Process and Rules

Op-Ed: How to Add Teeth to Obama's Plan for a Debt Failsafe

Washington Post | April 29, 2011

In his recent it’s-time-to-get-serious-on-the-budget speech, President Obama introduced his idea for a debt fail-safe to, in his own words, “hold Washington — and to hold me — accountable and make sure that the debt burden continues to decline.” While budget trigger mechanisms haven’t worked particularly well in the past, there is reason to believe this time — if done right — they could be part of the solution.

The president’s debt fail-safe would mandate cuts to government spending and tax breaks if by 2014 — notably, not until after the election — deficits were not projected to be declining as a share of the economy. To be workable, debt targets and triggers, which the Peterson-Pew Commission on Budget Reform spent the past two years working on, need to be well structured and politically realistic, and they need to come with enforcement mechanisms that are strong enough to push lawmakers to act. A number of ideas could improve the president’s fail-safe proposal:

Start right away. Deficit reduction cannot be delayed until after the election. A budget framework should be put in place this year, with real savings targets starting next year. We have no idea when our creditors will lose faith in the United States, but we should not push this to beyond the election and risk finding out.

Set annual targets. The purpose of a budget target is to lay out a clear fiscal objective, such as balancing the budget, or (as is now more realistic given our debt-swollen starting point) bringing the debt down to a more reasonable share of the economy by the end of the decade. But there also should be yearly measures for getting there, to avoid politicians loading all their promised savings far in the future. Politicians’ promises to make tough choices years from now ring hollow.

Exempt nothing. To be taken seriously, a budgetary target needs to be coupled with triggers, which are basically the teeth that make the target more than an empty political promise. Obama’s proposed trigger would levy cuts on spending and on the credits, deductions and exclusions that clutter the tax code. But it exempts Social Security and Medicare benefits — which is like punishing your kids by denying them dessert, except for candy and ice cream. All programs need to be part of the trigger, which is what will get policymakers to develop a savings proposal on their own terms rather than waiting for the trigger to force their hand.

Shoot high. The president proposed stabilizing the debt by the end of the decade. Not good enough. Obama’s commission on fiscal responsibility proposed saving $4 trillion over the decade; the president countered with proposals to save $2.5 trillion. He should match what his own commission proposed, which would lead to the debt shrinking relative to the economy after 2013.

How should a budget trigger fit into the unfolding debate? An obvious fit is as part of the debt ceiling discussion. The debt ceiling has to be lifted — failing to do so would be catastrophic. Yet, not making changes to the budget situation would be disastrous as well — only the consequences would not be as immediate.

Ideally, we would attach a full budget reform framework, as the Gang of Six (a bipartisan group of senators pushing a comprehensive plan) is working on, to the debt ceiling increase. But time is short; we bump up against the debt ceiling in the coming weeks. Targets and triggers may work as a perfect bridge to the larger plan. However, they will only work if they reflect the political will to make changes, rather than a political punt, and even the best debt fail-safe mechanism needs to include some specific spending cuts upfront to help pave the way.

The Gramm-Rudman budget act failed because the targets became too stringent to be realistic; the Medicare solvency trigger failed because there was never really any intent to fix the program. So while the debt fail-safe may be the perfect starting point to help buy some time, only real policy changes will get the job done.

Getting Back in the Black

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In Getting Back in the Black, the Peterson-Pew Commission on Budget Reform calls on policymakers to reform the federal budget process in order to help stabilize the nation’s debt-GDP ratio, a proposal advanced in the Commission first report Red Ink Rising. The Commission concludes that policymakers must improve the budget process through implementing fiscal targets, budgetary triggers, and increased transparency as part of a package of fiscal reforms.

Essay: Our Unsustainable Budget Situation

NIHCM Foundation | May 2010

 

Our Burgeoning Federal Debt

There is little doubt that the United States is on an unsustainable budget path. Budget projections made by the Congressional Budget Office (CBO) have consistently anticipated an explosion in federal non-interest spending, fueled by rapid growth in Medicare, Medicaid and Social Security spending due to rising health care costs and an aging population. The directors of the CBO and the Government Accountability Office, the Social Security and Medicare trustees, and many other budget analysts have been sounding the alarm on this front for years.1 These warnings have not, however, resonated widely with the public or policymakers. Policy inertia has been the rule.

Now, of course, the problem has become much more immediate. The large budget deficits run up during the economic expansion earlier this decade and the even larger deficits used to combat and resulting from the “Great Recession” have the federal debt climbing to uncomfortable territory. Last year, the federal budget deficit was an eye-popping $1.4 trillion, or almost 10 percent of Gross Domestic Product (GDP). While the deficit situation will improve somewhat as the economy rebounds, deficits will still average well over a half-trillion dollars annually for the rest of the decade, adding continually to federal debt. Our country’s debt burden is quickly expected to reach levels not seen since World War II (Figure 1).

CBO projections show the public debt growing from $5.8 trillion in 2008 to $8.8 trillion in 2010 and climbing to $15 trillion in 2020.2 Total debt, which includes what the federal government owes to the Social Security and other trust funds, is expected to grow from roughly $13 trillion in 2010 to almost $21.5 trillion by 2020. These numbers are so large as to be almost unfathomable.

As troubling as this scenario is, it is almost certainly too optimistic since the CBO projections assume current law is adhered to. If the 2001/2003 tax cuts are not allowed to expire for all taxpayers as scheduled at the end of 2010 or if policymakers continue their routine “patching” of the Alternative Minimum Tax so that millions of Americans don’t have to pay the tax, then CBO’s federal revenue projections will be overstated. Likewise, if Congress again steps in to prevent the large drop in Medicare physician fees dictated by the sustainable growth rate formula, federal outlays for Medicare physician payments will be considerably higher than assumed. Discretionary spending also may grow much faster than the rate of inflation assumed by the CBO.

More likely assumptions show the cumulative deficits between 2011 and 2020 will be $12.4 trillion – twice as large as officially projected. Public debt would reach 100 percent of GDP in 2020. Beyond 2020, without changes, the situation would get far worse. CBO’s current law projections are quite bad, but numbers based on more plausible assumptions are devastating.3

The Harm of Excessive Debt

Borrowing money is the natural response to an economic slowdown, and the added government spending can help to offset lower consumer spending and stem job loss. But excessive debt can push up interest rates, slow wage growth, erode living standards, and deprive the nation of the fiscal flexibility to respond to future crises and new national priorities as they arise. More than half of our total debt, and the vast majority of our new debt, is held by foreign investors – giving our foreign creditors increasing leverage over U.S. policy, both domestically and abroad. With the federal debt about to expand dramatically, the risks of doing nothing are unacceptably high for the American taxpayer. We are also laying an exceedingly heavy burden on future generations who will eventually have to pay for today’s borrowing.

The Policy Response to Date

In his FY 2011 budget proposal, the President has proposed that the 2001/2003 tax cuts be allowed to expire for families making over $250,000 a year, a three-year freeze for all non-security discretionary spending, and reducing or eliminating a number of tax preferences. These are all steps in the right direction, but given the magnitude of the challenges we face, they are baby steps at best. New CBO analysis predicts the proposed budget will add $9.8 trillion, or 5.2 percent of GDP, to the national debt over the next 10 years. This projection was produced just before the final passage of the health care reform legislation and incorporates rough rather than precise estimates for the small savings expected from health reform.

The Administration also proposed the goal of having non-interest spending equal to revenue by 2015, which will require reducing deficits to roughly 3 percent of GDP. However, the spending and tax plan in the proposed budget would reduce the deficit only to $752 billion in that year, or 3.9 percent of GDP.4 The Administration is counting on the newly appointed bipartisan Commission on Fiscal Responsibility to trim the deficit by the final 1 percent of GDP, or almost another $200 billion, needed in order to reach its 2015 fiscal target. The panel must issue its recommendations by December 1, 2010. Recommendations require approval by 14 of 18 Commission members, guaranteeing bipartisan support but also setting a high threshold for action.

In addition to the obvious question of whether the Commission will succeed, one can ask whether its fiscal goal is sufficiently aggressive. Their current goal will bring the deficit down quite slowly and still leave the federal debt at close to 70 percent of GDP, well above historical levels.

An Alternative Proposal

In December 2009, the Peterson-Pew Commission on Budget Reform called on policymakers to set a bold yet reasonable goal: stabilize the debt at 60 percent of GDP by 2018.5 Around this same time, three other groups put forth similar proposals, setting debt-to-GDP targets of 60 to 70 per cent and end dates between 2019 and 2022.6 The Peterson-Pew Commission adopted a six-step plan to return the nation to fiscal health:

Commit immediately to stabilize the debt at 60 percent of GDP by 2018. A credible commitment now to stabilize public debt over the medium term can help to reassure our creditors and financial markets. The 60 percent debt threshold is both reasonable and consistent with international standards identified by the European Union and the International Monetary Fund. A more ambitious target could easily prove too difficult for lawmakers to accept and strains credibility. A less aggressive target might be insufficient to reassure markets.

Develop a specific and credible debt stabilization package in 2010. Congress and the White House must then quickly agree on the necessary reforms – almost certainly a mix of spending cuts and tax increases – and the timing for implementing them. Achieving the stated debt reduction goal will require average deficits of 2 percent over the implementation period, but the changes can start more gradually to avoid stalling the economic recovery.

Begin to phase in policy changes in 2012. The timeline for implementing agreed-upon changes must balance the risk of unduly aggressive changes that hamper recovery against delays that undermine the plan’s credibility and needlessly perpetuate high deficits. While the Commission currently believes economic conditions will favor new policies in 2012, policy makers need to watch conditions closely to determine exactly when to start making changes.

Review progress annually and implement an enforcement regime. Once a plan is adopted, we need a mechanism to ensure that it stays on track. The Commission recommends automatic triggering of spending cuts and tax increases any time an annual debt target is missed. This “debt trigger” should be punitive enough that lawmakers are encouraged to be fiscally responsible but not so large that they would try to override it if targets are missed.

Stabilize the debt by 2018. Reducing the debt to 60 percent of GDP will require a dramatic deviation from the current debt path. While the task will be much easier if we stick to current policy and do not extend expiring tax cuts without paying for them, significant structural changes to the budget will be needed regardless.

Continue to reduce the debt as a share of the economy over the longer-term. As we move to a longer-term perspective we will have to find ways to reduce the debt even below the midterm target of 60 percent of GDP. A more reasonable long-term target is something closer to the U.S. historical fifty-year average of less than 40 percent. Debts at this level would give the federal government the fiscal flexibility to respond to unexpected events such as the economic crisis we just experienced.

Moving Boldly Forward

Policymakers face an immensely difficult and unpalatable task. But as daunting as it will be to develop a plan to put the debt on a sustainable course, there simply is no other option. Action to set the changes in motion must begin right away.

The biggest factor in whether our country will succeed is political will – leaders will need to act together and courageously make very tough choices. Promises to not raise certain taxes or reduce certain benefits only stand in the way of bringing politicians together to develop a realistic plan. Any meaningful effort to address the budget problems will have to be bipartisan, giving both parties political cover and reinforcing the collective will to act. Our debt should not be our destiny. The time to act is now.

 


1 See, for example, Walker, DM. “Facing Up to America’s Health Care Challenge,” NIHCM Expert Voices essay series. 2008. http://www.nihcm.org/ publications/expert_voices

2 Congressional Budget Office. “The Budget and Eco - nomic Outlook: Fiscal Years 2010 to 2020,” 2010.

3 Committee for a Responsible Federal Budget. “CRFB Analysis of CBO’s January 2010 Baseline,” 2010. http://crfb.org/document/crfb-analysis-cbo%E2% 80%99s-january-2010-baseline

4 Budget of the United States Government, Fiscal Year 2011, http://www.whitehouse.gov/omb/budget/Overview/

5 Peterson-Pew Commission on Budget Reform. “Red Ink Rising, A Call to Action to Stem the Mounting Federal Debt,” 2009. http://budgetreform.org/sites/default/files/ Red_Ink_Rising_hyperlinked.pdf

6 Committee on the Fiscal Future of the US. “Choosing the Nation’s Fiscal Future,” 2010; Center for American Progress. “A Path to Balance,” 2009; and Center on Budget and Policy Priorities. “The Right Target: Stabilize the Federal Debt,” 2010.

 

Copyright 2010, NIHCM Foundation

No Budget, No Plan, No Accountability...No More

CHAIRMAN
Bill Frenzel
Tim Penny
Charlie Stenholm

 
PRESIDENT
Maya MacGuineas
­­­
 
DIRECTORS
Barry Anderson
Roy Ash
Charles Bowsher
Steve Coll
Dan Crippen
Vic Fazio
Willis Gradison
William Gray, III
William Hoagland
Douglas Holtz-Eakin
Jim Jones
Lou Kerr
Jim Kolbe
James Lynn
James McIntrye, Jr.
David Minge
Jim Nussle
Marne Obernauer, Jr.
June O'Neill
Rudolph Penner
Peter Peterson
Robert Reischauer
Alice Rivlin
Martin Sabo
Gene Steuerle
David Stockman
Paul Volcker
Carol Cox Wait
David M. Walker
Joseph Wright, Jr.
 

SENIOR ADVISORS
Elmer Staats
Robert Strauss

 
 
 
 


No Budget, No Plan, No Accountability...No More
May 18, 2010



Well past the April 15 deadline, Congress still has yet to adopt a budget resolution for FY2011. Meanwhile, policymakers are looking to add hundreds of billions of dollars to the debt for additional government spending and tax cuts. And the House and the Senate are eyeing ways to weaken their already weak budget process restraints. The result is an already dangerous fiscal situation, growing ever-more dangerous each day.

Instead of disregarding fiscal discipline and pushing forward major initiatives that are not paid for, Congress must consider the long-term fiscal and economic impact of the decisions they are making today. Legislators must think beyond the next election and develop a plan now for the longer term. Here is where we stand:

Chances for budget resolution fading. Each passing day without a decision on a budget resolution makes it less likely that Congress will adopt a basic budget blueprint. Many politicians would rather not have a budget debate that will highlight mounting deficits and debt in an election year and either the hard choices involved in getting the debt under control, or their failure to make those choices. The very reasonable push to reduce some discretionary spending has left the House unable to agree on a plan.

“That so many members of Congress are unwilling to consider even relatively small spending reductions does not bode well for the type of budget discussions we should be having,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Large structural changes to the budget will have to be considered—the types of changes currently being suggested are merely the opening act for what is to come.”

Lack of a budget is no excuse for adding to the debt and avoiding the fiscal problems. According to its rules, the House may now begin considering appropriations bills without a resolution in place. Spending decisions should not be made without firm limits. There is growing talk that Congress may simply “deem” a discretionary spending figure for appropriators to divide up this year and attach such a deeming resolution to other must-pass legislation. That process would deny members the opportunity to hold a separate debate on this year’s overall spending levels.


“Having no budget is no reason to add further to the debt,” added MacGuineas. “If a deeming resolution is used, it must emphasize fiscal restraint. Failing to pass a budget should not be an excuse to open the spending floodgates.”

PAYGO must be strengthened, not weakened. There are also reports that such a deeming resolution may be billed by Democrats as a “budget enforcement resolution” and include provisions reaffirming the commitment of congressional leaders to bring the recommendations of the White House deficit commission to a vote and bringing pay-as-you-go rules in line with statutory PAYGO requirements. However, the PAYGO law passed by Congress earlier this year contains several major exemptions totaling upwards of $2 trillion, including for the Medicare “doc fix” and extensions of the 2001/2003 tax cuts for the middle class.

“The new statutory version of PAYGO has loopholes so absurdly large, you could drive a tanker through them. The rules in the House and Senate are far more responsible and consistent with previous iterations of pay-as-you-go budgeting. Instead of trying to bypass the basic principle that we need to pay for what we spend and the sensible PAYGO rules, lawmakers should be figuring out how to comply with them,” said MacGuineas.

“Extenders” bill should not extend the debt. Congress wants to enact legislation that would extend until the end of the year popular tax breaks such as the research and development tax credit and social programs like expanded unemployment benefits and COBRA subsidies for the jobless. Democrats will likely unveil a bill that contains offsets for the tax cuts, but not the social spending. The proposal may also include a five-year extension of the “doc fix” that isn’t paid for. And Congress may also attempt to enact a permanent extension of the estate tax at levels that would violate even the weak statutory PAYGO currently in place.

“Congress cannot continue to act as though there are no consequences to adding to the debt,” said MacGuineas. “What are we doing—looking at Greece and saying ‘oh that looks like fun, let’s give that a try’? As the federal debt continues to soar, investors are watching lawmakers and as problems abroad clearly demonstrate, investor confidence is crucial. We should stop considering every bill as an ‘emergency’ in order to bypass PAYGO and pay for stimulus measures over the longer term so that they do not add to the long-term debt.”

Deficit reducing measures should actually reduce the deficit. Finally, the House is said to be looking into ways to ensure that savings from the President’s Fiscal Commission are preserved for deficit reduction. This is an excellent idea. The last thing we need is to see this money used to finance new spending or tax cuts. For that matter, savings from the health reform bill, which are currently on the PAYGO scorecard, should not be used to offset the costs of other borrowing either.  

 


Click here for a pdf version of this release.

For press inquiries, please contact Kate Brown at (202) 596-3365 or brown@newamerica.net.

 

 

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