One of the key elements of the Congressional Budget Control and Impoundment Act of 1974 (Budget Act) was the provision to adopt a budget resolution, which sets out Congressional priorities on the budget and provides a framework for legislation affecting spending and revenues. The budget resolution is a concurrent resolution, which means it is adopted by the House and Senate but not signed by the President. It establishes internal rules and procedures for legislation that impacts spending and revenues. But currently, the budget resolution mechanism has not been an effective tool in providing a framework for legislative action or imposing fiscal discipline. Congress has repeatedly failed to pass budget resolutions in recent years, and when it does adopt a budget resolution it fails to follow through and enforce the budget.
As part of our Better Budget Process Initiative, we have identified several potential changes to the budget resolution mechanism to make it a more meaningful and effective tool. Our proposed options include:
Change the process for adopting a budget resolution
- Make the Budget Committee a leadership committee
- Change to a joint budget resolution signed by the President
- Divide the budget resolution into two parts: fiscal goals and an enforceable legislative framework
- Implement a biennial budget with off-year amendments
- Provide for more informed consideration of amendments to the budget resolution
Strengthen enforcement of the budget resolution
- Enforce deficit reduction assumptions in the budget resolution through reconciliation
- Make it harder to consider legislation violating spending or revenue levels in the budget resolution
Modify the contents of the budget resolution
- Include enforcement provisions in the text of the budget resolution
- Reinforce pay-as-you-go rules
- Link the debt limit to the budget resolution
- Include Social Security in the budget resolution
- Provide for long-term savings targets
- Limit the use of reserve funds
- Show all budgetary resources in budget functions and committee allocations
The Case for Strengthening the Budget Resolution
An effective budget process should provide policymakers with a method to set fiscal goals and a set of mechanisms that allow for enforcement and implementation of those goals. The Budget Act of 1974 created such a system by requiring Congress to adopt a budget resolution each year before considering any tax or spending legislation. The Budget Act was enacted in part to provide an overall framework for the consideration of tax and spending decisions instead of considering legislation on an ad hoc basis without regard to the impact on aggregate spending, revenue, and deficit levels. The adoption of a budget resolution sets such levels, which are enforced through points of order1 against legislation in violation. A budget resolution may also provide reconciliation instructions for expedited consideration of legislation that would enact policy changes affecting the deficit called for in the budget resolution. In short, the current budget process provides for a robust mechanism for setting and enforcing fiscal goals centered on adoption of a budget resolution.
However, Congress has repeatedly failed to pass a budget resolutions, falling short of this goal six times in the last decade. It also appears unlikely that a budget resolution will be adopted this year. Even when Congress does pass a budget resolution, it often fails to implement or enforce the resolution. Budget resolutions are increasingly viewed as “aspirational” documents that are disconnected from the rest of the legislative process, with no expectation that the policies assumed in the resolution will be implemented or the tax and spending levels will be enforced. For example, the Fiscal Year 2016 resolution adopted last year assumed savings of $6 trillion over ten years to balance the budget, but there was only action on a small portion of the savings, and the effect of legislation enacted in 2015 actually increased the deficit by about $1 trillion over ten years.
In addition, the executive branch has no formal role in adoption of the budget resolution. As a result, in times of divided government Congress often proceeds with tax and spending legislation based on priorities that are at odds with the administration and therefore are unlikely to be signed into law. This increasingly has resulted in ad-hoc negotiations at the end of the year and budget-busting omnibus legislation that is put together without the discipline of an overall budgetary framework.
Adopting a budget resolution that does not result in action on the resolution’s deficit reduction provisions and is routinely waived to pass legislation that violates the budget is arguably worse than not passing a resolution at all, as it undermines credibility of the budget process. Members of Congress are understandably frustrated with the amount of time and political pain devoted to a budget resolution when it appears to have little bearing on final decisions and outcomes on fiscal policy.
Finally, the text of the budget resolution voted on by Congress focuses on functional totals for categories of spending that are not enforced and do not fully reflect the cost of all policies within that budget function.
Making the budget resolution more meaningful and relevant would be an important step towards strengthening accountability and discipline in the budget process. Reforms should create a greater incentive for Congress to adopt a budget resolution, encourage key actors to buy-in, and strengthen procedures to implement and enforce the budget resolution.
Options for Strengthening the Budget Resolution
In this paper, we put forward fourteen options that could improve the current budget resolution mechanism. Among them include options to change the process for adopting a budget resolution, strengthen enforcement of the budget resolution, and modify the contents of the budget resolution. Many of them could be enacted together, though they could also be enacted separately. Most of these proposals envision amendment to the Budget Act, though some could be achieved through changes in House and Senate rules as well. While we do not endorse any of these options as the right choice, we believe they should all be on the table for consideration.
Change the process for adopting a budget resolution
1. Make the Budget Committee a leadership committee
Current process: Membership of the House and Senate Budget Committees is composed of rank-and-file members, often more junior members because the committees are considered less prestigious than committees with legislative authority. Although there are seats on the House Budget Committee reserved for representatives of leadership and the Ways and Means and Appropriations Committees, 22 of the 36 members on the House Budget Committee are in their first three terms in Congress.
Problem: Although the budget resolution is intended to be the framework to guide legislation on tax and spending policies, it is developed with little formal input or buy-in from the Committee Chairs who are responsible for tax and spending legislation. The seats reserved for the Appropriations and Ways and Means Committee tend to go to more junior members of those committees because it is considered a less prestigious assignment than appointment to an Appropriations or Ways and Means subcommittee.
Proposal: Include representatives of leadership and Chairs and Ranking Minority Members of all committees with significant spending or tax legislation within their jurisdiction on the Budget Committees.
The budget resolution is intended in part to set priorities among the various committees. By including representatives from the most relevant committees on the Budget Committee – at a minimum the Chairs and Ranking Members of Appropriations, Ways and Means, and Finance – these members would directly participate in the decisions regarding relative priorities among committees. Membership could also be extended to include Chairs of Agriculture, Education and Workforce/Health, Education, Labor and Pensions, and Energy and Commerce Committees as well as other major committees in years when major fiscal policy legislation is being considered for reauthorization.
Including key committee Chairs on the Budget Committee will give them a role in setting committee allocations and potential reconciliation instructions that are realistic and consistent with committee plans and give them greater buy-in to the decisions in the budget resolution. Likewise, including a senior representative of leadership on the Budget Committee will give leadership more buy-in to the budget resolution, which is critical to passage and enforcement of a budget resolution. Finally, including a senior representative of leadership and chairs of key committees on the Budget Committee will increase the committee’s stature and send a message that the budget produced by the Budget Committee is a serious document that will be used to guide legislative actions on tax and spending policies.
2. Change to a joint budget resolution signed by the President
Current practice: The budget resolution is a concurrent resolution, which means it is adopted by the House and Senate but not signed by the President. Although it sets Congressional rules and procedures, it does not have the force of law.
Problem: Currently, the President’s involvement in the budget-writing process is advisory at best. The White House proposes its own budget (which is of a very different nature than the budget resolution) at the beginning of the year, but this budget functions more as a set of suggestions than anything else. The President has absolutely no input when it comes to the allocation or levels of spending and revenue in the budget resolution.
Indeed, the first time the President has any formal role in the budget process is when legislation following up on the budget resolution – typically appropriations bills but sometimes legislation that results from reconciliation instructions – comes to the President’s desk for a signature or veto late in the year.
Because the President has veto power over individual tax and spending bills but no veto power over the aggregate levels outlined in the budget resolution, a Congress that follows through with its budget resolution is likely to pass policies the President opposes, requiring ad hoc negotiations revising spending and revenue levels at the end of the year. These end-of-year budget deals rarely look at the impact of legislation on the entire budget outlook as the budget resolution does, often leading to deficits much higher than called for in the budget resolution.
In addition, the concurrent resolution can only be enforced through points of order prohibiting consideration of legislation that violates the budget resolution and other internal procedures and cannot establish statutory enforcement mechanisms. It is therefore often viewed as “non-binding” and not taken as seriously as a law.
Proposal: Rather than a concurrent resolution agreed to by both chambers of Congress, there could be a joint budget resolution agreed to by both Congress and the President.
A joint budget resolution requiring a presidential signature would bring the President into decisions about discretionary spending levels, other tax and spending levels, and deficit reduction targets early in the process. This would lead to a more desirable outcome where negotiations occur at the beginning of the year before Congress moves forward with the legislative process, rather than at the end of the year after legislation has already been written.
Having these negotiations early in the process will allow discussions regarding the top line for discretionary appropriations and other legislation to occur within the context of an overall framework that considers the impact of individual decisions on the overall bottom-line. Resolving disagreements over the aggregate levels of spending and revenue before filling in the details would be more efficient. Agreement on a joint budget resolution would allow the appropriations process to move forward with an agreement on the top line for spending, providing more opportunity for consideration of individual issues in the appropriations bills through the regular process.
Requiring that the President sign a budget resolution could delay adoption of a budget resolution by requiring additional time for negotiations with the administration. The process could be expedited by the creation of a joint budget committee that produces a single budget resolution for consideration by the House and Senate. In addition, there may be a need for a fallback mechanism setting spending and revenue levels based on the joint resolution for purposes of internal enforcement to allow appropriations and other budget-related legislation to move forward if the President vetoes the joint budget resolution.
Changing the budget resolution to a joint resolution signed by the President would also make it possible for the budget resolution to establish statutory changes, including adjusting discretionary spending caps, increasing the statutory debt limit, and setting up an enforcement mechanism such as sequestration that would take effect if Congress fails to meet the specified deficit reduction targets. This improvement will cause lawmakers to take the budget resolution more seriously and consider whether they are prepared to abide by the limits in the budget, especially if they were accompanied by statutory enforcement mechanisms.
3. Divide the budget resolution into two parts: fiscal goals and an enforceable legislative framework
Current practice: The budget resolution sets out goals for fiscal policy over the next ten years along with spending and revenue levels necessary to achieve those goals. The spending and revenue levels in the budget resolution are enforced by points of order that prohibit consideration of legislation that would cause those levels to be breeched. The resolution may also include reconciliation instructions providing for action on legislation that changes laws regarding mandatory spending and revenues.
Problem: Recent budget resolutions have become viewed as “aspirational” documents expressing support for achieving a balanced budget within the ten-year window while relying on large, mostly unspecified, spending cuts that Congress has no intention of enacting to achieve that goal. This leads to a disconnect between the spending and revenue levels in the budget that are supposed to be enforced and the reality of the legislative agenda. As a result, the budget resolution is not taken seriously and the Budget Act is routinely waived for tax and spending legislation. If the spending and revenue levels in the budget resolution are viewed as aspirational goals unrelated to the actual legislative agenda, the budget resolution will not provide meaningful budget discipline.
Proposal: Divide the budget resolution into two separate pieces for goals and a budgetary framework. This way, Congress can continue to lay out its fiscal and budgetary goals while also putting forward an enforceable framework for legislation that will be considered during the rest of the year. The “goals” component would set out the roadmap for the budget over the 10-year window and possibly beyond while the “budgetary framework” would provide for concrete steps toward achieving fiscal goals. The two components could be combined in a single resolution or considered as two separate resolutions. If the budget resolution is changed to be a joint resolution as suggested above, Congress could pass a concurrent resolution outlining broad goals to stake out the Congressional position on fiscal policy as a counter to the President’s budget and a joint resolution signed by the President to govern actual legislative actions.
The resolution setting out fiscal goals could include overall targets for revenues, spending totals and priorities, deficits, and debt levels over the next ten and twenty years. This resolution could also call for consideration of major policy changes that may not be ready for immediate action. The enforceable budget framework would set the discretionary spending top line for the upcoming fiscal year, committee allocations for mandatory spending and revenue levels for the next five years, and reconciliation instructions that make a down payment on deficit reduction necessary to achieve long-term fiscal goals. The fiscal goals resolution could set out more ambitious long-term goals, while the budgetary framework would focus on the concrete steps that can be taken to move toward that goal. The fiscal goals resolution would address the desire of Members of Congress to show support for long-run fiscal policy goals that may be unlikely to be achieved through enacted legislation in the upcoming year, while the budget framework resolution would set realistic targets for tax and spending legislation that can be enforced.
4. Implement a biennial budget with off-year amendments
Current process: Congress is supposed to pass a new budget resolution every year, though it often fails to do so.
Problem: Requiring adoption of a budget resolution every year results in Congress having essentially the same debate twice each Congress (each Congress lasting 2 years). Since the partisan composition of Congress is unchanged between the first and second session of Congress, there is little to no reason to expect a different outcome on major macro-budget priorities such as the appropriate levels of spending, revenues, and deficits. The budget resolution in the second session of Congress is often much more difficult to pass than the first since it must be passed during an election year. Indeed, Congress has failed to pass complete budget resolutions in seven of the last nine election years. Work to develop two resolutions each Congress delays consideration of other important matters including actual legislation.
Proposal: Adopt biennial budgeting, where budgets are passed every other year.
Under this proposal, Congress would pass a comprehensive budget resolution setting all budget totals and other budget policies in the first year of the two-year Congressional cycle. There could be a formalized process for expedited consideration of amendments to the budget resolution in the second year to accommodate any new legislative priorities, achieve further deficit reduction, or otherwise address changed circumstances without having to rehash major fiscal policy issues settled in the budget resolution adopted in the prior year.
A biennial budget could be accompanied by biennial appropriations with a process for a supplemental appropriations bill in the second fiscal year, adjusting priorities consistent with the amended budget resolution. Alternatively, annual appropriations could be retained, with Congress being able to begin work on individual appropriations bills earlier in the second year of the cycle.
5. Provide for more informed consideration of amendments to the budget resolution
Current practice: The Budget Act limits debate on the budget resolution in the Senate to fifty hours. However, the Budget Act allows an unlimited number of amendments to be filed, even after the fifty hours for debate time has expired.
Problem: The ability to offer amendments after the time for debate has expired has led to a practice known as “vote-a-rama” whereby numerous amendments are offered and voted on at the end of the process without any debate or time to review the amendments. As a result, Senators vote on and often approve amendments to the budget resolution without a full understanding of the implications of the amendment.
Proposal: Institute a filing deadline requirement on amendments offered to the budget resolution and provide for a one day layover of amendments before votes. For example, former Senator Robert Byrd (D-WV) proposed requiring that first degree amendments be filed at the desk prior to the 10th hour of debate and second degree amendments be filed prior to the 20th hour of debate and that consideration of the budget resolution be set aside for one calendar day prior to the 40th hour of debate to allow amendments to be printed in the record and reviewed before they come to a vote in the Senate.
Strengthen enforcement of the budget resolution
6. Enforce deficit reduction assumptions in the budget resolution through reconciliation
Current practice: The budget resolution may include reconciliation instructions that require authorizing committees to report legislation changing mandatory spending or revenues within their jurisdiction by a specified amount. The intent is to “reconcile” spending and revenue levels in current law with the levels provided in the budget resolution. The budget resolution conference report also provides for authorizing committee allocations of spending and revenues for legislation reported by the committee.
Problem: Recent budget resolutions have assumed large, unspecified savings without reconciliation instructions directing committees to report legislation achieving those savings. The Fiscal Year 2016 congressional budget resolution report provided for a reduction in mandatory spending of $15 trillion that was not allocated to any committees in the Senate but rather included as “unassigned” savings.
Proposal: Amend the Budget Act to require reconciliation instructions for any changes in mandatory spending or revenues assumed in the resolution and prohibit “unassigned” spending reductions.
Providing for action on legislation that implements specific policy changes necessary to achieve all of the deficit reduction assumed in the budget resolution would increase the credibility of the deficit reduction assumptions in the budget resolution. Requiring all spending cuts assumed in the budget resolution to be assigned to committees, backed up by reconciliation instructions, would also discourage the reliance on assumptions of large unspecified or unrealistic savings. If the budget resolution were divided into separate fiscal goals and legislative framework, the legislative framework would have reconciliation instructions to provide for legislative action to implement savings assumed in the framework while the fiscal goals would not include reconciliation instructions.
7. Make it harder to consider legislation violating spending or revenue levels in the budget resolution
Current practice: The Budget Act establishes points of order against legislation that increases spending above a committee’s allocation under the budget resolution or reduces revenues below the revenue level in the budget resolution. Budget resolutions often include “reserve funds” allowing committee spending and revenue allocations to be adjusted prior to consideration of legislation meeting certain criteria, generally including deficit neutrality, to protect that legislation from being subject to a point of order for violating budget allocations. These points of order can be waived in the rule for floor consideration in the House. Major Budget Act points of order can be waived by 60 votes in the Senate; other points of order established in law and through rulemaking can be waived by a simple majority vote.
Problem: The House routinely waives budget points of order as part of the rules under which legislation is considered on the floor. These rules often waive all points of order against legislation without much debate or even awareness that budget points of order are waived. According to the House Rules Committee Survey of Activities, the Budget Act was waived a total of 60 times during the 113th Congress. Seventeen of the waivers were to provide new budget authority in excess of a committee’s spending allocation. Another 14 waivers were to allow total spending to be above the level in the resolution or reduce revenues below the level in the resolution.
In the Senate, Budget Act waivers are often included in global waivers of all points of order, which avoid debate on the merits of any Budget Act waivers. The sixty vote threshold to waive the Budget Act in the Senate is currently less significant because the need for 60 votes to obtain cloture to proceed to any legislation is common. Waiving the Budget Act is viewed as yet another 60-vote procedural hurdle and not a substantive vote on whether legislation violating the budget should be considered. Often, Budget Act points of order are not raised because legislation has already received 60 votes on cloture, and it is assumed that there would be the same number of votes to waive the Budget Act.
Proposal: Make it harder to waive Budget Act points of order for violating spending or revenue levels in the budget resolution.
This would involve a number of specific changes. First, it would mean amending the Budget Act and/or House and Senate rules to require the Budget Committees to publish a report in the Congressional Record at least one day prior to floor consideration of the legislation certifying whether or not legislation affecting spending or revenues violates budget allocations so Members are aware of Budget Act violations. The Budget Committees already perform this review of legislation and provide information to the parliamentarian to rule on points of order, but publishing a statement about Budget Act violations in the Congressional Record would bring greater transparency to the process and make Members of Congress aware of Budget Act violations before consideration of legislation.
In addition, it would mean requiring a separate vote to waive a budget point of order for violating budget resolution allocations. This could operate similarly to the unfunded mandates rule or emergency spending rule in Statutory PAYGO, which provide for a separate vote on whether to proceed with legislation notwithstanding the point of order. Alternatively, it could be accomplished by providing for privileged amendments striking Budget Act waivers in the rule for consideration of legislation.
Strengthening enforcement of Budget Act points of order in the Senate would entail providing for an automatic vote on waiving Budget Act points of order identified by the Senate Budget Committee and prohibiting global waivers of Budget Act violations. An even stronger step to strengthen enforcement of the budget resolution would be to require 67 votes in the Senate to waive a Budget Act point of order for violating spending or revenue levels in the budget resolution.
It is important to remember that these procedures would only apply to legislation that violates the tax and spending levels in the budget resolution, making such legislation more difficult to pass than legislation that complies with the budget. Hopefully, this would help to make the budget resolution more meaningful and create an incentive to rely on more realistic assumptions in the budget resolution to accommodate likely legislation in the budget framework so as to avoid the need to waive the Budget Act.
Modify the contents of the budget resolution
8. Include enforcement provisions in the text of the budget resolution
Current Practice: The text of the budget resolution sets recommended spending levels divided among 19 budget functions (for example, function 050 for defense and function 400 for transportation). These functional levels are non-binding and have no connection to budget enforcement. The budget is enforced through committee allocations for spending and revenues that are set out in the joint statement of managers accompanying the budget resolution. The spending allocations for committees are known as the 302(a) allocations. The Appropriations Committee establishes separate sub-allocations for Appropriations subcommittees that are known as 302(b) allocations.
Problem: The focus on functional totals in the budget resolution creates a misleading impression about how spending would be divided as a result of the budget resolution. While the spending totals in the budget resolution appear to show how spending is divided among various national priorities, it is the committee allocations that actually determine where spending will be increased or decreased as a result of the budget resolution. The committee allocations, which are the aspect of the budget that is actually enforced, are not included in the text of the resolution subject to a debate and vote. As a result, the debate and decisions regarding budget priorities reflected in consideration of the budget resolution often have little bearing on how spending is actually divided in the legislative process.
Proposal: The spending and revenue allocations for all committees should be included in the text of the budget resolution voted on by the House and Senate instead of including them in a joint statement of managers or the conference report. Ideally, the budget resolution would include the 302(b) allocations for Appropriations Subcommittees, but even including just the 302(a) allocations for all committees in the resolution would be a positive step. This would increase transparency of the budget resolution and focus more attention on the budget limits that will be enforced as a result of adoption of the budget resolution.
9. Reinforce pay-as-you-go rules
Current Practice: The Statutory Pay-As-You-Go Act requires the net effect of all legislation enacted during a session of Congress affecting mandatory spending or revenues to not increase the deficit over the five- and ten-year budget window. There is a similar provision in Senate rules (established by a budget resolution) prohibiting consideration of legislation affecting mandatory spending or revenues that increases the deficit over the five- and ten-year budget window. The Budget Act provides that a budget resolution may set out procedures to effectuate pay-as-you-go in the House and also provides that legislation which complies with pay-as-you-go requirements is not subject to points of order for violating spending or revenue allocations in the budget resolution.
Problem: The pay-as-you-go principle does not apply to the budget resolution, so it is possible for a budget resolution to provide for legislation increasing mandatory spending or reducing revenues without providing for corresponding offsets. Congress also routinely evades the existing pay-as-you-go requirements by including language in legislation excluding the costs from the PAYGO scorecard.
Proposal: Apply pay-as-you-go requirements to the budget resolution by prohibiting a budget resolution from providing for consideration of legislation increasing mandatory spending or reducing revenues without corresponding offsets or assuming a net increase in mandatory spending or reduction in revenues that is not offset. Require a budget resolution to include provisions enforcing compliance with pay-as-you-go requirements, including a prohibition against excluding costs from the PAYGO scorecard.
10. Link the debt limit to the budget resolution
Current practice: The budget resolution sets forth recommended levels of debt subject to limit, but those recommendations do not affect the actual statutory limit on debt.
Problem: There is no connection between the spending and revenue decisions made in the budget resolution that result in debt and the statutory limit on debt. Members may vote for a budget that increases debt or policies that increase the debt beyond the budget resolution and vote against legislation increasing the debt limit necessary to cover debts incurred as a result of those prior policy decisions.
Proposal: Amend the Budget Act to provide for a separate bill increasing the debt limit by the amount of increased debt assumed in the budget resolution for the upcoming fiscal year either as a spin-off bill deemed to pass the House and Senate upon adoption of a budget resolution or a separate bill automatically voted on upon passage of the budget resolution conference report. Also amend the Budget Act or House and Senate rules to require any legislation that violates allocations in budget resolution to include an increase in the debt limit equal to the amount of the violation.
While this proposal is usually discussed as a way to facilitate action on the debt limit, it also has potential benefits for the budget process in several ways. First, it creates an incentive for Congressional leaders to expend the political capital necessary to pass a budget resolution in order to avoid the need to pass separate legislation increasing the debt limit, which is considered to be a difficult vote.
Linking an increase in the debt limit to the debt levels in the budget resolution would also create an incentive for policymakers to ensure that the actual increase in debt does not exceed the increase in the debt limit approved in conjunction with the budget resolution. There will be an incentive to make realistic economic assumptions in the budget resolution for purposes of projecting debt levels. It also provides consequences for passing laws violating the budget or failing to enact deficit reduction legislation assumed in the budget. If the budget resolution relies on overly optimistic economic assumptions or Congress fails to enforce the budget resolution, then the debt will exceed the limit set by passage of the budget resolution and require a separate vote to raise the debt limit further. It still may be necessary to pass a separate debt limit increase in response to unforeseen events, but adopting a budget with realistic assumptions and following through on enforcing the budget would significantly reduce the potential need for separate legislation increasing the debt.
11. Include Social Security in the budget resolution
Current process: Social Security revenues and outlays are excluded from the spending and revenue totals in the budget resolution. Reconciliation instructions cannot provide for changes to Social Security. The budget resolution does set out Social Security revenues and outlays for purposes of enforcing Senate rules prohibiting legislation increasing Social Security outlays or reducing Social Security revenues in a manner that harms solvency.
Problem: Social Security represents a major component of our fiscal position and budget. Social Security is the largest government program and the payroll taxes dedicated to the program are second largest revenue source. Spending and revenues for Social Security represent roughly one-quarter of total federal spending and revenues. Excluding Social Security from the budget resolution provides an incomplete picture of federal fiscal policy. Social Security was excluded from the budget when the Social Security system was running a surplus and its inclusion in the budget resolution masked the size of the deficit in the rest of the budget, but the Social Security system is currently paying more in benefits than it collects in revenues. As a result, excluding Social Security from the budget masks the true size of the unified budget deficit. In addition, excluding Social Security from the budget resolution prevents the budget resolution from providing for any Social Security changes, which means reconciliation legislation cannot include any changes increasing or decreasing Social Security revenues or benefits, including cross-cutting policies which apply to Social Security along with other parts of the budget or even increase revenue or benefits.
Proposal: Include Social Security revenues and outlays in budget resolution totals as well as functional totals and committee allocations. This will provide both a more complete presentation of the budget and apply regular budget enforcement rules to Social Security. This change should be accompanied by language clarifying that increases in Social Security revenues and reductions in Social Security outlays should not be counted as an offset for budget enforcement purposes to avoid double counting savings for solvency of Social Security trust fund and as an offset for increased spending outside of Social Security. It would also allow reconciliation instructions to assume changes in Social Security and permit changes to Social Security to be included in reconciliation.
12. Provide for long-term savings targets
Current Practice: Reconciliation instructions require committees to achieve savings over the budget window covered by the budget resolution, usually ten years.
Problem: Reconciliation is a powerful tool to put the U.S. fiscal house in order. However, it currently has limited capacity to encourage policymakers to address the county’s largest fiscal challenges, which are over the long run. By focusing reconciliation instructions on short- and medium-term savings, budget resolutions create an incentive for committees to meet instructions through policies that produce up front savings that don’t grow over time and in some cases produce no savings beyond the ten-year window.
Proposal: Amend the Budget Act to allow budget resolutions to include reconciliation instructions with a second-decade deficit reduction target. Reconciliation legislation reported with a second-decade savings target would automatically be subject to a second-decade estimate by the Congressional Budget Office. Because long-term estimates are subject to more uncertainty, the instructions could set savings targets as a percentage of Gross Domestic Product and/or ranges rather than an exact dollar amount. Allowing the budget resolution to set an aggregate savings goal in the second decade or another period of time beyond the ten-year budget window could provide an incentive for committees to enact structural reforms that produce savings that grow over time. This reform could be helpful even if the second decade instructions are only advisory and not binding on committees.
13. Limit the use of reserve funds
Current process: Reserve funds are included in the budget resolution to give the Chairman of the Budget Committee authority to adjust budget allocations for legislation meeting certain conditions. Generally, this is for legislation that is deficit neutral with costs in one area that are offset by savings elsewhere in the budget. They are used by the Budget Committee to provide useful flexibility in considering legislation with budgetary effects that are uncertain when the budget is put together. They also ensure that legislation increasing spending is only allowed to move forward if it is accompanied by offsets.
Problem: While reserve funds provide useful flexibility for legislation with uncertain budgetary effects, there has been a proliferation of floor amendments creating reserve funds for legislation with little or no budgetary impact. The Fiscal Year 2016 budget resolution conference report contained 120 reserve funds, 70 of which were added by Senate floor amendments. These amendments essentially use the creation of a reserve fund for certain legislation as a “Sense of Congress” in support of that legislation rather than the intended purpose of accommodating budgetary effects of legislation. The proliferation of amendments creating reserve funds is a major contributor to “vote-a-rama,” or numerous votes at the end of consideration of the budget resolution in the Senate—a source of great frustration with the budget process. The approval of amendments creating reserve funds for various bills unlikely to be considered also creates a misleading perception of what the budget can accomplish, further undermining the credibility of the budget resolution.
Proposal: Preserve the ability to include reserve funds to provide flexibility in budget enforcement, but limit use of reserve funds as de facto “Sense of Congress” amendments by limiting or prohibiting floor amendments creating reserve funds, possibly by requiring amendment sponsors to demonstrate that a proposed reserve fund would apply to legislation with budgetary effects.
14. Show all budgetary resources in budget functions and committee allocations
Current process: The text of the budget resolution sets out recommended levels of spending for each function. The spending levels in the resolution incorporate offsetting collections and receipts, which are treated as negative spending. The budget resolution report includes a list of tax expenditures by function, but the budget resolution itself does not include recommended levels for tax expenditures by function.
Problem: Only showing net spending in each function provides an incomplete picture of the budgetary resources devoted to each function and masks the true size of government. In many budget functions, gross spending totals for programs within that function are partially offset by user fees or other collections credited to those programs. The budget resolution does not show federal support for various budget functions through tax expenditures, many of which function similar to spending programs.
Proposal: Include recommended levels for gross spending, offsetting collections and receipts, and tax expenditure levels in the functional totals of the budget resolution to show the full federal commitment to the purpose of each budget function. Provide allocations for gross spending and offsetting collections and receipts for each committee. Establish an enforceable allocation for total tax expenditures similar to allocations for mandatory spending, with reconciliation instructions requiring a reduction in tax expenditures if the allocation is lower than current law. Showing gross spending and tax expenditures for each budget function would represent a step toward portfolio budgeting to have a full debate on the amount of budgetary resources devoted to various policy goals.
The Budget Act provides lawmakers with several tools to establish fiscal priorities and enforce fiscal discipline, but these tools have become less effective over time. Reform of the budget process should begin by examining why the budget resolution is not as effective in enforcing budget discipline as it could be and by considering reforms to make it more effective.
Ultimately, the effectiveness of a budget resolution depends on the will of Members of Congress to follow through and comply with the limits in the budget resolution. However, the reforms set out in this paper could make the budget resolution a more meaningful document that provides a framework that is followed in the legislative process.
1 A point of order is a parliamentary tool to enforce rules in the House of Representatives and the Senate. Any Member of the House or Senate can raise a point of order against legislation (or amendments to legislation) for violating a procedural rule. Some points of order apply to consideration of the entire bill, while others apply to specific provisions in legislation that violates rules (surgical point of order). If a point of order is sustained against legislation or an amendment, consideration of the legislation or amendment is blocked.If a surgical point of order is upheld, the specific provision in violation is struck.
Senator Bernie Sanders deserves credit for trying to pay for his spending proposals' costs but, the offsets fall short according to our new analysis as part of our Fisacl FactCheck project. Senator Sanders's proposals would add $2 trillion to $15 trillion to the debt, depending on whether his health plan's costs run higher than he estimates. As a share of the economy, debt under these policies would grow from roughly 75 percent of Gross Domestic Product (GDP) today to between 93 percent and 139 percent of GDP in 2026 (compared to 86 percent of GDP under current law).
Senator Sanders would also increase spending and revenue levels as a share of the economy to well-above historical averages. Spending as a percentage of GDP would average about 30 percent over the next decade, compared to the historical average of about 20 percent. On the revenue side, it would increase to 25 percent over the next decade, while revenue as a share of GDP has averaged about 17.4 percent over the last half-century.
Ultimately, using Senator Sanders's tax increases in order to pay for new spending would leave less options available to address the current fiscally unsustainable path of our nation's debt.
The Congressional Budget Office (CBO) released its estimate of the President’s FY 2017 budget, using its own economic and technical assumptions to evaluate the President’s policy proposals. While CBO estimates lower near-term deficits and debt than the President’s own Office of Management and Budget (OMB), it projects that after 2018, deficits and debt will both rise slowly but more or less continuously as a share as Gross Domestic Product (GDP), ultimately in excess of OMB’s estimates.
Specifically, CBO estimates debt held by the public under the President’s budget would fall modestly, from 75.4 percent of GDP in 2016 to 74.1 percent in 2018, before rising to 77.4 percent of GDP by 2026. By contrast, OMB estimates that debt would remain roughly stable over the decade, reaching 75.3 percent of GDP by 2026. This higher estimated debt is in part due to higher nominal-dollar debt but also because OMB uses economic projections that include the economic effects of the President’s policies (most significantly, immigration reform), while CBO does not.
Other major findings from CBO’s estimates include:
- Deficits would total $6.9 trillion over the next decade under the President’s budget, $2.4 trillion below current law (but $776 billion above OMB estimates)
- Net savings in the President’s budget are entirely attributable to $2.7 trillion of gross tax increases, partially spent on new spending and tax breaks.
- Annual deficits under the President’s budget would fall from $529 billion (2.9 percent of GDP) in 2016 to a low of $383 billion (1.9 percent of GDP) by 2018, before rising nearly continuously to $972 billion (3.5 percent of GDP) by 2026.
- Under the President’s budget, trillion-dollar deficits would likely return by 2027, five years later than under current law.
- Both revenue and spending under the President’s budget would be above ten-year current law and historical averages. Revenue would average 19.3 percent of GDP, compared to 18.1 percent under current law, while spending would average 22.3 percent of GDP, compared to 22.1 percent under current law. Over the last half-century, revenue and spending have averaged 17.4 and 20.2 percent of GDP, respectively.
Ultimately, CBO shows that while the President’s budget responsibly offsets new spending and produces additional deficit reduction to put the debt on a better path, it does not go far enough to reduce debt from its current post-war record-high level as a share of GDP. The budget needs to go further, particularly by slowing the growth of Social Security, Medicare, and Medicaid, to ensure a sustainable fiscal future.
Spending, Revenue, Deficits, and Debt under the President’s Budget
CBO estimates that under the President’s budget, debt would fall modestly from 75.4 percent of GDP in 2016 to 74.1 percent by 2018 before rising to 77.4 percent by 2026. In dollar terms, debt would rise from $13.9 trillion today to $21.4 trillion by 2026, a $7.5 trillion increase. CBO’s estimates are somewhat worse than OMB’s, which project debt levels of 75.3 percent of GDP by 2026, but CBO’s projections represent a significant improvement over CBO’s current law baseline, which estimates debt levels of 85.6 percent of GDP by 2026.
CBO’s projection of a rising debt path occurs because deficits would widen in the later years of the ten-year window, while they estimate economic growth would fall short of OMB’s projections. After declining to a low of 1.9 percent of GDP in 2018, deficits would rise to 2.5 percent of GDP just one year later and 3.5 percent by 2026. These deficits are an improvement over CBO’s current law deficit in 2026 of 4.9 percent by 2026 but higher than OMB’s estimated deficit of 2.8 percent of GDP in 2026.
CBO projects deficits would also fall and then rise under the President’s budget when measured in dollar terms. Specifically, they would fall from $529 billion in 2016 to $383 billion by 2018 before rising gradually to $972 billion by 2026. Trillion-dollar deficits would return by 2027.
Rising deficits in the President’s budget are the result of both spending and revenue growth over time. Spending would grow from 21.1 percent of GDP in 2016 to 23.0 percent of GDP by 2026, while revenue would rise from 18.2 percent in 2016 to 19.5 percent by 2026. Spending increases are driven by built-in growth under current law (mainly due to population aging and rising interest rates), while revenue increases are the result of policies put forward in the budget.
CBO projects spending under the President’s budget to be 0.1 percent of GDP lower than current law in 2026 (though above current law in all other years), while revenue is projected to be 1.3 percent of GDP higher than current law. Both spending and revenue would also be higher than historical averages of 20.2 percent and 17.4 of GDP, respectively.
Policy Changes in the President’s Budget
Excluding the drawdown of war spending, the President’s budget contains a total of $1.7 trillion of net deficit reduction through 2026, based on CBO’s estimates, which is about $800 billion less than the $2.5 trillion estimated by OMB. The total deficit reduction is the net result of about $2.7 trillion of new revenue, nearly $300 billion of spending reductions, $100 billion from immigration reform, and $250 billion in interest savings to pay for more than $1.2 trillion of new spending and $435 billion of new tax breaks.
We described the changes proposed in the President’s budget in our initial analysis of the budget in February (read the analysis in full here). Some of the biggest differences between CBO and OMB’s estimates come from CBO having lower revenue raised from the budget’s tax increases. These include the 28 percent limit on the value of tax preferences ($104 billion lower revenue), the one-time tax on un-repatriated foreign income ($104 billion lower), the other international tax changes ($52 billion lower), and the $10.25 oil tax ($46 billion lower)1. Some other differences include higher estimated costs for Medicaid and Children’s Health Insurance Program policies ($63 billion higher), lower estimated savings from Medicare Advantage changes ($51 billion lower), and a lower estimated cost for the clean infrastructure proposal ($38 billion lower).
Differences Between CBO and OMB Estimates
In total, CBO estimates 2016-2026 deficits under the President’s budget would be $689 billion higher than OMB’s estimate. This difference, along with 2.3 percent lower nominal GDP, is responsible for the 2.1 percent of GDP higher debt ratio projected by CBO. There are at least three ways to understand the source of the differences between OMB and CBO.
One way to understand the difference between CBO and OMB estimates is to determine how much is attributable to differing estimates in policy changes versus how much is attributable to differences in baseline projections prior to policy action. By our estimate, more than the entire difference – $808 billion – is attributable to policy change estimates. In fact, excluding policy changes, CBO’s baseline deficits would be $119 billion lower than OMB.2
Another way to understand the differences is to look at them by budget category. CBO estimates that the budget will have $1.6 trillion of lower revenue, $612 billion of lower primary spending, and $298 billion of lower interest spending than OMB estimates. In other words, CBO’s higher deficits are more than entirely driven by lower revenue estimates, with lower spending offsetting about half of that effect.
Finally, one can look at the source of the differences in assumptions. CBO’s more pessimistic economic projections – including GDP that is 2.3 percent lower in 2026 – explain $490 billion of higher deficits. Technical differences – which include things like demographics, program enrollment, and average benefits – increase CBO’s deficits above what OMB estimated by another $199 billion. Some of these differences are due to different conventions. For instance, OMB projects what the economy would look like with the President’s policies in place; CBO does not take them into account.
CBO’s analysis of the President’s budget generates similar findings to OMB’s, but it suggests a somewhat bleaker fiscal outlook – particularly in later years.
CBO shows that the President’s budget would commendably pay for all of the initiatives it proposes with real savings and include significant deficit reduction to prevent the sharp rise in debt that CBO projects over the next decade.
However, CBO’s analysis also shows that the budget includes too little net savings to reduce debt below today’s post-WWII record-high as a share of GDP. In fact, unlike OMB’s estimates, CBO finds the President’s budget would result in a small but continuous rise in deficit and debt levels after 2018, with trillion-dollar deficits returning by 2027.
While the President’s budget does include some important health reforms, it does not go far enough to put entitlement spending on a sustainable long-term path. It is particularly disappointing that even in his final budget, the President has no plan to shore up Social Security, a program within 15-20 years of insolvency.
On a positive note, the budget offers helpful deficit reduction policies and may set a minimum standard (roughly stable debt) for the next President to build from. We hope that many of the policies put forward by the President will be used by policymakers to address the unsustainable growth of the national debt – not simply to pay for new costly initiatives. And we would encourage policymakers to go beyond what the President’s budget proposes and pursue serious structural entitlement reforms that would help the long-term debt situation. This means not only identifying further health care reforms but also making Social Security sustainably solvent over the long term. In addition to tax reform and other spending cuts, these reforms will be necessary to put the country on a sustainable fiscal course for this and future generations.
Read the full paper as a printer-friendly PDF. (6 pp.)
1This paper originally cited CBO not counting savings from reducing the tax gap as one of the differences with OMB. However, CBO does count those savings; they are just considered non-scoreable for budget enforcement purposes. Both the text and Figure 3 have been modified to correct the original error.
2This assumes identical baseline conventions. Our “baseline assumptions” figure does not include policies which are included in the baseline (such as the Administration’s war drawdown) or the treatment of sequestration after 2021. Those differences in policy estimates are counted with the other changes in policy.
Since faster economic growth would represent a boon for wages and the fiscal situation, a number of Presidential candidates have been promising or assuming it on the campaign trail. For example:
- Ted Cruz: “America can get to 5 percent growth.”
- Donald Trump: “We are looking at a 3 percent but we think it could be 5 [percent] or even 6 [percent]. We are going to have growth that will be tremendous”.
- Analysis supported by campaign staff of Bernie Sanders: “The growth rate of the real gross domestic product will rise from 2.1% per annum to 5.3%”
These diverge quite substantially from projected growth and even economic history:
- The Congressional Budget Office (CBO) projects real (inflation-adjusted) growth will average 2.1 percent over the next decade.1 The Blue Chip projection is for 2.2 percent.2
- Since 1947, the average rate of US economic growth has been 3.2 percent; growth is expected to be about 1 percent lower than that due to slower labor force growth (mainly from population aging).3
- In the post-war era, there has never been a period of 10 consecutive years that have averaged 5 percent GDP growth.
- The record was 4.9 percent from 1958 to 1967 (due to recovery from the 1958 recession, the post-war economic boom, and the Kennedy-era tax cuts in 1964)
- Since 1973, there has not been a 10-year period that has averaged even 4 percent growth.
- The contemporary example of a booming economy, the technological revolution of the 1990s, averaged about 3.5 percent growth – driven in part by demographics and a dot-com bubble.
- Adding together all pro-growth policies estimated by the official scoring agencies would at most increase annual economic growth to about 3 percent.4
For more information or to speak with a CRFB expert, contact firstname.lastname@example.org.
1 CBO projects the economic situation assuming a current law baseline in which Congress meets its obligations but does not change the law. For the purposes of this short analysis, growth refers to real (inflation-adjusted) Gross Domestic Product (GDP) growth, considered widely to be the most relevant measure of the size of the economy.
2 The Blue Chip projection is an average of 50+ independent macroeconomic forecasts that vary by modeling method and assumptions. http://www.wklawbusiness.com/product-family/blue-chip
3 Simple average of the annual growth rates from 1948 to 2015.
4 Tax reform will likely only be able to increase growth by 0.02 to 0.5 percent per year, according to official estimates from the Joint Committee on Taxation and the Treasury Department. According to CBO’s most recent estimate, repealing the Affordable Care Act could increase growth by less than 0.1 percent per year. CBO estimated that the Senate’s immigration reform bill in 2013 could increase growth by up to 0.3 percent a year. In CBO’s long-term budget outlook, they calculate that a $4 trillion deficit reduction package would have positive economic returns of around 0.1 percent yearly on, average, over ten years. In total this could add about 1 percentage point to the growth rate that CBO projects of about 2.1 percent, bringing average growth to around 3 percent.
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.