November 1, 2014

Checklist for a Fiscally Responsible Budget

As Congress begins work on the Fiscal Year 2007 budget resolution, The Concord Coalition offers the following checklist for a responsible budget.

 check box serving as bullet in listEstablish a meaningful deficit reduction target. The goal of cutting the deficit in half by 2009 is inadequate relative to the fiscal challenges we face. Policymakers should return to the goal of balancing the budget within the ten-year budget window.

check box serving as bullet in list Budget for costs of policies likely to be approved over the five-year budget window. Congress should acknowledge the future costs of funding its policies over the entire period covered by the budget resolution such as continued military operations in Iraq and Afghanistan and extension of politically popular policies scheduled to expire.

check box serving as bullet in list Reject the administration's proposal to include permanent extension of certain expiring tax cuts in the baseline. The decision whether to remove the legislated sunsets for the tax cuts is a policy decision. It should be made through the legislative process, not by budget scorekeepers.

check box serving as bullet in list Apply budget discipline to all parts of the budget and make the tradeoffs necessary to reduce the deficit. The budget resolution is the one place where Congress can debate competing claims and priorities. Such a debate must examine all aspects of the budget.

check box serving as bullet in list Offset all new revenue reductions or spending increases. Congress must have the courage of its convictions. If deficit reduction is a priority, Congress should reinforce its rhetoric with offsets for new spending or additional tax cuts.

check box serving as bullet in list Provide another spending reconciliation bill to achieve savings in entitlement programs. The explosion in entitlement spending that looms on the horizon is the single biggest threat to our nation's fiscal health. Including entitlement savings as a regular part of the annual budget process would be an important first step in addressing our long-term challenges.

check box serving as bullet in list Reject reconciliation protections for legislation that would increase the deficit. The procedural protections for reconciliation legislation are intended to help Congress take actions that are responsible but politically difficult, not irresponsible but politically popular.

check box serving as bullet in list Defer legislative action on new tax cuts or the extension of expiring tax cuts until the long-term fiscal challenges arising from the baby boom retirement are addressed. Legislation with lasting impact on revenues, such as removing the sunset on tax cuts, must be considered within the context of future spending obligations.

check box serving as bullet in list Establish discretionary spending targets that realistically restrain spending. Recent budget resolutions have relied on large unspecified savings in out-year discretionary spending that require cuts deeper than any future Congress is likely to enact. While spending restraint is important, a budget plan should not rest on the assumption that a future Congress and a future President will somehow defy previous experience by enacting draconian domestic spending cuts.

check box serving as bullet in list Adopt strong budget enforcement rules, including discretionary spending caps, and “pay-as-you-go” rules for tax cuts and entitlement increases. Pay-as-you-go rules for all tax and entitlement legislation and spending caps for appropriations are proven tools for fiscal discipline and should be part of the budget resolution.


 

THE BUDGET RESOLUTION CHECKLIST

 

Congress begins the fiscal year 2007 budget process with a familiar dilemma. The short-term deficit is substantial, the long-term outlook is even worse, and the only realistic options for dealing with the problem are spending cuts or tax increases that politicians would like to avoid -- particularly in an election year.

Given these circumstances, it would be all too easy for Congress to adopt a budget resolution that simply ignores the looming fiscal problems. Doing so, however, would be an abdication of responsibility. The deeply ingrained mismatch between current spending and tax policies will not go away if it is ignored. In fact, it will get worse. And while it is unreasonable to expect that Congress will deal with this problem in any one budget resolution, it is not unreasonable to expect Congress to adopt an honest budget resolution that faces up to the challenge and takes at least some realistic steps to deal with it. The budget resolution must show some resolve.

Aside from providing a short-term fiscal blueprint, the budget resolution sets the tone for future actions. A budget resolution that pretends there are no sacrifices to be made -- that we can keep doing everything we're currently doing and promise to do in the future -- would set a false tone of fiscal security.

As Congress begins work on the fiscal year 2007 budget resolution, The Concord Coalition offers the following checklist for a responsible budget.

check box serving as bullet in list Establish a meaningful deficit reduction goal

Analysts of diverse ideological perspectives and nonpartisan officials at the Congressional Budget Office (CBO) and the Government Accountability Office (GAO) have all warned that current fiscal policy is unsustainable over the long-term. Establishing deficit reduction as an official goal is a positive first step in addressing this problem. It focuses attention on proposals to reduce the deficit and keeps at least some pressure on policymakers to avoid actions that would jeopardize the goal through increased spending or lower revenues. However, the administration's goal of cutting the deficit in half by 2009 is inadequate relative to the fiscal challenges we face. The goal is too modest and the time frame is too limited.

Policymakers should return to the bipartisan balanced budget consensus of the 1990's. Achieving a balanced budget within the ten-year budget window is an achievable goal. In fact, the CBO projects that the budget would return to surplus by 2012 under current law. While the CBO baseline leaves out the costs of several policies Congress is likely to enact, establishing a goal of balancing the budget within the ten-year window would require policymakers to make tradeoffs and consider offsets for the costs of these policies.

This goal would also help overcome the myopic approach to budgeting, which has encouraged lawmakers to ignore the looming financial crisis. Setting a path to balance the budget over the next ten years is particularly important given that the annual costs of providing Social Security benefits may begin to exceed dedicated revenues within the next decade, eliminating the revenue windfall from excess payroll taxes, and the costs of Medicare and Medicaid will begin to increase rapidly. Achieving a balanced budget within ten years would lower government borrowing from the financial markets and provide a much needed boost in national savings at precisely the right time to help the budget and the economy meet the challenges of an aging population.

 

check box serving as bullet in list Budget for the full cost of polices likely to be approved over the five-year budget window

 

Recent budget resolutions have achieved substantial “deficit reduction” on paper by assuming a revenue windfall from the Alternative Minimum Tax (AMT) and leaving out funding for military activities in Iraq and Afghanistan. These maneuvers provide a misleading picture of the budget outlook in future years and make the budget resolution appear much more fiscally responsible than it actually is. A realistic projection of the likely deficit under the budget resolution must include the full cost of extending policies supported by Congress as well as likely future costs of military operations in Iraq and Afghanistan.

The budget resolution adopted last year took a very small step toward greater transparency in budgeting by allocating some funding for military operations for one year, but assumed no spending in subsequent years. The budget resolution should incorporate reasonable projections of future costs, which could be adjusted as circumstances warrant, instead of assuming that there will be no costs at all after 2007. The ongoing costs of operations have become relatively stable and can be reasonably predicted, since the military has to plan its troop rotations a number of years in advance. Furthermore, an increasing proportion of supplemental requests are for procurement to repair and replace equipment, which are relatively predictable.

Similarly, there is little justification for leaving out the costs of extending the AMT “fix” throughout the budget period. It is unrealistic to assume that AMT relief will be allowed to expire given that there is broad bipartisan support for continued AMT relief in Congress. Moreover, those costs are easily quantifiable. According to CBO, extending AMT relief would add $218 billion to the deficit over the next five years -- $56 billion in 2009 alone.

If the budget resolution assumes the extension of politically popular provisions such as deductibility of state and local sales taxes and the hold-harmless provision for the Medicare physician payment formula, it should include the costs of extending those provisions throughout the budget window instead of assuming that Congress would allow them to expire next year.

 

check box serving as bullet in list Reject the administration's proposal to change baseline rules to assume permanent extension of certain expiring tax cuts in the baseline

 

The administration has proposed a change in baseline rules to assume the extension of certain tax cuts as if the expiration dates (or “sunsets”) on those tax cuts do not exist. As explained by CBO, the baseline provides “a neutral benchmark against which to measure the effects of proposed changes in tax and spending policies.”[1] This benchmark is used in applying budget enforcement rules such as the limitations on the size of tax cuts allowed by the budget resolution. If permanent extension of tax cuts were assumed in the baseline, those costs would not be subject to the tradeoffs between competing priorities that are applied to all other tax and spending proposals. In addition, including tax cuts in the baseline would effectively exclude extensions from pay-as-you-go rules if Congress were to reinstate these rules.

This is very different from the treatment of entitlements. The baseline assumes the extension of entitlement programs because, unlike tax cuts, the costs of extending entitlement programs are scored and subject to budget discipline at the time they are enacted. The tax cuts enacted in 2001 and 2003 are expiring because Congress included a sunset provision when they were initially enacted to limit the official cost. This was done to circumvent budgetary limits in place at the time.The cost of the tax cuts would have been several hundred billion dollars higher over that period if the tax bills had not included sunsets. Those additional costs were not subject to budget limits when the tax cuts were originally enacted. Making tax cuts permanent without considering their budgetary impact over the long-term and exempting their costs from budget enforcement would mean that those costs would never be subject to budget discipline.

The decision whether to remove the legislated sunsets for the tax cuts is a policy decision and should be treated as such. New legislation is required to prevent the tax cuts from expiring at various times between now and 2011. The revenue loss from any such legislation should be weighed against other competing initiatives that Congress and the President may wish to undertake -- not simply assumed into the baseline.

 

check box serving as bullet in list Apply budget discipline to all parts of the budget and make the tradeoffs necessary to reduce the deficit

 

The budget resolution is the one place where Congress can conduct a debate about competing claims and priorities. Such a debate must examine all aspects of the budget. The burden of deficit reduction should be distributed fairly and equitably. It is neither fiscally responsible nor politically viable to make cutbacks in limited areas of the budget in the name of deficit reduction while exempting most of the budget from any discipline. As long as large parts of government spending are exempt from scrutiny and every tax cut is untouchable and substantially more expensive than proposed spending cuts, developing a credible plan to balance the budget will be impossible.

Relying almost entirely on reductions in domestic appropriations for deficit reduction is woefully inadequate to controlling the deficit. A responsible budget must examine all areas of the budget for savings, including appropriations for defense and homeland security, entitlement spending and revenues.

Dealing with our fiscal challenges will require Congress to set priorities and make compromises among competing needs. We can't have it all. It is not fiscally viable to fight two wars, fund homeland security, rebuild the Gulf Coast, maintain full promised benefit levels for entitlement programs and keep cutting taxes. Congress should set aside proposals that would increase the deficit, put everything on the table and negotiate the necessary trade-offs.

 

check box serving as bullet in list Offset all new revenue reductions or spending increases

 

The first step in bringing the deficit under control is to stop digging the hole deeper. Rhetoric about deficit reduction will lack credibility if Congress continues to treat rising debt as a viable alternative to spending cuts or tax increases. Budgets are about making choices. If Congress decides that new or expanded spending initiatives or new or extended tax relief is a priority, it must also decide which spending reductions or tax increases will be made to offset the costs of these initiatives.

A plan intended to reduce the deficit should not create new entitlements that are not fully financed or offset, no matter how attractive they may seem. Similarly, while low taxes may be a laudable policy goal, including tax cuts in a budget plan will reduce revenues and require offsets to prevent an increase in the deficit. Politically convenient rhetoric to the contrary, tax cuts do not pay for themselves.

 

check box serving as bullet in list Provide for another spending reconciliation bill to achieve savings in entitlement programs

 

No credible, sustainable, deficit reduction strategy is complete without a plan to address the growing costs of entitlement spending. Last year, Congress took a modest step in this regard by utilizing the reconciliation process to address entitlements for the first time in eight years. Reconciliation bills making changes in entitlement programs were a regular part of the legislative process prior to the surplus era. Now that the surplus era has been replaced with large structural deficits, Congress should return to this norm.

Congress should give serious consideration to the entitlement savings proposals contained in the President's budget and explore other options for entitlement savings. While the mandatory savings in the President's budget are relatively modest in comparison to the rapid growth projected in mandatory spending, dealing with the growth in entitlement spending will require a concerted, ongoing effort. Making entitlement savings a regular part of the annual budget process would represent an important development in the effort to address long-term fiscal challenges.

 

check box serving as bullet in list Reject reconciliation protections for legislation that would increase the deficit

 

The budget reconciliation process provides special procedural protections to facilitate the passage of legislation. Most notably, a reconciliation bill is the only piece of legislation that cannot be filibustered on the Senate floor, making it easier to pass by a majority vote. These protections are intended to help Congress take actions that are responsible but politically difficult, not irresponsible but politically popular.

In recent years, Congress began to use the reconciliation process to facilitate the passage of tax cuts, which increase deficits. This is exactly the opposite way reconciliation was intended to be used. It was a bad precedent to set in a period of surpluses, and is even worse now that the budget is back into deficit. If this practice continues, it may be used in the future not only to cut taxes further but also to expand popular entitlement programs such as the Medicare prescription drug benefit.

 

check box serving as bullet in list Defer legislative action on new tax cuts or extension of expiring tax cuts until the long-term fiscal challenges arising from the baby boom retirement are addressed

 

Legislation with a lasting impact on revenues, such as removing the sunset on the tax cuts enacted in 2001 and 2003, must be considered within the context of future spending obligations. Projected entitlement benefits far exceed the revenues dedicated to pay for them over the long-term. Unless Congress enacts major reforms slowing the growth of entitlement spending, revenues will need to increase well above current levels to meet these obligations.

According to projections by the Government Accountability Office (GAO), the combination of allowing the growth of these entitlement programs to continue unchecked and making tax cuts permanent will result in a deficit of 10 percent of GDP by 2024.[2] The costs of Social Security, Medicare and Medicaid would consume all federal revenues by 2039 under this GAO simulation, and the deficit would reach 22.8 percent of GDP.While the higher revenues from allowing the tax cuts to expire would fall far short of closing this long-term fiscal gap, it makes no sense to make the gap worse by locking in permanently lower revenues before restraining the growth of entitlement spending.

In light of the costs associated with the baby boomers' retirement and health care costs, Congress should defer action on extending the tax cuts until reforms controlling the growth of entitlement spending are enacted. Doing the opposite puts the cart before the horse.

 

check box serving as bullet in list Establish discretionary spending levels that realistically restrain spending

Recent budgets have relied on large unspecified savings in discretionary spending in future years that will require deeper cuts than Congresses is likely to enact. It is all too easy to offset specific tax cuts and spending increases in other areas by assuming unspecified savings in non-defense discretionary spending. It is much more difficult to turn these assumptions into reality by finding specific reductions to achieve those savings. For example, the budget's request for non-defense, non-homeland security discretionary budget authority for fiscal year 2007 is nearly $10 billion higher than the budget resolution adopted last year assumed.[3]

Recent experience has shown that Congress can limit discretionary appropriations only with extraordinary difficulty. A budget plan should not rest on the assumption that a future Congress and a future President will somehow defy previous experience by enacting heroic domestic spending cuts.

Domestic discretionary spending has steadily remained at about 3.5 percent of GDP since the late 1980's and has never been below 3 percent of GDP since the statistic was first recorded in 1962. It has grown from 3.4 to 3.8 percent of GDP since 2001. Any savings assumed in the budget resolution from holding non-defense discretionary spending well below historical averages are not likely to be realized. Meanwhile, the spending increases and tax cuts included in the budget resolution and enacted into law with the promise of future savings in discretionary spending will remain in place.

 

check box serving as bullet in list Adopt strong budget enforcement rules, including discretionary spending caps and “pay-as-you-go” rules for tax cuts and entitlement increases

 

Although process alone will never be able to solve the nation's fiscal problems, enforcement mechanisms can bring greater accountability to the budget process and help provide Members of Congress with the political cover to make the tough choices necessary to reduce the deficit. Pay-as-you-go (paygo) rules for all tax and entitlement legislation and spending caps for appropriations are proven tools for fiscal discipline and should be part of the budget resolution. By helping to constrain fiscal policy, these budget enforcement mechanisms made a direct contribution to the more favorable budget outlook that developed by the end of the 1990s.

The statutory enforcement mechanism of the 1990 Budget Enforcement Act expired in 2002. Since the budget resolution is not signed into law, it cannot reinstate statutory paygo rules enforced by sequestration. The budget resolution can, however, establish paygo as part of House and Senate rules by creating a point of order prohibiting tax or entitlement legislation that would increase the deficit.

The current paygo rule in the Senate, which only applies to those policies not assumed in the budget resolution, provides little incentive for fiscal discipline. It essentially allows Congress to enact fiscally irresponsible policies by simply assuming them in the budget resolution. That is a loophole much too tempting to permit - even if proposed in good faith.

To be meaningful, a paygo rule should apply to all legislation that would increase the deficit, whether it is from increased spending or decreased revenues. Since spending and tax decisions both have consequences for the budget, there is no good reason to exempt either from enforcement rules. Exempting the revenue side of the budget from enforcement undermines the effectiveness of the budget mechanisms and makes them more difficult to sell politically. Moreover, exempting tax cuts from paygo encourages an expansion of so-called “tax entitlements” where benefits are funneled through the tax code rather than by direct spending.



[1] CBO, The Budget and Economic Outlook Fiscal Years 2007-2016, January 2006 p.5.

[2] Government Accountability Office, January 2006 Long Term Simulation.

[3] The Fiscal Year 2006 budget resolution conference report assumed $403.4 billion in new budget authority for non-defense discretionary spending in Fiscal Year 2007. The President's Fiscal Year 2007 budget requested $415 billion in new budget authority for these programs in Fiscal Year 2007.