Last week GAO (the Government Accountability Office) released an update of its long-term deficit scenario. In a nutshell, the deficit crisis is quickly growing worse.  According to GAO's data:

• By 2025, the equivalent of all federal revenues will be consumed by Medicare, Medicaid, Social Security and Interest on the accumulated public debt. 

 

• By 2035, the equivalent of all federal revenues will be consumed by Medicare, Medicaid, and Interest on the accumulated public debt.

(These projections are based on GAO's "Alternative Fiscal Policy Simulation," under which: expiring tax provisions are extended, except for expiring provisions in the Recovery Act and after 2019, revenue is assumed to be brought back to its 40-year historical average of 18.3%; and Medicare spending is based on projections assuming that physician payments are not reduced as specified under current law.)

Consider the consequences of these scenarios.  By 2025, all federal revenues will be consumed by the rapidly growing costs of Medicare, Medicaid, Social Security and interest payments--the rapid growth being the result of rapidly rising health care costs and retirement of the baby boomers.  This leaves no room in the budget for defense, veterans, education, health research, children's programs, law enforcement, education....in other words, all of the functions of government.

Why the rapidly deteriorating outlook?  

1. Medicare is growing rapidly -- from 3.1% of GDP in 2010 to 5.1% in 2025.  (Reasons: health care costs growing faster than the economy and the retirement of the boomers.)

 

2. Medicaid is growing rapidly -- from 2.0% of GDP in 2010 to 2.3% in 2025. (Main Reason: rapid growth of health care costs.)

 

3. Interest on the Debt is growing very rapidly -- from 1.2% in 2010 to 5.5% in 2025. (Reason: rapid growth in the accumulated public debt.)

The other stark reality is that the longer we as a nation fail to address the deficit crisis, the more difficult and costly the solutions become.

PDF of GAO Report 

A key -- but often overlooked -- detail of this year's budget process, is that Congress' FY 2010 Budget Resolution requires that the costs of health care reform be fully "offset," that is, paid for by entitlement spending cuts and/or tax increases.

There are two legislative routes to enactment of health care reform:

1. If Congress moves a free-standing health care reform bill, the Budget Resolution requires that the bill must be "deficit neutral." (This path to enactment would effectively require 60 votes in the Senate to overcome a filibuster by bill opponents.)

2. If Congress moves health care reform as part of this year's Budget Reconciliation bill, the Budget Resolution requires that the bill's bottom line must reduce the deficit by one billion dollars. (This path to enactment would effectively require 51 votes in the Senate since budget reconciliation bills are filibuster-proof.) 

The key point here is that either path to enactment of health care reform requires that the costs of expanding health care coverage must be offset by spending cuts and/or tax increases.

The Administration, in its FY 2010 budget request, has proposed that the costs be paid for by: (1) reforms in Medicare and Medicaid; (2) limiting tax deductions by upper income earners; and (3) tax enforcement measures.

From a long-term fiscal responsibility perspective, the fact that the projected growth rate of Medicare and Medicaid expenditures may be significantly trimmed as part of health care reform is significant.

Medicare and Medicaid are growing much faster than the economy itself and are -- more than any other federal programs -- the source of dire long-term fiscal projections.  For example, Medicare, Medicaid, and Interest on the Debt will consume all federal revenues by 2035. 

Consequently, this year's budget process framework may lead to some tough decisions on reforming Medicare and Medicare.  In the short-run these reforms will contribute to expanding health care coverage, and in the long-run have the possibility of contributing in a significant way to making Medicare and Medicaid costs sustainable. 

One caveat though: the Budget Resolution requires only that the new costs of health care coverage be fully offset.  That does not necessarily mean that the pre-existing unsustainable growth of Medicare and Medicaid will be successfully brought under control.

CBO has published an extensive book of health care deficit reduction options.  Among the more significant options for reducing Medicare and Medicaid expenditures are the following (dollars reflect 10-year budget savings in billions of dollars) -- (Note: items are included in this list for illustrative purposes only and do not constitute an endorsement by the Concord Coalition)

• Increase Medicare Part B premium to 35% of program costs ($217 b)
• Reduce annual updates in Medicare payments to reflect expected productivity gains ($201 b)
• Establish benchmarks for Medicare Advantage through competitive bidding ($158 b)
• Set the benchmark for private plans in Medicare at local per capita in fee-for-service ($157 b)
• Reduce the Floor on Medicaid payments to states to 45% ($131 b)
• Require manufacturers to pay a minimum rebate on drugs covered by Part D ($110 b)
• Reduce Medicare update for hospitals' inpatient operating payments by 1 point ($93 b)
• Convert Medicare and Medicaid disproportionate share (DSH) payments into block grants ($85 b)
• Consolidate Medicare and Medicaid payments for graduate medical education ($57 b)
• Reduce the update by one point in Medicare's payments to post-acute care providers ($54 b)
• Reduce Medicare payment rates in high-spending areas ($51 b)
• Require a copayment for home health covered by Medicare ($47 b)
• Restrict Medigap coverage of Medicare's cost-sharing ($41 b)
• Require the use of health information technology as a condition for participation in Medicare ($34 b)
• Replace Medicare's current cost-sharing w/ a unified deductible and uniform coinsurance ($26 b)
• Impose cost-sharing for first 20 days in a skilled nursing facility ($27 b)
• Reduce inflation update for Medicare payments for skilled nursing by one point ($24 b)
• Impose a deductible and coinsurance for Medicare lab services ($24 b)
• Impose a surcharge on Medicare cost-sharing in high-cost areas ($21 b)
• Reduce Medicare payments to hospitals with high readmission rates ($10 b)
• Increase Medicare Part D premium for upper income enrollees ($10 b)

CBO health care options book

In other health reform news, momentum continues to build behind comprehensive health care reform as the President hosted a meeting today with representatives from hospitals, the insurance industry, medical device and pharmaceutical companies, labor and physician groups.  The groups set forth an objective to reduce the annual health care spending growth rate by 1.5 percentage points for each of the next 10 years.  Some of the changes the coalition is working on, and explained in their fact sheet, include:

• Improving Care after Hospitalizations and Reduce Hospital Readmission Rates
• Reducing Medicare Overpayments to Private Insurers through Competitive Payments
• Reducing Drug Prices
• Improving Medicare and Medicaid Payment Accuracy
• Expanding the Hospital Quality Improvement Program  

The Administration today released the remaining details on its FY 2010 budget request. Economic assumptions will not be revised from the Administration's February estimates until the Mid-Session Review is released in July.  However, the new budget documents reflect worsening deficit estimates, which now stand at $1.841 trillion for FY 2009 ($89 billion more than February) and $1.258 trillion for FY 2010 ($87 billion more than February).  Budget highlights:

• Overview:  The budget proposes $3.6 trillion in outlays and $2.3 trillion in revenues, with an FY 2010 deficit of $1.258 trillion.  The budget includes deficit reduction from reducing war costs; allowing tax cuts for high income earners to expire; and closing corporate "loopholes." At the same time, the budget proposes to invest heavily in health care, energy, and education initiatives. 

• Rosy Scenario?  In view of last week's bleak economic news (8.9% unemployment rate) the Administration's projection of 3.2% growth in real GDP in 2010 is increasingly unrealistic.  In March, CBO projected 2.9% growth in 2010. The Administration will update their economic projections in July.

• Halving the Deficit: Based on the  projections of 3.2% growth next year, the proposed budget estimates that projected deficits would be "cut in half" over the next four years from more than a trillion dollars at the start of the Administration to $512 billion by FY 2013.  At that level, the deficit would be equivalent to 2.9% of GDP.  

• Tax Proposals: 

• For taxpayers with incomes over $250,000, the Bush tax cuts would be allowed to expire. The top rate would jump from 35% to 39.6%; the tax on capital gains would jump from 15% to 20%, and the tax on estates worth more than $3.5 million would be taxed at the current rate of 45%. Also, the earnings of hedge fund managers would be taxed as normal income, rather than the lower 15% capital gains rate. These provisions would generate more than $600 billion in revenues over 10 years. 

• For all other taxpayers, the budget would extend the Bush tax cuts--including the 10, 15, 25, and 28 percent brackets, the child tax credit, and marriage penalty relief--at a cost of more than $2 trillion over 10 years (including debt service). The budget would also make permanent the stimulus bill's annual $800 per family tax cut at a cost of $504 billion over 10 years (paid for by new "cap & trade" revenues -- see below).

• Health Care Reform: The budget proposes to spend at least $635 billion over 10 years on health care reform aimed at controlling costs and expanding coverage.  Health reform would be paid for by: (1) making $309 billion in reforms to Medicare and Medicaid; (2) placing a 28% cap on the tax deductions that upper-income earners can claim (instead of the current 35%); and (3) new tax enforcement measures and loophole closers.

• Defense Spending:  For the FY 2010 defense budget (excluding war costs), the budget proposes a 4% increase over FY 2009 levels.
• Veterans:  The budget proposes to increase VA funding by $25 billion over the next 5 years.  

• Global Warming and Investments in Renewable Energy: The Obama Administration proposes selling carbon emission allowances through auction as part of a "cap-and-trade" system to cut greenhouse gases dramatically by 2050.  Sale of the emission allowances (estimated at $624 billion over 10 years) would be used to pay for $15 billion per year in renewable energy investments and offsetting the cost of making the stimulus bill's middle class tax cuts permanent (the theory being that the tax cuts will help to offset price increases resulting from higher utility costs).

• Education:  The Budget would make Pell grants (for college) an entitlement and would increase and expand maximum awards, spending $116 billion over 10 years. This would be partially offset by originating all new student loans in the Direct Loan program, thus eliminating bank subsidies.

• TARP/Financial Stabilization:  The budget includes a $250 billion "placeholder" for further efforts to infuse capital into shaky banks, although Congress did not accommodate additional TARP funds in the FY 2010 Budget Resolution.

OMB Director's Blog on Release of the full budget for FY 2010 

President's Budget: Summary Tables

President's Budget: Analytical Perspectives

President's Budget: Appendix (account by account detail)

President's Budget: Historical Tables

The Obama Administration's FY 2010 budget details includes a volume called "Terminations, Reductions, and Savings" that proposes to trim 121 programs by $17 billion in FY 2010.  A few important points to keep in mind about the proposed cuts:

1. The cuts would not actually reduce total federal spending for FY 2010 or reduce projected deficits.  The total amount of Federal spending for FY 2010 has already been set by the FY 2010 congressional budget resolution. These proposed budgetary program cuts would free up funds for other programs considered to be more effective and/or a higher priority. 

 

2. The proposed reductions are very small in budgetary terms, amounting to only 1/2 of one percent of federal spending and many of the cuts will be resisted by Congress. 

 

3. This year's key opportunity for deficit reduction will occur when the Administration and Congress look for ways to pay for health care reform.  As explained in the article above, both the Administration and Congress have committed to making health reform deficit neutral.  This means that new spending to provide coverage for uninsured Americans will have to be fully offset by cuts in entitlements (Medicare and Medicaid) and/or tax increases.

Examples of the budget cuts released this week include:

• Halting production of the F-22 fighter ($2.9 billion), the VH-71 presidential helicopters ($750 million), and an alternate engine for the Joint Strike Fighter ($465 billion);
• Safe and Drug-Free Schools grants ($295 million);
• No longer reimbursing state and local governments for holding suspected criminals who turn out to be in the country illegally--shifting costs from the federal to state & local governments ($400 million);
• Eliminating the Even Start program--aimed at promoting literacy for young children and their parents--but considered to be ineffective ($66 million); and
• Eliminating federal subsidies for private lenders to service student loans--and applying the savings to increase Pell grants ($3.6 billion in 2010).

President Obama's FY 2010 budget outline released in February called for $353 billion over 10 years in "other revenue changes and loophole closers."  Of that amount, $210 billion (over 10 years) was to come from "implement(ing) international enforcement, reform deferral, and other tax reform policies."

Last week, the Administration released details on their plans to reduce overseas tax deferrals. Obama called his proposal a "down payment" on broader tax reform.  (Earlier this year, Obama tapped former Fed Chair Paul Volcker to lead a tax reform panel charged with "closing loopholes, streamlining the law and generating revenue."  The report is due December 4th of this year.)

A major component of the revenue raising plan is to tighten "deferral" rules--which allow multinational corporations to delay paying taxes on income earned overseas. The changes to deferral would raise $60 billion.

Proponents of limiting "deferral" argue that it gives companies a major incentive to mover operations overseas. However, business groups and many in Congress argue that the availability of deferral simply allows U.S. companies to compete on a level playing field with foreign competitors who are not taxed by their home nations on income earned abroad.

Other proposed tax provisions include:

• closing foreign tax credit loopholes (raising $43 billion); and
• limiting the ability of corporations to use off shore tax havens to avoid taxes (raising $95 billion).

In addition, the tax package would use some of the new revenues to permanently extend the R&D tax credit, costing $75 billion over 10 years.   

Additional Background:  Treasury Announces International Tax Reforms