On Friday, March 20, the Congressional Budget Office released a preliminary analysis of the President's FY 2010 Budget.  Highlights follow: 

Comparison of OMB and CBO Deficit Projections for President’s Budget (billions of $)

FY	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
OMB	1,752	1,171	912	581	533	570	583	637	636	634	712
CBO	1,845	1,379	970	658	672	749	785	895	949	1,023	1,189

 

Good News for the Obama budget plan:  

• Recession projected to end this fall:  According to CBO, "although the economy is likely to continue to deteriorate for some time, the enactment of the (stimulus bill) and very aggressive actions by the Federal Reserve and the Treasury are projected to help end the recession in the fall of 2009."  However, where the Administration projects a 3.2% growth rate in 2010, CBO projects lower real GDP growth of 2.9% ("real GDP" adjusts for inflation).

 

Bad News for the Obama budget plan:

• Deficits $2.3 trillion higher:  Last month, OMB projected that the Obama budget plan would generate deficits of $7 trillion over 10 years.  CBO estimates 10-year deficits totaling $9.3 trillion.  The OMB/CBO gap widens in the outyears with OMB projecting a deficit of $712 billion in 2019 (3.1% of GDP) and CBO projecting $1.2 trillion (5.7% of GDP). 

• Debt would spike under President's Budget:  CBO estimates that "debt held by the public" would rise from 41% of GDP in 2008, to 57% in 2009, and then 82% by 2019 under the President's policy proposals. 

• Obama's proposed extension of Bush tax cuts costs nearly $2 trillion:  CBO's analysis estimates that President Obama's proposal to permanently extend the Bush tax cuts (except for upper income earners) would cost $1.9 trillion over 10 years (2010-2019).  The Obama budget avoids this fact by "assuming" the tax cut extensions in their baseline. However, if Congress adheres to its PAYGO (pay-as-you-go) rules, the extension of the Bush tax cuts will have to be paid for or the PAYGO rule waived. 

Other highlights of the CBO Analysis:

• The President's budget--and CBO in its analysis of the budget--shows no net effect from health reform, because the proposed "health reform reserve fund" is designed to be self-financing, that is, tax increases on upper income earners and reforms to Medicare and Medicaid are intended to offset the costs of health care reform.
• AMT "fix" costs nearly a half trillion:  CBO estimates that the President's proposal to index the Alternative Minimum Tax for inflation would cost $447 billion over 10 years.  (The stimulus bill earlier this year "patched" the AMT for 2009 only.)
• Climate policies raise new revenues and provide countervailing tax relief:  New revenues from auctioning CO2 emissions (a key component of the President's global warming policies) would raise $629 billion over 10 years, with more than 2/3 of the new revenues being used to permanently extend the February stimulus bill tax cuts (as a countermeasure to higher energy prices).
• Protecting physicians from automatic Medicare cuts costs $285 billion: The Obama budget proposes to override a current law that calls for automatic cuts to Medicare physician payments. The 10-year cost is $285 billion.
• Pell grant reforms cost nearly $300 billion: The Obama proposal to change college Pell grants from a discretionary program to an entitlement and to index grant amounts to inflation is estimated by CBO to cost $293 billion over 10 years.

Administration Response to CBO estimates:   In his blog posting responding to the new CBO estimates, OMB Director Peter Orszag said "a key driver of the new CBO deficit numbers after 2014 are estimates about long-term economic growth--where CBO is somewhat more pessimistic than the consensus....Second, and more importantly, the CBO report only underscores the severity of the economic and fiscal crisis the Administration has inherited. There is need for urgent action to get our economy moving again, invest for the future, and put the nation on a sustainable fiscal path. The President's Budget has proposed to do exactly this by addressing our challenges head on...."

CBO Analysis of President's FY 2010 Budget Plan

OMB Response to CBO Projections  

With the House and Senate Budget Committees aiming to mark-up their FY 2010 Budget Resolutions this week, it remains unclear whether Congress will utilize the filibuster-proof "budget reconciliation" process.

On ABC's This Week, Senate Budget Committee Chairman Kent Conrad said his committee's budget plan would not include filibuster-proof "budget reconciliation" instructions. Conrad also said that his committee's FY 2010 budget resolution would cover 5 years, rather than 10.

However, Congressional Quarterly reported yesterday that House leaders want to provide reconciliation protection for Obama's health care initiative as a fallback position, in case the effort stalls due to a Senate filibuster. In the event the House Budget Committee includes reconciliation instructions for health care reform, and the Senate does not, the issue would be decided in April in a House-Senate conference committee on the budget resolution.

Media reports had indicated last week that White House Chief of Staff Rahm Emanuel and OMB Director Peter Orszag favor the use of Reconciliation in order to prevent a Senate Republican filibuster of the Obama budget plan.

Republicans appear to be lining up in opposition to several key components of the Obama budget plan: (1) paying for health care reform by limiting itemized deductions for for upper income earners; (2) allowing tax cuts to expire for upper income earners; (3) auctioning CO2 emission allowances and using the revenues for clean energy technologies and tax relief to offset higher energy prices; and (4) closing a variety of tax loopholes to reduce deficits.  

As the possible use of Reconciliation continues to be scrutinized, following are some key points for budget observers to consider:   

1. Myth: Reconciliation was intended to be used only for deficit reduction.  Fact: The congressional budget process was not established to achieve a particular result; it was intended to enable Congress to develop a global budget framework within which spending and tax bills would be adopted.

2. Myth: Reconciliation was not intended for major policy initiatives like health care reform. Fact: A major factor in today's runaway deficits is the grossly inefficient and ineffective health care system.  To the extent that the Obama budget calls for major health care reforms to reduce the rapid increases in Medicare, Medicaid, and other health care costs, it is fully consistent with the purpose of budget reconciliation. (However, the use of reconciliation for Obama's cap-and-trade plan to reduce carbon emissions is a more difficult argument to make, and is opposed by many Democrats as well as Republicans.)

3. Myth: Reconciliation provisions must sunset after 5 or 10 years. Fact:The only limitation is that reconciliation provisions cannot increase deficits beyond the "budget window," which is why the Bush tax cuts expire at the end of 2010. To the extent that health care reform is fully paid for, it would not have to expire at any particular time.

4. Myth: The Senate's Byrd Rule precludes major policy changes. Fact: The Byrd Rule precludes major changes to policy that are merely incidental to budget provisions, but reconciliation bills such as OBRA-93 have accomplished major policy changes to Medicare, Medicaid, and the tax code that are integral to budgetary objectives.

Secretary Timothy Geithner announced this morning that the Treasury Department is launching a "Public-Private Investment Program" to absorb between $500 billion and $1 trillion of so-called "legacy assets," which are: (1) real estate loans held directly on the books of banks ("legacy loans") and (2) securities backed by loan portfolios ("legacy securities" or "mortgage-backed securities"). 

According to Treasury, these so-called toxic assets "create uncertainty around the balance sheets of these financial institutions, compromising their ability to raise capital and their willingness to increase lending." (source: Treasury fact sheet)

The plan has two major components:

1. Legacy Loans Program: To cleanse bank balance sheets of troubled legacy loans, the FDIC and Treasury are launching a program to attract private capital to purchase eligible legacy loans through the provision of FDIC debt guarantees and Treasury equity investment.
2. Legacy Securities Program:  Under the second part of the program, the Treasury and the Federal Reserve would expand a program started last month known as TALF (Term Asset-Backed Securities Loan Facility), which allows the Fed to purchase securities to ease the market for loans for students, small businesses, and car buyers. The expansion would extend the program to purchase of mortgage-backed securities. 

Overall, the plan aims to spread the risk between taxpayers and private investors.  Using $75 to $100 billion in TARP capital and capital from private investors, the program is aimed at leveraging $500 billion in purchasing power to buy legacy assets--with the potential to expand to $1 trillion.

Treasury Fact Sheet

Secretary Geithner's op-ed in today's Wall Street Journal