Not Stepping Backward: CRFB's Paper on Budget Gimmicks

In his recent testimony, CBO directory Doug Elmendorf argued that it would be beneficial for policymakers to make large improvements to our budgetary picture, but that small steps forward would be better than nothing, and "no steps at all would be better than stepping backward." Budget gimmicks fall squarely into that stepping backwards category by potentially offsetting real costs with phony savings.

Today, CRFB released a paper "Beware of Budget Gimmicks" which warns against using these various tricks. The types of gimmicks the paper warns against are:

• Phony Drawdown Savings: This gimmick involves claiming savings for the drawdown of costs related to the war in Afghanistan, which is already in place, and the discontinuation of one-time Superstorm Sandy aid, which was never meant to continue. We discussed the war gimmick previously in detail.
• Timing Shifts or One-Time Savings: There are many policies which provide one-time savings, shift costs just outside or shift savings just inside the ten-year window, or save money upfront but cost money in later years. Using these policies to achieve ten-year savings provides a very incomplete and misleading picture of their effect on the budget.
• Ignoring Policies Currently in Place That Are Likely to be Extended: Policies like the "doc fix" are temporary but very likely to be continued into the future. A major gimmick would be to artificially improve budget numbers by ignoring the costs of these current policies.
• Double-Counting Savings: For technical reasons, some savings -- particularly increasing federal employee retirement contributions -- could be used both to offset the cost of repealing part of the sequester and create room under the discretionary caps for more spending. Doing both of those would result in a double-counting of savings and could lead to higher debt. Read more about this gimmick here.
• Excessively Back-Loading Savings: Policymakers may choose to enact policies late in the ten-year window that they have little intention in following through on. While starting some policies at a later date might be ideal to give people time to prepare for the changes, having a sudden "cliff-like" spending cut or tax increase take effect would not be credible.
• Shifting the Sequester Cuts: One gimmick to provide sequester relief in the short term would involve shifting those cuts to later years. While "smoothing" the sequester so there is a constant nominal dollar increase in the caps could be credible, spending up to pre-sequester levels by cutting well below sequester levels in later years without a reasonable path to get there would be a gimmick.
• Trust Fund Revenue Transfers: Because of the budgetary accounting mechanisms, transferring general revenue to trust funds that are due to be exhausted, such as the Highway Trust Fund and the Disability Insurance trust fund, are not recorded as costs even though they allow lawmakers to spend more than they would if the trust funds were exhausted. If policymakers wish to improve the financial situation of a trust fund, they should identify policy changes to do so, not rely on general revenue.

Relying on any of these budget gimmicks would be a step backward after lawmakers have taken some steps in the right direction. It would also undermine fiscal credibility by showing that lawmakers are not serious about our debt challenge and will look for easy ways out instead of making hard choices. They should instead use legitimate, targeted savings if they wish to provide sequester relief or offset other costs rather than further adding to the debt through smoke and mirrors.