The Fiscal Year (FY) 2015 budget deficit totaled $435 billion, according to yesterday’s estimates from the Congressional Budget Office (CBO). Although this is roughly 10 percent below the FY 2014 deficit and nearly 70 percent below its 2009 peak, the country remains on an unsustainable fiscal path.
In this paper, we show:
- Annual deficits have fallen substantially over the past six years, largely due to rapid increases in revenue (largely 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.
- Simply citing the 70 percent fall in deficits over the past six years without context is misleading, since it follows an almost 800 percent increase that brought deficits to record-high levels.
- Even as deficits have fallen, debt held by the public has continued to rise, growing from $5.0 trillion in 2007 and $7.5 trillion in 2009 to $13.1 trillion today. As a share of GDP, debt rose from 35 percent in 2007 to about 74 percent in 2014 and 2015.
- Both deficits and debt are projected to rise over the next decade and beyond, with trillion-dollar deficits returning by 2025 or sooner and debt exceeding the size of the economy before 2040, and as soon as 2030.
Unfortunately, the recent fall in deficits is not a sign of fiscal sustainability.
The Deficit in FY 2015
According to CBO, the federal deficit totaled $435 billion in FY 2015 (a final estimate from Treasury will be released later this month), with $3.25 trillion of revenue, $3.43 trillion of primary (non-interest) spending, and $260 billion of spending on interest on public debt.
Since 2009, the budget picture has changed significantly, with deficits falling by 70 percent, from $1.4 trillion to $435 billion. This reduction was driven mainly by the 54 percent ($1.1 trillion) increase in tax collections that has come largely as a result of the economic recovery but also due to general real bracket creep as well as new taxes from the American Taxpayer Relief Act and the Affordable Care Act and increased remittances from the Federal Reserve.
At the same time, nominal spending is only slightly higher than in 2009, even as the economy has grown, and inflation has eroded the value of this spending. Indeed, nominal spending has decreased in a number of areas, particularly due to the absence and reversal of financial rescue and economic recovery programs through the Troubled Asset Relief Program (TARP), the rescue of Fannie Mae and Freddie Mac, and the expiration of stimulus spending. Defense spending has also fallen as a result of the drawdown in war spending along with spending caps (further reduced under “sequestration”) on base defense spending. Meanwhile, non-defense discretionary spending has remained relatively flat in nominal terms since 2009, while Medicare, non-ACA Medicaid, and interest costs have all grown slowly relative to their historical trends.
With spending growing at a relatively slow pace, revenue has largely caught up – leading to a substantial reduction in deficits between 2009 and 2015. However, at $435 billion (2.4 percent of GDP), the deficit in 2015 was still significantly higher than the pre-recession deficit of $161 billion (1.1 percent of GDP) in 2007.
Deficits Fell From Record Levels, And They Will Rise Again
A 70 percent drop in annual deficits since 2009 is certainly significant, but when put in context it is less impressive than some would suggest. The rapid fall was from record-high levels and followed an even more rapid increase. At $1.4 trillion, the 2009 deficit was the highest ever in both real and nominal dollars, and the largest as a share of the economy except during World War II. The 2009 deficits represented a 779 percent increase from 2007 – only two years earlier.
While legislated spending reductions, tax increases, and other factors have played a role in reducing deficits from since 2009, the end of trillion-dollar deficits was largely the expected result of the recovering economy and the fading of measures intended to boost the recovery. As unemployment rates have fallen and GDP risen, revenue collection has returned to more normal levels and countercyclical spending has subsided in areas such as unemployment insurance and food stamps. Meanwhile, stimulus and financial rescue measures enacted to speed the recovery have mostly ended and are in some cases now generating income for the government.
Unfortunately, even with these gains, the deficit remains about 270 percent as high as in 2007 (1.3 percentage points higher as a percent of GDP) and is projected to grow over time. Under CBO’s current law baseline, annual deficits will return to trillion-dollar levels by 2025. Under the more pessimistic Alternative Fiscal Scenario in which policy makers fail to pay for new spending and tax cuts, the deficit will reach $1.3 trillion in 2025, rapidly approaching the nominal-dollar record set in 2009.
As Deficits Fall, the Debt Keeps Rising
Arguably the most important metric of a country’s fiscal health is its debt-to-GDP ratio. And unfortunately, even as deficits have fallen the last six years, debt has grown. Indeed, over the same period that deficits fell by 70 percent, nominal debt held by the public grew by about 75 percent – from $7.5 trillion to $13.1 trillion. As a percent of GDP, debt has also grown rapidly, from 35 percent of GDP in 2007 to 52 percent of in 2009 and nearly 74 percent in 2015. This puts debt at just under twice the 50-year historical average of 38 percent of GDP, and leaves it near record-high levels never seen other than around World War II.
Falling deficits have not prevented the debt from growing; rather, they have only slowed down the growth trend. While the debt-to-GDP ratio was essentially stable between 2014 and 2015 and may remain so for the next few years, debt is projected to continue growing faster than the economy over the long run. As the population ages, health care costs grow, and interest rates rise to more normal levels, CBO projects debt will rise from 73 percent of GDP in 2018 to 77 percent of GDP by 2025, and will exceed the size of the economy before 2040. Under CBO’s Alternative Fiscal Scenario (AFS), debt will exceed the size of the economy by 2030.
The fact that deficits have fallen from their trillion-plus dollar levels is an encouraging sign that the economy will continue to recover. Unfortunately, Washington’s myopic focus on short-term deficits has likely slowed the recovery by cutting deficits somewhat faster than the ideal pace in the short term while leaving substantial imbalances in place over the long term.
The significant decline in the deficit followed a massive deficit increase in response to the economic crisis. Moreover, this decline does not suggest the country is on a sustainable fiscal path as debt levels are near historic highs and are projected to grow unsustainably over the long run. In only a decade, deficits are projected to again exceed $1 trillion, and within 15 to 25 years debt is projected to exceed the entire size of the economy.
Policymakers must work together on serious tax and entitlement reforms to put debt on a clear downward path relative to the economy, and should not declare false victories while sweeping the debt issue under the rug.
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Today marks the end of Fiscal Year 2015. As we look forward to the important work lawmakers face this coming year, let us also take a brief look back at the happenings over the past fiscal year. Since one number cannot sufficiently describe FY 2015, we picked our 15 favorites:
- $13,142,733,278,888: Debt held by the public. Debt held by the public rose from $12.8 trillion at the beginning of the fiscal year to more than $13.1 trillion as we approach the new fiscal year.
- 70%: How much the deficit has shrunk since 2009. After recording a deficit in FY 2009 of $1.4 trillion, the Congressional Budget Office’s (CBO) latest projection for FY 2015 shows a deficit of $426 billion, 70 percent less than the 2009 deficit.
- 778%: How much the deficit grew between 2007 and 2009. The 70 percent drop in the deficit since 2009 followed a period when the deficit increased by nearly 800 percent, rising from $161 billion in 2007 to $1.4 trillion in 2009.
- 74% of GDP: Debt as a share of the economy today. Largely because of the Great Recession and policymakers’ responses, debt surged in recent years well above its historical average to 74 percent of GDP in 2015. This marks the highest total since World War II.
- 38% of GDP: The average debt as a share of the economy over the past 50 years. Since 1965, debt has averaged 38 percent of GDP.
- $5 trillion: Ten-year deficit reduction needed to get debt back to historical average by 2040. Based on a reasonable path of deficit reduction, it would take $5 trillion over the next ten years to get debt back to its historical average by 2040.
- $1.9 trillion: Deficit reduction needed to reduce debt to 70 percent of GDP in a decade. CBO projects that debt will reach nearly 77 percent of GDP in 2025. This means that it would take $1.9 trillion of savings over the next ten years to hold debt to 70 percent in that year.
- $500 billion: Amount the “permanent doc fix” added to the debt over 20 years. Yes, for the policy that generated so much cheering about how “fiscally responsible” and bipartisan it was, that is quite the price tag.
- $275 billion: Total amount lawmakers added to 10-year deficits in FY 2015. In addition to the $140 billion permanent doc fix, lawmakers added $40 billion to deficits from tax extenders, $30 billion through gimmicks in the CROmnibus legislation, and $65 billion from other pieces of legislation and interest costs.
- 199: Number of days since we hit the debt limit. The debt limit, which was last suspended in February 2014, was re-instated on March 15 of this year, but the Treasury Department has used “extraordinary measures” to avoid hitting the limit for the last 200 days.
- $137 billion: Cost of repealing the Affordable Care Act, with dynamic scoring. In June, CBO issued its first comprehensive score of repealing the Affordable Care Act since 2012, finding a ten-year cost of $137 billion, or $353 billion if macroeconomic effects of repeal are excluded.
- 13: Number of days tax extenders legislation was actually in effect. The package of “tax extenders” that expired at the end of December 2013 was extended through calendar year 2014 – but only on December 19, 2014, leaving the law’s provisions to expire less than two weeks after they were enacted.
- 6: Number of FY 2016 appropriations bills passed by the House. The House was only able to pass 6 of the 12 FY 2016 appropriations bills before the fiscal year started. Still, that compares favorably to the zero passed by the Senate.
- 1: Number of years until Social Security Disability Insurance (SSDI) goes insolvent. Although there has been plenty of discussion about SSDI lately, there has been no major action from policymakers, meaning that the trust fund is still set to become insolvent during FY 2017.
- 337: Number of CRFB blogs. During FY 2015, CRFB wrote 337 blogs, covering legislative developments, new budget projections, changing economic circumstances, new policies, the early-going of the 2016 Presidential campaign, and more.
See the full document below or download it here.
For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
A previous version of this chartbook is available at Chartbook: Avoiding Budget Gimmicks and explanations of the previous charts are included on the blog Everything You Need to Know About Budget Gimmicks, in 8 Charts.
As Congress begins the appropriations process, maneuvers through this year’s Fiscal Speed Bumps, and looks to pay for the costs of new legislation, they may be tempted to rely on budgetary slights-of-hand in order to avoid hard choices. With debt already at record-high levels, these budget gimmicks will both worsen the fiscal situation and undermine Congress’ credibility.
Here are four gimmicks to watch out for. See illustrations of these and other gimmicks in our chartbook:
- Pension Smoothing: Some policies would save money in the near-term by shifting revenues from the future, taking advantage of the ten-year Congressional budget window. One specific policy called “pension smoothing” would reduce employer pension contribution requirements (increasing taxable profit) initially and increase them (reducing taxable profit) later. The policy would raise revenue in the first decade but lose that same revenue afterwards, and thus should not be used as a pay-for.
- OCO Defense Slush Fund: Non-war defense spending is capped under current law and limited by “sequestration.” But the caps can be circumvented by designating some non-war defense spending as “Overseas Contingency Operations” (OCO) funds, which are exempt from spending limits. The current budget resolution allows appropriators to spend $96 billion on OCO, even though the Pentagon only requested $58 billion, using the account as a slush fund. Any significant divergence from the Pentagon request would represent a gimmick meant to inflate defense spending.
- Phony CHIMPs: Just as policymakers may use the OCO designation to exceed defense spending caps, they may use savings from CHIMPs – or Changes in Mandatory Programs – to thwart the non-defense caps. CHIMPs allow policymakers to offset discretionary spending over current limits with mandatory spending cuts. While the principle is sensible, in reality most of the mandatory cuts either reduce spending that would have never occurred or count one-year spending delays as if they are spending cuts. The use of this gimmick has increased since 2011 and should ultimately be discontinued.
- Double Counting Tax Reform Revenue: The same money cannot be used twice, but complicated budget conventions sometimes allow policymakers to claim it can. For example, they may use the same revenue to simultaneously pay for rate reduction and finance spending from the Highway Trust Fund. Revenue raised should only be used for one purpose or the other.
For additional budget process resources including specific options for reform, visit our Better Budget Process Initiative home page.
This year, Congress made it a priority to pass a concurrent budget resolution. Both the House of Representatives and Senate passed their own budget plans at the end of March, and now they must work through the differences in the two budgets through a budget conference committee. This week, both chambers began the process and appointed conferees to serve on the committee. Below, we explain how this budget conference will work, and what it intends to accomplish.
What is a budget conference?
A budget conference is a process by which the House and Senate iron out the differences in the budget resolutions they each passed separately to arrive at a unified “concurrent budget resolution” that each chamber will then adopt. The leaders of each party and budget committee in both houses choose members to participate in the conference committee.
Over what time period will the conference negotiate?
According to the Budget Act of 1974, which created the current budget process, a budget conference is supposed to be completed and the resolution passed by both chambers by April 15th. Obviously, Congress has not met this deadline – and indeed it is routinely missed. However, Senate Budget Committee Chairman Mike Enzi (R-WY) and House Budget Committee Chairman Tom Price (R-GA) have already been negotiating ahead of a formal conference, and formal negotiations will begin shortly now that conferees have been named. A formal meeting of the conference committee will occur on April 20th, after which a timeline for completion may become clearer.
Who is in the budget conference?
The budget conference committee will consist of 30 lawmakers – 22 from the Senate and 8 from the House of Representatives. Of the Senate members, 12 are Republicans and 10 are Democrats (including two independents caucusing with Democrats). Of the House members, 5 are Republicans and 3 are Democrats. The conference committee is chaired by Representative Tom Price (R-GA) and Senator Mike Enzi (R-WY), and includes Representatives Diane Black (R-TN), Mario Diaz-Balart (R-FL), John Moolenaar (R-MI), Gwen Moore (D-WI), Todd Rokita (R-IN), Chris Van Hollen (D-MD), and John Yarmuth (D-KY) and Senators Kelly Ayotte (R-NH), Tammy Baldwin (D-WI), Bob Corker (R-TN), Mike Crapo (R-ID), Tim Kaine (D-VA), Angus King (I-ME), Lindsey Graham (R-SC), Chuck Grassley (R-IA), Ron Johnson (R-WI), Jeff Merkley (D-OR), David Perdue (R-GA), Rob Portman (R-OH), Bernie Sanders (I-VT), Jeff Sessions (R-AL), Debbie Stabenow (D-MI), Pat Toomey (R-PA), Mark Warner (D-VA), Sheldon Whitehouse (D-RI), Roger Wicker (R-MS), and Ron Wyden (D-OR).
How many people have to agree to the recommendations?
In order for the conference committee to offer recommendations, the proposal must be agreed upon by a majority of each chamber’s representatives to the conference. From a practical standpoint, that probably means all Republican members of the conference committee will need to support the package. Once agreed upon, the budget resolution is sent to the House and Senate for a vote, where a simple majority will be required for passage.
What is a concurrent budget resolution?
A budget resolution is a blueprint outlining intended revenue levels and spending by category for the coming fiscal year as well as future years. It does so by setting the top-line spending and revenue numbers along with various processes to achieve those numbers, but it does not specify exactly how the funds should be spent nor mandate any specific policy changes.
A concurrent budget resolution is a budget resolution agreed to by both chambers of Congress. Importantly, while both the House and Senate must vote in support of this resolution, it is not signed by the President and thus not legally binding.
While a budget resolution does not, by itself, carry the force of law, it can establish rules in both chambers of Congress in ways that make future laws easier to enact. A budget resolution can be an important component of any ultimate budget agreement for at least four reasons. First, budget resolutions set the top-line spending levels and establish safeguards preventing those levels from being exceeded. Second, budget resolutions can establish rules governing debate over legislation that impacts the budget. Third, budget resolutions can include a process known as reconciliation that requires the various committees to achieve a certain amount of deficit reduction and removes legislative hurdles (such as the filibuster in the Senate) for legislation that meets the given targets and other criteria. And finally, concurrent budget resolutions can represent an important political agreement between the chambers on future fiscal policy.
What cannot be decided in a budget resolution?
While a budget resolution sets spending limits for committees of jurisdiction and may include instructions for savings that must be achieved, it does not determine the allocation of funds within that limit or dictate how any assumed savings can be achieved. With regards to annual appropriated funds, the budget resolution can set top-line numbers but not determine where money is allocated within agencies. With regard to mandatory spending and revenue, the resolution can set targets but cannot specify what policies would achieve these targets.
In addition to not being able to set specific policies, a budget resolution cannot set even top-line numbers when it comes to Social Security or the Postal Service, both of which are considered “off-budget.”
Finally, and perhaps most importantly, budget resolutions cannot change actual tax or spending policy nor otherwise change the law.
What happens after the budget conference?
If the conference committee is able to reach an agreement on spending levels, revenue levels, and any reforms or instructions, the final resolution would receive expedited, or “fast track,” consideration in Congress. It can pass with only a majority of votes in the Senate as opposed to the 60-vote margin typically needed to overcome a filibuster. After the resolution has been approved by both chambers, the respective appropriations committees may work on funding bills to fit within the spending caps laid out in the budget resolution. In addition, if the budget resolution includes reconciliation instructions, the instructed committees must report legislation that complies with the instructions by the date specified in the budget resolution.
When was the last time we had a budget conference?
The last time a budget conference met was in the fall of 2013, after the agreement ending the government shutdown initiated a conference between the House and Senate budgets. The House budget under Chairman Paul Ryan (R-WI) was substantially different than the Senate budget by Chairman Patty Murray (D-WA). While the conference committee met publicly only once and did not conference a budget resolution, it did result in negotiations between the two chairs. The resulting Bipartisan Budget Act, also referred to as Ryan-Murray, successfully set spending levels for fiscal years 2014 and 2015.
When was the last time we had a conferenced concurrent budget resolution?
The last budget conference that resulted in a concurrent budget resolution passing both chambers took place in April 2009 (the budget resolution for Fiscal Year 2010). At that time, Democrats held majorities in both the House and Senate, so the resolutions were relatively similar. Among other things, the resolution provided reconciliation instructions for what would become the Health Care and Education Reconciliation Act, which was part of the Affordable Care Act.
Where are the two sides starting from as we enter the new budget conference?
The budgets passed by the House and Senate are similar in many ways, but there are differences that must be worked out. Some of these differences relate to the proposed spending levels. For example, starting in FY 2017 the House spends much less on non-defense discretionary spending than the Senate and also spends much more on defense discretionary spending. Meanwhile, the House saves less from the Medicare program than the Senate. All told, the House includes $5.5 trillion of deficit reduction compared to the Senate’s $4.9 trillion, and the House reaches balance in 2024, one year earlier than the Senate’s 2025. See “Debt and Deficits Under the FY 2016 Budgets” for more information.
Arguably much more important than the top-line numerical differences, however, are a number substantive differences between each budget. For example, the Senate budget includes a Deficit-Neutral Reserve Fund for sequester relief whereas the House budget uses Overseas Contingency Operations funding—a type of emergency spending—to provide defense sequester relief. In addition, the House budget provides reconciliation instructions—a fast track process for savings bills—for every committee with mandatory spending oversight whereas the Senate only gives these instructions to the Finance and Health, Education, Labor, and Pensions (HELP) committees. As a final example, both resolutions contain a variety of different budget process reforms that will also have to be agreed upon.
What is budget reconciliation?
Budget reconciliation is a process of expedited consideration for changes to mandatory spending programs or federal revenue. The budget resolution can provide reconciliation instructions to committees to achieve a certain level of savings. Lawmakers can pass a reconciliation bill with only a simple majority in the Senate without the threat of a filibuster. A special rule, known as the “Byrd Rule,” places limits on what can be considered in the reconciliation process. It prohibits provisions that are not related to mandatory spending or revenues, increase deficits beyond the timeframe covered by the resolution, or have no budgetary effect, among other limitations.
In total, 20 bills have been passed into law through reconciliation, including the 1990 Omnibus Budget Reconciliation Act, the Balanced Budget Act of 1997, the 2001 and 2003 tax cuts, and portions of the Affordable Care Act. Some of these efforts, such as the 1990 and 1993 Omnibus Budget Reconciliation Acts, have produced significant deficit reduction (each saved nearly $500 billion over five years) while others, such as the 2001 and 2003 tax cuts, have increased deficits. See a full comparison here.
How does the budget conference relate to the debt limit?
The budget resolution passed in the Senate included a provision prohibiting the Senate from considering any proposal from the conference committee that provides for an increase in the statutory debt limit. If this provision is kept in conference it would prevent a debt ceiling increase being approved through the reconciliation process under the 51-vote threshold. This means that the debt limit will have to be dealt with on a separate track. However, an agreement on a plan to reduce deficits as part of the budget conference may facilitate action on separate legislation increasing the debt limit.
What should policymakers do now?
The budget conference is a perfect place to instruct the relevant committees to find long-lasting solutions to our long-term fiscal challenges and to diminish the frequency and intensity of the showdowns the country has become accustomed to in the last few years. Both the House and Senate budget resolutions this spring called for putting debt on a downward path as a share of the economy, and the same should be expected from the conference committee recommendations and any subsequent action.
A conferenced concurrent resolution on the budget should allow authorizing committees to develop reconciliation legislation to meet the prescribed instructions for deficit reduction. Under the statutory time frame, the House may begin to consider Fiscal Year 2016 appropriations legislation on May 15th with a soft deadline of June 10th to pass all twelve appropriations bills through committee and complete all action in the House by the end of June. The Senate would, in theory, work on appropriations legislation on a similar time frame and the House and Senate would conference each bill. A hard deadline and major Fiscal Speed Bump exists on October 1st when the federal government’s discretionary funding runs out. All appropriations bills will need to be passed identically by both chambers and signed by the President to keep the government open and avoid a shutdown similar to the one in October of 2013.
Update 3/16/2015: This document was updated to correct several typographical and formatting errors.