDP).

Between that time, health care and Social Security spending have grown significantly due to natural upward pressure, aging of the population, and to a lesser extent, the coverage expansions in the Affordable Care Act. Interest spending is also higher as a result of the huge increase in debt since 2009. Meanwhile, discretionary and other mandatory spending are down from fading stimulus, the economic recovery, and legislated deficit reduction like the sequester.


Gleckman: A Return to Fiscal Normalcy but Not For Long

In response to the release of final FY 2014 deficit numbers, Tax Policy Center's Howard Gleckman writes that this year's outcome just returns the budget to "fiscal normalcy" -- and only temporarily. Although the deficit has fallen significantly in recent years, this year's budget is largely in line with the averages of recent decades.

In 2014, federal tax receipts reached 17.5 percent of GDP, a level unseen since 2007, just before the economy cratered. That’s only slightly higher than the 40-year average of about 17.4 percent of GDP.


The story is similar on the spending side. In 2009, federal outlays topped out at 24.4 percent of GDP. By the fiscal year just ended, they had declined to 20.3 percent, a shade below the 40-year spending average of 20.5 percent.

Why Has the Deficit Come Down Faster Than Expected?

We noted in our discussion of the final Monthly Treasury Statement for 2014 that the deficit has fallen by two-thirds since 2009 after rising by nearly nine-fold between 2007 and 2009. However, much of this decline was already expected as a result of a recovering economy and unwinding stimulus, so another way to look at what's happened with the budget in the last five years is how the projected 2014 deficit has changed since 2009.

For this analysis, we use the August 2009 Congressional Budget Office (CBO) baseline as a starting point, since it was the first CBO update after the passage of the 2009 stimulus and when CBO and other economic forecasters were getting a better grasp at how deep the recession actually was. That baseline showed a projected 2014 deficit of $558 billion, $75 billion higher than the actual deficit of $483 billion. Notably, however, the projected deficit excluded the effects of the 2001/2003 tax cuts set to expire after 2010, even though it was widely expected that most or all of them would eventually be extended permanently. Also notable is that debt-to-GDP was only projected to be 66 percent of GDP in 2014 compared to the actual 74 percent; debt ended up being higher due to worse-than-expected economic performance, the aforementioned tax cut extensions, and further short-term stimulus.


If you incorporate the presumption that all of the 2001/2003/2010 tax cuts would be extended into CBO's 2009 projections, then this year's official deficit was $375 billion lower than projected. $220 billion of that decline stems from changing economic and technical assumptions (including the $25 billion drop in the deficit since CBO's August 2014 update), and legislation prompted the remaining $155 billion reduction in 2014's deficit (primarily through discretionary spending cuts, the fiscal cliff deal, and the Affordable Care Act). Perhaps surprising at first blush is that changes to economic projections actually contributed $70 billion to the declining 2014 deficit, even though in 2009 CBO expected GDP to have reached its potential by now and unemployment to average 5 percent for the year. A slower than expected recovery, however, has also led to interest rates remaining extremely low, saving the government significantly on debt service costs.

Update: Falling Deficit is Not a Sign of Fiscal Sustainability

With the Treasury Department's year-end Monthly Treasury Statement having been released, we have revised last week's report today showing what the 2014 totals mean for the budget. The FY 2014 budget deficit totaled $483 billion, according to Treasury's statement. Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

Source: CBO

Last week the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion.  While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary. Treasury's statement, which is considered final, shows revenues and outlays in FY 2014 that were $8 billion and $5 billion higher, respectively, than CBO's estimates. The result is a FY 2014 deficit of $483 billion, which is $3 billion lower than last week's CBO projection.

Delayed Action on Extenders Might Add to FY 2015 Deficit

While explaining why deficits have fallen from their historically large peak in 2009, we noted the main source of this tumble is a 43 percent rise in revenue. This increase came largely from the recovering economy, but also from legislated tax increases and the expiration of some temporary tax provisions. However, those provisions may be coming back soon and lead to a significantly greater increase in the deficit next year than projected under current law.

As CBO pointed out, the expiration of bonus depreciation played a large part in revenue increase:

Taxable profits were boosted in large part by the expiration at the end of December 2013 of various tax provisions, most significantly the rules that allowed firms with large amounts of investment to expense—that is, immediately deduct from taxable income—50 percent of their investment in equipment.

In our paper analyzing the Fiscal Year 2014 budget results, we pointed out that the decrease in the deficit was a temporary phenomenon and deficits would start increasing again after next year. If Congress were to extend expired tax breaks, it would both magnify the decline in the deficit in 2014 and prevent the deficit from declining in 2015.

Since the 2014 fiscal year is over and these tax extenders have not been extended yet, the 2014 deficit would not change even if the provisions are made retroactive to the beginning of the year as planned. The revenue loss from the 2014 tax cuts will show up in 2015 when companies and individuals file their taxes for 2014 and have lower tax payments or receive refunds as a result of the retroactively extended tax breaks. The same thing happened with bonus depreciation in FY 2010, when it registered very little cost because it was not extended until near the end of the fiscal year. In either case, the federal government loses the full amount of revenue from the tax break, but in the following year.

Medicare Registers Fourth-Lowest Growth Rate in Program History in 2014

With today's release of the Congressional Budget Office's (CBO) final Monthly Budget Review for Fiscal Year (FY) 2014, many will be focused on the final 2014 deficit, but it also shows that Medicare clocked its fourth-lowest annual growth rate in history, at just 2.7 percent.

We have been closely following the unusually slow growth of Medicare throughout this year, and also documenting the program's "underlying" growth rate, or what growth would be with temporary or phased-in legislative cuts removed from the calculation*. Dechipering this underlying growth rate should provide a truer picture of the magnitude of Medicare's cost slowdown.

Interestingly (though not surprisingly), the three years with slower growth than this year -- 1998, 1999, and 2013 -- coincided with similar temporary or phased-in cuts.

For 2014, Medicare's underlying growth rate ended up at 4.9 percent, roughly one percentage point faster than both economic and beneficiary growth. Therefore, even removing these temporary effects, Medicare still grew slower than general inflation on a per beneficiary basis.

A Drama-Less Happy Fiscal Year!

The calendar turns over for the federal government today as FY 2015 is underway. Unlike last year, which started with the government being shut down for the first two-and-a-half weeks, a continuing resolution will fund the government through December 11 mostly at FY 2014 levels. The drama-free start to FY 2015 was set up by the chaos of early FY 2014, as the government shutdown led to a budget conference that set spending levels for the next two years.

It's not clear how FY 2015 will unfold with midterm elections next month, but we can take a look back at what happened in the year that just finished. Here are 14 important facts about FY 2014.

White House Releases Supplemental Immigration Request

The White House this week requested an additional $4.3 billion in discretionary appropriations for the current fiscal year to cover the cost of the "urgent humanitarian situation" involving Central American children crossing the Southern border and to pay for fighting this summer's wildfires. $3.7 billion is dedicated to the situation at the border, while $615 million more for wildfires will likely provide enough funding for the whole wildfire season.

Of the additional funding for the migrant situation, about half ($1.8 billion) would go to the Department of Health and Human Services to provide medical and other care for refugee children. The Department of Homeland Security would receive $1.4 billion to cover the additional costs associated with increased arrests and deportations. The request includes $300 million of international assistance given to governments or non-profits in Central American countries to address the "root causes" of migration, including for economic support and to provide services and community support to the migrants that are most likely to attempt a return.

Administration Supplemental Spending Request by Category (billions of dollars)
Category FY 2015 Spending
Services and medical care for child refugees $1.8 billion
Apprehending, prosecuting, and removing undocumented families $1.4 billion
Repatriation of migrants and aid to Central American countries $300 million
Other increased enforcement and surveillance $177 million
Additional 40 immigration judges and other legal costs $64 million
Subtotal, Immigration Request
$3.7 billion
Wildfire Funding $615 million
Total, President's Request $4.3 billion

Winners and Losers from the Omnibus Legislation

Last month's Ryan-Murray budget deal set overall spending levels for the government at $1.1 trillion, but it did not set specific spending levels for each agency. On Monday, the Appropriations Committee released an omnibus spending bill detailing how the money is allocated between agencies, along with dozens of specific instructions directing what projects agencies must and must not fund.

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