Last week, CBO Director Douglas Elmendorf shook up the health reform debate, telling the Senate Budget Committee that House and Senate health reform legislation thus far lacks the "fundamental changes" needed to slow the spiraling growth in health costs, and instead would expand "the federal responsibility" for health costs. Highlights of Elmendorf testimony:

Elmendorf Written Testimony

The House is scheduled this Wednesday to take up HR 2920, statutory PAYGO legislation. This follows on a June proposal by the Administration.

Background.--Last month, in response to urging from the fiscally conservative House "Blue Dog" coalition, the White House unveiled a proposal to re-enact the pay-as-you-go ("PAYGO") budget law from the 1990s.

The PAYGO concept is simple: if sponsors of new legislation want to enact new entitlement programs, expand existing entitlement programs, or enact new tax cuts, they have to find offsets to "pay for" the cost of the new benefits or tax cuts. Offsets can be reductions in entitlement (mandatory) spending or tax increases.

(Important note on discretionary spending: PAYGO has never applied to discretionary spending. In the 1990s, discretionary spending was controlled by statutory caps. If the caps were breached, automatic across-the-board cuts in discretionary spending were triggered. The Administration is NOT proposing to re-establish statutory caps on discretionary spending.)

The teeth in the 1990s PAYGO requirement was a "sequester mechanism." OMB was required to execute automatic cuts in nonexempt mandatory spending programs if the cumulative effect of tax and entitlement legislation was to increase the deficit. Under the PAYGO law, a negative balance on OMB's cumulative "PAYGO scorecard" was something to be carefully avoided since Medicare would take a significant hit from an automatic sequester. Other nonexempt programs that would be hit by a PAYGO sequester included farm price supports, child support enforcement, and social services block grants.

In other words, 1990s PAYGO was a "Sword of Damocles" approach to budget discipline: the automatic across-the-board cuts in Medicare and other programs that would result from violating the PAYGO requirement would be so politically unpalatable that Congress avoided enacting new entitlement spending or new tax cuts without the required offsets.

In 2001, PAYGO was effectively terminated in order to enact massive tax cuts, and the PAYGO law officially expired in 2002.

In 2007, when Democrats became the majority party in Congress, they re-established a PAYGO policy similar to the 1990s -- but as internal rules of the House and the Senate. Enactment of statutory PAYGO, with its automatic sequester mechanism, was strongly opposed by the Bush Administration and congressional Republicans on the grounds that new tax cuts should not have to be paid for with offsets.

The Obama Administration's proposal to re-enact statutory PAYGO is a mixed bag:

• On the positive side, if enacted, it will add more weight to the requirement that the costs of health care reform be fully paid for by spending cuts and tax increases. In addition, entitlement expansions -- such as filling the "doughnut hole" in the Medicare Rx program -- would have to be paid for.

• However, on the negative side, the Administration's PAYGO proposal specifically exempts $3.5 trillion of specific policies from the PAYGO requirement. These include extension of the 2001 and 2003 tax cuts; reducing the estate tax; effectively eliminating the AMT (Alternative Minimum Tax); and eliminating an automatic requirement that Medicare physician payments be cut--thereby accepting $3.5 trillion of additional public debt.

In sum, the Obama PAYGO proposal would enhance fiscal responsibility moving forward, but paves the way for easy extension of some very expensive policies that ought to be paid for.

The legislation language to be considered this Wednesday has not yet been released by Majority Leader Hoyer's office.

President's PAYGO Announcement at the White House (C-SPAN)

White House Summary of PAYGO Legislation

White House PAYGO Legislative Text

Concord Coalition Issue Brief

CBO Analysis of HR 2920

Latest Summary of House PAYGO bill

Last week, as reported by Congressional Quarterly, Senate Budget Committee Chairman Kent Conrad (D-ND) announced that he hopes to "reinvigorate" the Senate Deficit Reduction Caucus that was active in the 1990s.

Conrad met with caucus members on July 15th and plans to hold monthly meetings.

Conrad said, "I think it is time that we restore a focus to debt and deficit reduction and that will be the focus of that caucus."

Current deficit and cumulative debt projections pose greater challenges to the U.S. economy than ever before:

• This year's federal deficit (FY 2009) is projected to top $1.8 trillion;


• The total public debt (debt held by the public) is projected to equal the size of the nation's entire economy (GDP) by 2023 and double the size of the economy by 2037.


• According to CBO, "since the founding of the United States...federal debt held by the public has surpassed 100 percent of GDP only for a brief period during and just after World War II. That budgetary situation was temporary, however. After peaking at 113 percent in 1945, federal debt held by the public declined as a percentage of GDP to its lowest level in the post-World War II era, 24 percent in 1974. Similarly, when federal debt increased in the 1980s, its rise was followed by declining deficits from 1993 to 1997 and surpluses from 1998 through 2001. The systematic widening of budget shortfalls projected under CBO's long-term scenarios has never been observed in U.S. history." (Testimony by CBO Director Elmendorf on July 16, 2009, emphasis added)


• In FY 2019, interest on the debt is projected to be $799 billion--equivalent to more than 1/3 of income tax payments, with a substantial amount of those payments leaving the U.S. economy to pay foreign holders of U.S. debt.

Currently pending are three major health reform measures at various stages of development:

1. A tri-committee House plan (Ways & Means/Rangel, Energy & Commerce/Waxman, and Education and Labor/Miller). CBO Cost Estimate JCT Revenue Estimate


2. A Senate HELP Committee Democratic plan (Health, Education, Labor, and Pensions/Kennedy-Dodd). HELP Committee Release
   
3. A Senate Finance Committee bipartisan plan (Baucus/Grassley) is under development.

*FPL: Federal Poverty Level

House Subcommittee (302(b) Allocations

Senate Subcommittee (302(b) Allocations