November 23, 2014

WASHINGTON BUDGET REPORT: June 29, 2009

WASHINGTON BUDGET REPORT: June 29, 2009
Economists Warn of Increasing Deficit Dangers CBO Releases Dismal Long-Term Budget Outlook The Path to PAYGO Paying for Health Care Reform APPROPRIATIONS TRACKER

Announcements

Welcome to the Concord Coalition's weekly Washington Budget Report: a nonpartisan plain English summary of key budget, appropriations, and tax developments.

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Budget Process: Step-by-Step

Note: Congress is in recess the week of June 29 - July 3

Track 1- Economic Stimulus:

Track 2 - Completion of '09 Appropriations:

Track 3 - FY 2010 Budget [SEE APPROPRIATIONS TRACKER BELOW]:

  • February 26: President Obama transmitted a budget outline.
  • March 20: CBO released its Preliminary Analysis of the President's FY 2010 budget (using CBO economic projections)
  • March 25-26: House Budget Comm. and Senate Budget Comm. marked-up their respective versions of the FY 2010 Congressional Budget Resolution.
  • April 29: House and Senate adopted Budget Resolution Conference Report (S.Con.Res. 13).
  • May 11: Administration released remaining details of President's FY 2010 Budget
  • May-Sept: Action on the 12 regular FY 2010 appropriations bills beginning with the House and Senate Appropriations Committees dividing their respective budget resolution allocations among their 12 subcommittees (known as 302(b) allocations -- see Appropriations Tracker, below)
  • October 15: Budget Resolution deadline for committees to report budget reconciliation legislation (health care reform and student loan reform), although congressional leaders will initially try to move a free-standing health reform bill without budget reconciliation's filibuster-proof protections.

Track 4 - Stabilizing the Financial, Housing, and Auto Sectors (Ongoing)

Track 5 - Health Care Reform

  • March 5: White House Summit on Health Reform
  • May 11: White House meeting with Key Stakeholder Groups
  • June 17: Senate HELP Committee began mark-up of health care reform bill and will resume mark-up in July
  • June 19: Three House Committees release joint health reform proposal
  • July: Senate Finance Committee and House Ways & Means aiming for July mark-up, but both committees are currently struggling to reduce the overall cost and identify poltically viable offsets
  • Oct. 15: Budget Resolution deadline for committees to report budget reconciliation legislation (including health care reform), although congressional leaders will initially try to move a free-standing health reform bill without budget reconciliation's filibuster-proof protections.
Track 6 - Climate Change - Energy

  • May 21: House Energy & Commerce Committee passed the Waxman-Markey climate change bill, approving the measure on a nearly party-line vote (33-25). The bill would mandate a 17% reduction in greenhouse gas emissions by 2020 and 83% by 2050. To accomplish this, the government would set a cap on the amount of carbon dioxide that could be emitted and would issue allowances to polluting sectors that could buy and sell those rights ("cap-and-trade").
  • June 6: CBO says Waxman-Markey climate bill (HR 2454) would reduce the federal deficit $24 billion over 2010-2019. CBO Report
  • June 17: Senate Energy Committee passed 15-8 a controversial energy bill opposed by many environmental groups Press Release Bill Summary Opposition from Environmental Groups
  • June 26: CBO estimates that the revised Waxman-Markey climate bill (HR 2998) would reduce the federal deficit $9 billion over 2010-2019 (increase revenues from "cap-and-trade" by $873 billion and increase direct (mandatory) spending $864 billion). CBO Report
  • June 26: House narrowly passes Waxman-Markey climate change bill 219-212
Track 7 - Highway Bill (FY 2010-15)

  • Leaders of key congressional committees have been negotiating the parameters of the next multiyear highway bill (FY 2010-2015).
  • However, the Obama Administration has signaled an interest in putting off consideration of a multiyear highway bill due to cost issues -- opting instead for an 18-month extension of current law--but even that will require finding $20 billion in revenues, since the federal gas tax is bringing in insufficient revenues to fund highway programs. The highway trust fund could run out of money as early as this August, and a general fund bailout could be politically difficult.
  • For the period covered by the budget resolution (2010-2014), Congress allocated $259 billion to the relevant House and Senate Committees for highway and transit spending. This amount reflects a $67 billion increase above the "baseline" level--which is tied to current highway bill spending.
Track 8 - Enacting Statutory PAYGO

Economists Warn of Increasing Deficit Dangers

Economists Alan Auerbach and William Gale at the Brookings Institution this week released a significant new paper on the fiscal outlook, "The Economic Crisis and the Fiscal Crisis: 2009 and Beyond," Excerpted highlights:

  • The budget outlook at every horizon is troubling: the fiscal-year 2009 budget is enormous; the ten-year projection is clearly unsustainable; and the long-term outlook is dire and increasingly urgent.

  • The federal government is not alone in its fiscal troubles. The individual states face daunting fiscal prospects. Most European countries will experience significant fiscal deterioration over the next few years. Standard and Poor’s recently warned the United Kingdom that it could lose its triple-A credit rating on account of its projected debt-to-GDP ratio.

  • CBO projects the 2009 deficit to be $1.7 trillion, about 12 percent of GDP. This represents the largest deficit share of the economy since World War II.

  • The collapse of the budget happened both gradually and suddenly. The gradual, but sizable, decline that occurred from 2001 to 2008 was primarily the result of policy – tax cuts and spending increases. The sudden, sharp decline that occurred from 2008 to 2009 was primarily the result of the economic downturn and the financial interventions.

  • Under the administration’s budget...the ten-year deficit is projected to be $9.1 trillion. The deficit declines to 4.0 percent of GDP by 2012. By 2019, although the economy is projected to have been at full employment for several years, the deficit rises to 5.5 percent of GDP (a structural deficit about equal to the 2009 figure); spending rises to 24.5 percent of GDP (the highest since World War II, except for the current downturn), the debt-to-GDP ratio rises to 82 percent (the highest since 1948), and net interest payments rise to 3.8 percent of GDP (the highest share ever and larger than defense or non-defense discretionary spending). All of these figures are poised to rise further after 2019, implying that the situation is unsustainable.

  • All of these estimates are based on assumptions that may prove optimistic. These assumptions include a relatively strong economic recovery, upon which doubt is cast by the fact that recent economic activity has been tracking behind the pace assumed in the projections. The estimates also make strong political assumptions: that major components of the stimulus package will be allowed to expire as scheduled and that Congress imposes and abides by PAYGO rules for the next 10 years.

  • It will prove difficult to close the gap entirely via modifications to existing taxes and spending programs. A new revenue source, such as a value added tax (VAT), may be needed.

  • The long-term fiscal problem is to some extent a medical care spending growth problem, in that the projected growth in Medicare and Medicaid is perhaps the single most important cause of the growing imbalance between projected revenues and expenditures. Under the projections using the administration’s baseline, cutting the annual growth rate of health spending by 1.5 percentage points for 10 years would reduce the long-term fiscal gap by 1.5 percent of GDP.

  • Over the next several years, as the recession ends and the economy recovers, policy makers will face a delicate balancing act between encouraging economic recovery and establishing fiscal sustainability. Fiscal discipline imposed too soon could weaken the recovery or push the economy back into recession. Fiscal discipline delayed too long could also harm the economy, either gradually, as higher interest rates reduce economic activity and deficits sap national saving, or suddenly, if investor fears trigger a sharp and adverse market response.
Full Report

CBO Releases Dismal Long-Term Budget Outlook

The Congressional Budget Office (CBO) released an updated Long-Term Budget Outlook. Similar to the Brookings report summarized above, the CBO projects a bleak fiscal and economic outlook unless Congress and the Administration come together to enact a robust package of spending cuts and revenue increases.

One of the more startling projections is that, without significant changes in spending and revenue policies, federal debt held by the public will surpass 100% of GDP in 2023, and 200% by 2038. (Editor's Note: By comparison, public debt reached 109% at the end of WWII, but was quickly reduced to 59% within 7 years. Moreover, the WWII debt was held domestically; nearly half of today's U.S. debt is held by foreign investors.)

% of GDP*

2010

2019

2023

2038

2050

Revenues

16.3

18.6

18.7

19.3

19.9

Spending

23.9

25.6

27.2

35.5

42.2

Deficit

7.6

7.0

8.5

16.2

22.3

Debt Held by Public

61

83

101

206

321

Net Interest

1.2

3.8

4.3

8.5

13.5

*From CBO's alternative fiscal scenario which assumes extension of Bush tax cuts, inflation adjustments for the AMT, and eliminating automatic Medicare physician payment cuts


Highlights of the CBO report:

  • Under current law, the federal budget is on an unsustainable path....Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario. Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt.

  • Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States.

  • Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy.

  • For decades, spending on the federal government’s major health care programs, Medicare and Medicaid, has been growing faster than the economy (as has health care spending in the private sector).

  • CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from almost 5 percent of GDP today to almost 10 percent by calendar year 2035 and to more than 17 percent of GDP by 2080. Constraining the costs of those health care programs will be a key to developing a sustainable fiscal policy.

  • Social Security has a smaller effect on the budget outlook: CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that rate through 2080.

  • The current recession contributes to the long-term fiscal imbalance by raising the debt burden of the federal government and shortening the period during which policymakers can enact measures that would correct the imbalances.

  • The growth of debt would lead to a vicious sycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges....More government borrowing would drain the nation's pool of savings, reducing investment....In addition, a worsening fiscal situation might put pressure on monetary policy, potentially endangering the Fed's ability to keep inflation low and stable. If the budget continued along the path of rising debt, serious concerns about fiscal solvency would arise. Investors would require the government to pay an interest premium on its securities to compensate for the risk that they might not be repaid or that the value of their securities would be eroded by inflation. Such a premium would drive up the cost of borrowing. Finally, the longer the growth of debt persisted, the larger and more costly would be the policy changes needed to control debt....

Full Report

CBO Director's Blog

The Path to PAYGO

Following up on the President's proposal to re-enact a pay-as-you-go (PAYGO) law, the House Budget Committee on June 25th held a hearing on PAYGO and the Concord Coalition released an issue brief exploring the subject. In a nutshell, the PAYGO law would require that all new mandatory spending and tax cuts be paid for with offsetting mandatory spending cuts and/or tax increases. For example, new spending on health care reform would have to be fully paid for.

PAYGO would not reduce currently projected deficits, but would prevent the nation from going deeper into debt than is currently projected. Highlights of the Budget Committee hearing follow.

Testimony of OMB Director Peter Orszag

  • PAYGO...tells Congress and the Administration that their minimum duty is not to make the existing multiyear structural deficit and worse than it already is.

  • The 2001 and 2003 tax cuts, and the Medicare Rx program violated the PAYGO principle.

  • Under the PAYGO Act proposed by the President, OMB would maintain a PAYGO ledger recording for each year the average 10-year budgetary effects of all mandatory spending and tax legislation enacted through 2013.

  • If there is a net cost on the PAYGO ledger for the upcoming year when Congress adjourns at the end of a session, OMB would be required to offset the deficit through automatic cuts (called "sequestration") in nonexempt mandatory spending programs. (Medicare cuts would be limited to 4%, and Social Security, veterans' benefits, and low-income programs would be exempt from sequestration.)

  • Sequestration is a threat--meant to deter deficit spending--not a remedy.

  • There are four exceptions to the proposed PAYGO law: extension of the 2001 and 2003 tax cuts, fixing the Medicare physician payment formula, setting estate tax rates, and fixing the Alternative Minimum Tax (AMT). "In each of these areas, the policies currently in place currently in place are set to expire or substantially change in coming years in ways that unrealistically reduce costs or increase revenues." (Editor's note: It is ironic that expiration of the Bush tax cuts is viewed as "unrealistic" given previous criticism of the cuts as irresponsible.)

  • The current debate over health care reform illustrates the importance of enacting the PAYGO Act.

Testimony of Alice Rivlin (OMB Director in the Clinton Administration)

  • Statutory PAYGO proved a highly effective deterrent to deficit-increasing legislation in the 1990's--at least until the surplus was achieved in 1998.

  • The effects of PAYGO were not visible to the public or the press because they involved spending and taxing proposals that never saw the light of day. At OMB...my uncomfortable job was to tell the President and rest of the Administration that many of their most cherished ideas could not even be proposed because we could not find a way to off-set them under the PAYGO rules.

  • Detractors of PAYGO, who point out that a serious sequestration has never been enforced, miss the point that sequestration is a deterrent, not a policy.

  • I believe sequestration would be even more effectiveas a deterrent if there were fewer exceptions to its automatic cuts.

  • We also need firm caps on discretionary spending and long run budgets for the three biggest entitlement programs.

Testimony of Robert Greenstein

Testimony of Douglas Holtz-Eakin

Paying for Health Care Reform

The two big issues in health care reform continue to be: (1) whether a public insurance plan is needed in order to restrain health care inflation through increased competition; and (2) how to pay for health care reform.

The good news is that there is strong agreement in Congress and the Administration that the costs of health care reform should be fully offset. At his press conference last Tuesday, President Obama said health care reform "must and will be paid for." However, strong disagreements persist on which offsets are acceptable. At least one trillion in offsets are likely to be required. Following is a brief overview:

  • Cap itemized deductions: In his budget, President Obama proposed to limit income tax deductions for upper income earners. Specifically, the proposal would raise $267 billion over 10 years by requiring that taxpayers in the top income brackets (33% and 35%) deduct their mortgage interest, state and local taxes, and charitable donations at the 28% income tax rate. Despite the fact that few taxpayers would be impacted by the provision, there is strong opposition from charitable and other nonprofit organizations who fear their donations would suffer.

  • Tax employee health benefits: Employer-provided health care benefits are currently not taxed (that is, they are excluded from employees' income). President Obama campaigned against the McCain proposal to tax employee health benefits, however Senate Finance Chairman Max Baucus (D-MT) and other influential Senators are seriously considering this as an offset to pay for health care reform. If included in the bill, the tax would likely be limited to health benefits above a certain level, for example benefits exceeding $15,000 per year. However, unions are strongly opposed to any taxation of health benefits.

  • Reduce Medicare and Medicaid spending: There are a broad range of options for reducing projected Medicare and Medicaid spending. The Administration has proposed reducing reimbursements to private Medicare plans (known as Medicare Advantage); reducing subsidies to hospitals serving large numbers of uninsured patients (since they would presumably have insurance under the new system); and reducing various payments to doctors, hospitals and other providers. The New York Times reports that the Senate Finance Committee is looking for ways to reduce Medicare and Medicaid payments to a broad range of players -- insurance companies, hospitals, doctors, pharmaceutical companies, nursing homes, home health care providers, and medical device makers.

  • Increase Sin Taxes: Various reports for Congress have reported on revenues that could be raised from new or increased taxes on sugared soft drinks, tobacco products, and alcoholic beverages. In addition to raising revenues, the logic behind these offsets are that they could reduce obesity, diabetes, and cancer.

APPROPRIATIONS TRACKER

House Subcommittee (302(b) Allocations

Senate Subcommittee (302(b) Allocations

House

Senate

Bill

Sub.

Comm

Floor

Sub.

Comm

Floor

Agriculture

6/11

6/18

CJS

6/4

6/9

6/18

6/24

6/25

Defense

Energy-Water

6/25

Financial

6/25

Homeland

6/8

6/12

6/24

6/17

6/18

Interior-Env

6/10

6/18

6/26

6/23

6/25

Labor-HHS

Legislative

6/9

6/12

6/19

6/18

Mil Con-VA

6/16

6/23

State-For Op

6/17

6/23

Transp-HUD

IN GENERAL.--Consideration of appropriations in the House is running into Republican procedural roadblocks designed to highlight discretionary spending levels which Republicans consider excessive.

Congressional appropriators also face the task of reconciling the President's FY 2010 discretionary funding requests that total $9 billion more than the amount allowed by the FY 2010 congressional budget resolution (see April 30, 2009 WBR). Appropriators will also have to decide whether to accept the $17 billion in program reductions and terminations proposed by the Administration (see May 11, 2009 WBR). Obama Administration's proposed "Terminations, Reductions, and Savings"

Following are LINKS to the latest congressional action, plus a sampling of issues facing the appropriators as reported by Congressional Quarterly. The numbers in parentheses are the FY '09 regular appropriations level in billions (not including stimulus funds), followed by the FY 2010 President's request.

1. AGRICULTURE ($21.6 / $22.9) -- Major issues include the President's proposed 6.5% increase over the current year; overhaul of the food safety system; and the President's proposal to end direct payments to farmers with more than $500,000 in annual sales revenue. House: Chairman's Statement Summary Table House Bill Summary

2. COMMERCE-JUSTICE-SCIENCE ($60.1 / $64.6) -- Major issues include the President's proposed 7% increase over the current year; funds to close Gitmo; a major Southwest Border Initiative; readiness of the Census Bureau for the upcoming census; NASA's post-space shuttle priorities; and a program to help states defray the costs of jailing illegal immigrants convicted of crimes. House: Chairman's Statement Summary Table House Bill Summary Senate Bill Summary

3. DEFENSE ($489 / $512) not including $129 billion for war funding and $23 billion for military construction and housing which are funded in a separate bill -- Major issues include termination of the F-22 fighter and the C-17 transport; proposed cuts in missile defense; proposed cuts in the Army's Future Combat Systems; and rising personnel costs.

4. ENERGY WATER ($32.8 / $32.9) -- Major issues include how to continue the big boost in renewable energy research after the stimulus bill's funds run out; the President's proposal to cut funding for the proposed nuclear waste facility at Yucca Mountain, Nev; the adequacy of funding for nuclear security initiatives, and funding for water infrastructure projects. House: Chairman's Statement Summary Table

5. FINANCIAL SERVICES ($22.8 / $24.2) -- Major issues include U.S. policy toward Cuba; education vouchers in the District of Columbia; funding for states to upgrade voting equipment; and a proposed OMB program to improve the efficiency of state programs receiving federal funds. House: Chairman's Statement Summary Table

6. HOMELAND SECURITY ($40 / $42.7) -- Major issues include funding efforts to find and deport illegal immigrants; the fence along the Mexican border; allowing Gitmo detainees into the U.S.; whether the proposal to cut the DHS budget starting in 2012 is realistic; the system for providing federal disaster relief; continuing an "antiquated" Coast Guard navigation system; and increased funding for road and rail security. House Bill Summary Senate Bill Summary

7. INTERIOR-ENVIRONMENT ($27.6 / $32.3) -- Major issues include boosting EPA funding; earmarks for water projects; eliminating a program to clean up diesel engines in California; adequacy of wildfire funding; drilling in federal lands and waters; and new taxes and fees on the oil and gas industry. House: Chairman's Statement Summary Table House Bill Summary Senate Bill Summary

8. LABOR-HHS-EDUCATION ($136.4 / $144) -- Major issues include modifications to funding of the Pell Grant program; funding for school construction; increased funding for OSHA; increased funding for NIH after the stimulus funds run out; and the Administration proposal to eliminate abstinence-only education.

9. LEGISLATIVE BRANCH ($4.6 / $5.1) -- Major issues include creating a fund to pay for renovation of the Capitol and House and Senate office building; and requests for more staffing at CBO and GAO. House Bill Summary

10. MILITARY CONSTRUCTION - VA ($72.9 / $76.3) -- Major issues include advance appropriating FY 2011 funds for VA health care; BRAC funding; housing for trainees; and funding for Guard and Reserve initiatives. (Since Jan. 2007, Congress will have increased the baseline for the VA by $20 b, a 59% increase.) House: Chairman's Statement Summary Table Earmark List

11. STATE-FOREIGN OPERATIONS ($36.6 / $52.0) -- Major issues include the President's proposed 9% increase for the State Dept. and foreign aid programs; funding for Millennium Challenge Corporation (aimed at countries that adopt democratic and free-market policies); and funding for the U.N. Population Fund (which is strongly opposed by anti-abortion groups). House: Chairman's Statement House Bill Summary

12. TRANSPORTATION-HUD ($57.8 / $106.6) Major issues include how to make up the shortfall in gasoline tax revenues flowing into the highway trust fund; funding for a new air traffic control system; increased funding for the Community Development Block Grant program; and increasing loan guarantees through the FHA.