The President has released his final budget today, laying out his priorities and proposals for fiscal year 2017 and years to come. The budget includes proposals to reform immigration, taxes, and Medicare, expand education and infrastructure, reduce middle- and working-class taxes, repealing a portion of future sequester cuts, raise new revenue and make other tax and spending changes.
Our main findings from the budget are:
- The President’s budget includes sufficient revenue and spending cuts to pay for his new initiatives and reduce projected deficits. The administration estimates net deficit reduction of $2.9 trillion through 2026, which would be about $2.5 trillion relative to Congressional Budget Office (CBO) scoring conventions.
- The President’s estimates show debt remains relatively stable as a share of gross domestic product (GDP), settling between 75 and 76 percent of GDP after 2021. In dollar terms, debt would rise from $13.7 trillion today to $21.3 trillion by 2026.
- Deficits under the President’s budget would grow in dollar terms from $438 billion in 2015 to $793 billion in 2026. As a share of GDP, deficits will grow modestly – from 2.5 percent of GDP in 2015 to 2.8 percent by 2026.
- Between 2015 and 2026, spending will grow from 20.7 percent of GDP to 22.8 percent and revenue from 18.3 percent of GDP to 20.0 percent. Historically, they have averaged 20.2 and 17.4 percent, respectively.
- Interest costs alone will triple in dollar terms, doubling relative to GDP from $223 billion (1.3 percent of GDP) in 2016 to $787 billion (2.8 percent of GDP) in 2026. As a share of the budget, interest would double from 6 percent to 13 percent.
The President’s budget should be commended for not only responsibly paying for new initiatives, but identifying significant deficit reduction to stabilize the debt. Preventing the debt from growing faster than the economy is an important first step to achieving sustainable fiscal policy.
Unfortunately, the President’s budget does not go far enough in terms of actually reducing the debt from its current record-high levels, nor does if sufficiently address the long-term growth of entitlement spending, particularly Social Security.
As the economy continues to normalize, high debt levels are likely to slow the growth of wages, increase cost-of-living, and leave the government less prepared to react to future needs or crises. Failure to address Social Security, in particular, will leave the program unable to pay full benefits as soon as 2029, when today’s newest retirees are reaching age 75 and today’s 54 year-olds are retiring at 67.
Spending, Revenue, Deficits, and Debt in the President’s Budget
Based on its own estimates, the President’s budget would roughly stabilize the debt as a share of GDP while allowing it to grow in nominal dollars. Specifically, debt would grow from less than $13.7 trillion today to $21.3 trillion by 2026 under the President’s budget. As a share of GDP, debt would grow from 73.7 percent of GDP last year to 76.5 percent of GDP this year, and stabilize between 75 and 76 percent of GDP between 2021 and 2026.
At 75.3 percent of GDP in 2026, debt is significantly below Office of Management and Budget’s (OMB) baseline of 87.6 percent of GDP and our “PAYGO baseline” of 83.4 percent.1 Still, debt remains near post-World War II record highs, nearly twice the historical average.
Under the President’s budget, annual deficits decline for the next couple of years before growing modestly in the future. Deficits fall from $616 billion in 2016 to $454 billion in 2018, before rising to $793 billion in 2026. As a share of GDP, deficits fall from 3.3 percent in 2016 to 2.4 percent by 2021, but then rise to 2.8 percent by 2026. By comparison, OMB’s baseline projects deficits of 5.0 percent of GDP by 2026, and our PAYGO baseline projections deficits of 4.2 percent.
Both spending and revenue rise under the President’s budget in order to maintain deficits below 3 percent of GDP. Spending would grow from 21.4 percent of GDP in 2016 to 22.8 percent by 2026 while revenue would grow from 18.1 percent of GDP in 2016 to 20.0 percent by 2026.
Spending growth is due in part to new spending initiatives, but more significantly to rising interest rates and growing entitlement costs baked into current law. As the population ages and health costs grow, Social Security, Medicare, and Medicaid together under the President’s budget grows by 1.3 percent of GDP over the next decade, while interest spending grows by 1.5 percent of GDP. The remainder of the budget shrinks by a combined 1.4 percent of GDP.
On the other hand, while built in “real bracket creep” explains part of the rise in revenue, growing revenue is largely the result of the significant tax increases proposed in the President’s budget.
At 20.0 and 22.8 percent of GDP in 2026, respectively, revenue and spending would both grow to well above their 50-year historical averages of 17.4 and 20.2 percent of GDP. Revenue would be higher than if the administration’s proposals were not enacted and spending about the same; under current law with the President’s war drawdown, revenue and spending would be 18.5 and 22.8 percent of GDP, respectively. A portion of this difference – 0.3 and 0.2 percentage points of GDP, respectively – is due to the higher revenue and spending from immigration reform.
The President’s budget includes a large number of tax and spending proposals reflecting the Administration’s many priorities. Among these changes include over $3.1 trillion of tax increases, $170 billion from immigration reform, and more than $460 billion of health and other mandatory savings in order to pay for nearly $1.6 trillion of new initiatives.
Relative to our “PAYGO baseline,”^ which reflects current law with a war drawdown, net deficit reduction totals $2.5 trillion with interest. As the Administration estimates it, that number climbs to $2.9 trillion, or $3.6 trillion including the war drawdown. Below we describe some of the major policies proposed in the budget.
New Spending Initiatives – The President’s budget includes several major new initiatives that increase spending by about $1.2 trillion over the next decade. Most significantly, the budget reverses a large portion of the “sequestration” cuts which are in effect on the mandatory side and scheduled to return in FY 2018 on the discretionary side. Through 2026, this would cost $201 billion on the mandatory side and relative to CBO’s budget conventions would cost $325 billion on the discretionary side (which is $440 billion less than a full repeal of the sequester caps).2
The budget further proposes a major $312 billion increase in infrastructure spending, focusing on transportation and clean energy infrastructure. In addition, the budget proposes more than $150 billion to fund universal pre-K and expand access to child care, over $60 billion to expand access to community colleges and fund minority-serving institutions, another $60 billion to reform unemployment insurance, and nearly $30 billion to help meet climate change goals agreed to in the Paris Climate Change Conference. Many of these initiatives are paid for with specific offsets – for example the infrastructure spending with an oil tax and a deemed repatriation tax and the universal pre-K with a cigarette tax increase.
New Tax Breaks – The President’s budget proposes to expand several existing tax breaks while creating a few new ones as well. Perhaps most significantly, the budget expands the Earned Income Tax Credit (EITC) for childless workers and create a $500 “second earner” tax credit, costing $150 billion combined. The budget would consolidate and expand tax breaks for college students and double the maximum child care tax credit. On the business side, the President’s budget would increase the amount of investments that small businesses can immediately expense, simplify and increase the research credit, and expand clean energy tax breaks.
Revenue Increases – To pay for new initiatives and reduce the deficit, the President’s budget includes nearly $3.2 trillion in tax increases. New to this budget is a $10.25 per barrel oil tax that raises almost $320 billion for infrastructure projects and a proposal to apply the 3.8 percent Medicare investment surtax to pass-through businesses, which when combined with other closing related loopholes would raise more than $270 billion. The budget also raises over $900 billion from higher earners by limiting tax expenditures to the 28 percent bracket, enacting a 30 percent minimum tax(“Buffett rule”), increasing the top capital gains and dividends rates by 4.2 percent, and taxing capital gains at death. The budget would generate more than $225 billion by increasing the estate tax in a variety of ways, $110 billion from a fee on financial institutions, $115 billion from higher tobacco taxes, and a number of other tax increases and loophole closers.
On the business side, the budget raises $300 billion from a one-time 14 percent “deemed repatriation” tax and proposes to raise $550 billion more to retroactively pay for the business portion of last year’s tax extender bill. This includes more than $480 billion from international tax reform – largely generated from a 19 percent minimum tax – and over $225 billion from closing domestic corporate tax breaks. Of that revenue, about $160 billion would be used for new (or expanded) tax breaks. The Administration continues to support using additional business revenue to finance reducing the corporate tax rate.
Health Care Reforms – Overall, the budget would reduce projected health spending by about $375 billion, with even larger savings in Medicare and a modest expansion of Medicaid. Nearly $175 billion of this savings comes from reducing prescription drug costs, mainly by requiring drug companies to effectively offer Medicare Part D’s discounted prices through “drug rebates.” The budget saves nearly $100 billion from reducing payments to post-acute care facilities, building on small reductions enacting in last year’s “doc fix” legislation. The budget also builds on that legislation by further expanding Medicare’s income-related premiums and reforming its cost-sharing (saving over $50 billion on a combined basis). And finally, the budget saves over $75 billion from Medicare Advantage by setting rates through competitive bidding. These and other savings are primarily used to reduce health care cost growth, but also to increase Medicaid spending – most significantly by removing the cap on Medicaid funding to expand eligibility and increase federal support to Puerto Rico and other territories. Additional savings are used to allow states that have not yet expanded Medicaid under the Affordable Care Act to take advantage of the 3-year 100-percent matching rate that was available to states that expanded earlier.
Other Mandatory Savings – Outside of the above proposals, the budget finds savings in other mandatory programs by reducing subsidies in the crop insurance program, allowing the Pension Benefit Guaranty Corporation to raise multiemployer premiums, and improving program integrity. The President’s budget would also enact various reforms to the Postal Service that would improve operations and increase revenue, such as increasing the authority for the Post Office to increase the price of stamps and reducing delivery from 6 to 5 days per week, to save the Postal Service from financial default. Finally, the budget includes a small amount of Social Security savings – largely from reducing fraud and overpayments. Sadly, these changes will do little to improve the solvency of Social Security, which is currently projected to exhaust its trust funds as soon as 2029, according to CBO.
Immigration Reform – The President’s budget calls for comprehensive immigration reform, supporting the approach in the 2013 Senate-passed bill. That reform would increase the size of the population and labor force, both increasing spending on those individuals as well as revenue collected from them. As a result, OMB assumes revenue would rise by $420 billion over the next decade and spending by $250 billion, resulting in $170 billion of total savings.
War Spending –The President’s budget requests $73.7 billion for overseas contingency operations (OCO) for FY 2017, the same amount as for last year and the amount specified in the Bipartisan Budget Act of 2015. Beyond 2017, the budget assumes a placeholder of $11 billion of war spending per year through 2021, acknowledging that the placeholder does not reflect decisions about future year’s funding. Although this placeholder is consistent with the Administration’s long-standing policy to limit total OCO spending between 2013 and 2021 to $450 billion, it is likely unrealistically low and therefore unlikely to materialize. Technically, these numbers would generate about $640 billion of savings over ten years relative to OMB’s baseline. However, this number is a combination of policy changes that are already in effect (the war drawdown) and policy changes that are unlikely to occur (the steep drop in spending starting in FY 2018) – and as a result should not be considered deficit reduction when generating savings estimates.
Ultimately, fiscal and economic choices are intertwined. Manageable debt levels and smart tax and spending policies can promote economic growth, while strong economic growth can improve the budget picture. In the President’s budget, unlike estimates made by CBO, the presumed economic impact of the President’s policies are baked into OMB’s economic assumptions.
At least in part as a result, OMB projects a somewhat more optimistic economic picture over the next decade than CBO. For example, OMB projects average real growth to total 2.3 percent per year, compared to CBO’s estimate of 2.1 percent. That gap is even more significant late in the budget window, when OMB projects annual growth of 2.3 percent and CBO only 2.0 percent. As a result of these differing growth projections – as well as differences in inflation -- OMB projects nominal GDP to be 2.3 percent higher than CBO.
This difference is due to a number of factors, including that OMB projects more robust growth over the next few years than CBO (likely due to the President’s proposed policies), assumes the economy reaches potential (CBO assumes it remains modestly below potential to account for the likelihood of a recession), and assumes faster growth in potential GDP – due largely if not entirely to its immigration reform policy.
As a result of this growth, OMB projects the unemployment rate to dip further from 4.9 percent today to 4.5 percent by 2017 and then stabilize at about 4.9 percent. By comparison, CBO projects the unemployment rate will settle around 5.0 percent.
By reducing Medicare cost growth, reforming the immigration system, and enacting a large number of tax increases, the President’s budget would not only pay for his new initiatives, but reduce projected deficits in order to stabilize the debt as a share of the economy.
It is encouraging that the budget would stem the growth of the debt, yet disappointing it does not go further. At 75 percent of GDP, debt would remain at record-high levels not seen other than during and just after World War II, and more than twice as high as in 2007. Such high levels of debt will tend to slow economic growth and perhaps more importantly would leave the federal government under prepared to face the next recession, war, or other national emergency.
The budget takes important steps to control Medicare cost growth, but does not go far enough on this front and fails to address the looming insolvency of the Social Security program altogether.
Though the President deserves much praise for paying for all of his new initiatives – and we strongly urge Congress to follow his lead – his budget simply doesn’t do enough to put our record-high debt levels – or our entitlement programs – on a sustainable long-term path.
We hope that Congress and the President will work together over the next year, combining the best parts of this budget with other reforms to restore the country’s fiscal and economic health.
1 CRFB’s “PAYGO Baseline” adjusts OMB’s baseline to remove claimed savings from a drawdown of OCO and to treat the so-called “sequester” under CBO’s conventions by assuming discretionary levels continue at sequester-levels, adjusted for inflation, beyond 2021.
^ PAYGO baseline assumes continuation of current law, including inflation adjustments of the 2021 post-sequester discretionary levels, along with a drawdown in war spending as in the President’s budget.
2 The Administration estimates discretionary sequester relief will save $77 billion over ten years, rather than costing $325 billion; their “baseline” projections assume that after budget caps and sequestration disappear in 2022, spending jumps roughly $100 billion to pre-sequester levels. By contrast CBO assumes that spending continues to grow with inflation from post-sequester levels based on a long-stranding convention of discretionary spending projections.
Statement by Maya MacGuineas, President of the Committee for a Responsible Federal Budget, On the President’s FY 2017 Budget Proposal
Congress Should Consider Omnibus and Tax Extenders Separately, Says Committee for a Responsible Federal Budget
This paper was updated on 12/16/15 to correct a typo
This paper was updated on October 15, 2015 to reflect the final end of year deficit as announced by the Treasury Department.
The Fiscal Year (FY) 2015 budget deficit totaled $439 billion, according to today’s statement from the Treasury Department. 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 2031.
Unfortunately, the recent fall in deficits is not a sign of fiscal sustainability.
The Deficit in FY 2015
According to the Treasury Department, the federal deficit totaled $439 billion in FY 2015 (an initial report from the Congressional Budget Office on October 7th estimated the deficit at $435 billion), with $3.25 trillion of revenue, $3.69 trillion of spending.
Since 2009, the budget picture has changed significantly, with deficits falling by 70 percent, from $1.4 trillion to $439 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 real tax bracket creep, new taxes from the American Taxpayer Relief Act, 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 $439 billion (2.5 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 it is less impressive than some would suggest when put in context. 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 (1.4 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. In 2016 deficits are projected to fall slightly however the likely continuation of tax extenders – even if only retroactively – means deficits will almost certainly rise that year. Under the more pessimistic Alternative Fiscal Scenario in which policymakers 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 2031.
The fact that deficits have fallen from their trillion-plus dollar levels is encouraging, but more a sign of the economic recovery than enacted deficit reduction. And unfortunately, Washington’s myopic focus on near-term deficits has led to savings which will do little to alter the trajectory of our growing debt.
The significant decline in the deficit followed a massive 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.
Download a printer-friendly version of the paper here.
This paper was updated on October 15, 2015 to reflect the final end of year deficit as announced by the Treasury Department. In addition, the paper is an update of “Deficit Falls to $483 Billion, but Debt Continues to Rise” from October 2014
The Congressional Budget Office (CBO) today released its updated budget and economic projections for the coming decade, showing that while short-term deficits are down, the debt continues to grow unsustainably over the long term. The report focuses on a “current law” baseline, which assumes policymakers generally pay for passing any new or extended tax cuts or spending increases. Under this scenario, CBO shows the following:
- Deficits will fall to $426 billion (2.4 percent of GDP) in 2015 and $414 billion (2.2 percent of GDP) in 2016, but will grow from there with trillion-dollar deficits returning by 2025, when annual borrowing will total 3.7 percent of GDP.
- Debt held by the public will grow by nearly $8 trillion between now and 2025, from over $13 trillion today to $21 trillion by 2025. As a share of GDP, debt will remain near its post-World War II record high of 74 percent through 2021, before rising to about 77 percent of GDP by 2025.
- Spending will grow from 20.6 percent of GDP in 2015 to 22.0 percent in 2025 while revenues will remain at about 18.3 percent of GDP.
- Interest spending represents the fastest growing major part of the budget, rising from $218 billion (1.2 percent of GDP) in 2015 to $755 billion (2.8 percent of GDP) by 2025. Spending on the major health and retirement programs will grow from 10 to 12 percent of GDP.
- CBO’s projections are quite similar to those made in March, with lower interest rates improving the forecast but being largely offset by various technical changes and the recent permanent “doc fix” legislation.
- Extrapolating forward, we project debt would likely exceed the size of the economy by around 2040, and continue to grow thereafter.
- We project under the assumptions of CBO’s Alternative Fiscal Scenario, where Congress extends various expired and expiring tax provisions and eliminates ”sequestration,” debt would exceed 85 percent of GDP by 2025 and exceed the size of the economy by around 2030.
CBO shows an unsustainable fiscal outlook under current law, and an even more dangerous one if policymakers continue to act irresponsibly. Lawmakers will therefore need to strictly abide by pay-as-you-go rules and take steps to control the growth of entitlement spending, while enacting other tax and spending reforms to put debt on a downward path over the long run.
See the full document below or download it here.
In early 2015, the Committee for a Responsible Federal Budget (CRFB) warned of the upcoming Fiscal Speed Bumps, explaining “lawmakers will face a number of important budget related deadlines…that will require legislative action.”
Inaction and postponed deadlines have created a gathering storm where Congress and the President must address four remaining Fiscal Speed Bumps before the end of the year:
- The end of 2015 appropriations and return of sequester caps (October 1)
- The expiration of the highway bill and insolvency of the Highway Trust Fund (October 30 & Summer 2016)
- The exhaustion of extraordinary measures to avoid raising the Debt Ceiling (mid-Fall)
- The deadline to renew tax extenders retroactively (December 31)
Although deadlines vary, political considerations may cause lawmakers to combine these issues – leading to a double, triple, or even quadruple cliff.
An irresponsible approach could add up to $2.5 trillion to the debt by 2025 above what current law allows, after interest. Instead, lawmakers should take advantage of this gathering storm to make sensible reforms to improve policy, accelerate economic growth, and address the overall fiscal situation.
Appropriations End. Sequester-Level Caps Return (October 1)
When the government’s fiscal year ends on September 30, so too will the laws that provide discretionary dollars. In theory, Congress is supposed to pass 12 appropriations bills before October in order to fund the government for Fiscal Year 2016 (FY 2016). However, the House has passed only six so far, while the Senate has not passed any. Failure to pass appropriations bills or a Continuing Resolution (CR) would result in a government shutdown.
Assuming policymakers avoid a shutdown, they will still need to decide at what level to fund the government. The Ryan-Murray Bipartisan Budget Act set spending levels for only FY 2014 and FY 2015. For FY 2016, current law spending caps will be dictated by automatic spending reductions commonly referred to as the “sequester.”
Under sequestration spending levels, nominal discretionary caps will rise only $3 billion (0.3 percent) next year – and remain about $90 billion below the pre-sequester caps set in the Budget Control Act. A number of policymakers and outside analysts have called for repealing or reducing the impact of this sequester.
Permanent sequester repeal would cost $1 trillion before interest over the next decade – although policymakers could enact a partial and/or temporary reduction of the sequester cuts. In any case, lawmakers should fully offset the costs with more thoughtful permanent savings that grow over time, without relying on gimmicks.
Legislation increasing the discretionary caps could also be accompanied by budget process reforms to strengthen their enforcement and restrict the use of gimmicks – such as the use of the Overseas Contingency Operations in the Congressional budget to effectively circumvent the defense caps. We describe such reforms in Strengthening Statutory Budget Enforcement.
In September, CRFB will release a plan to replace a portion of the sequester cuts over the next two years and on a permanent basis with savings elsewhere in the budget.
To learn more, read Everything You Should Know About Government Shutdowns, Appropriations 101, and Understanding the Sequester.
Highway Bill Expires and Trust Fund Runs Low (October 30 & Summer 2016)
At the end of October when the current highway bill expires, no new funds may be obligated to transportation projects without additional legislation. If highway spending is continued at current levels without additional revenue, the Highway Trust Fund will run out of money in the fourth quarter of FY 2016, or next summer.
Ultimately, policymakers should close the structural gap between dedicated tax revenue (e.g., the gas tax) and highway spending, which is projected to total about $13 billion this year and $175 billion through 2025. Preferably, this gap would be closed permanently with structural changes to revenue and/or spending, although a fully-offset general revenue transfer could be used to buy time, as it was this July.
CRFB released an illustrative plan in May: The Road to Sustainable Highway Spending, which included a fully-offset, short-term cash infusion into the trust fund, a process for tax and transportation reform, a scheduled 9-cent per gallon gas tax increase if alternatives were not identified, and a spending limit to keep future highway costs in line with revenue.
For more background, see our paper Trust or Bust: Fixing the Highway Trust Fund.
Federal Debt Ceiling is Reinstated (Mid-Fall)
The federal debt ceiling – which was suspended in February 2014 – was reinstated this March, limiting gross federal debt to its current level of $18.15 trillion. Through “extraordinary measures,” the Department of Treasury has been able to delay the need to address the debt ceiling even as the federal government continues to borrow. However, those measures are estimated to run out sometime after the end of October.
Policymakers must increase or suspend the debt ceiling to avoid a potentially disastrous government default, and should do so in a timely manner because waiting until the 11th hour could have negative economic consequences. At the same time, the debt ceiling can be – and in the past has been – an opportunity to take stock of the nation’s unsustainable fiscal situation and make fiscal reforms. An increase would ideally be accompanied with improvements to reduce the long-term debt.
Reforms to the debt ceiling itself should also be considered. Through our Better Budget Process Initiative, CRFB has presented a number of ideas for Improving the Debt Limit to better promote fiscal responsibility without generating as much economic risk.
To learn more about the debt ceiling, read Q&A: Everything You Should Know About the Debt Ceiling and Understanding the Debt Limit.
“Tax Extenders” Reach Reinstatement Deadline (December 31, 2015)
At the end of last year, over 50 temporary “tax extenders” expired. These include individual and business tax breaks for research and experimentation, wind energy, state and local sales tax, and many others.
Most are renewed regularly and can be reinstated retroactively through the end of 2015, and possibly later. Doing so for 2015 would cost over $40 billion before interest, and extending them into 2016 would cost about $95 billion. Many of these provisions have been enacted temporarily to hide their costs, but the price mounts if they are continued year after year. A permanent extension would cost roughly $500 billion through 2025 for traditional extenders, $245 billion for bonus depreciation, and $200 billion for expiring refundable credits – about $940 billion total, without factoring in interest costs.
Rather than add to the debt, lawmakers should use this deadline as an opportunity for comprehensive, pro-growth tax reform that simplifies the tax code, reduces tax rates and deficits, broadens the tax base, promotes growth, and makes thoughtful choices about how to address each tax extender. Last year, CRFB proposed the PREP Plan, which combined a temporary extension with a fast-track process for tax reform and offset the cost with tax compliance measures.
To read more about the tax extenders, see The Tax Break-Down: Tax Extenders.
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The gathering fiscal storm facing our country this fall will require legislation to address the important budgetary issues mentioned above. We hope Congress and the President use this as an opportunity to improve, rather than worsen, the nation’s unsustainable fiscal situation.
Update 9/10/2015: This paper was updated for the Department of Transportation's announcement that the Highway Trust Fund would last through the third quarter of FY 2016, and updated to clarify when listed costs included interest.