November 23, 2014

HOUSE TAX CUTS & SENATE SPENDING HIKES COULD WIPE OUT THE SURPLUS

WASHINGTON -- The Concord Coalition warned today that a combination of House-approved tax cuts and Senate-approved spending increases could wipe out the projected $3.1 trillion non-Social Security surplus over the next 10 years.  Moreover, if discretionary spending continues to go up every year at the 6 percent rate it has averaged over the past three years, taxes are cut by the amount approved by the House and entitlements are increased by the amount approved by the Senate, then much of the 10-year Social Security surplus could be eliminated as well.

      “It is astounding how quickly a surplus can disappear.  It doesn't take magic tricks. All it takes is a large backloaded tax cut and total lack of restraint on spending. We've seen both in recent weeks, which does not bode well for the upcoming budget negotiations between the House and Senate. If they compromise their differences by taking the House tax cuts and the Senate spending increases, it will be a fiscal nightmare. A far better approach would be to scale back both the tax cuts and spending increases to a more prudent level, particularly in the absence of any plan to deal with the huge fiscal challenges of the coming senior boom,” said Concord Executive Director Robert Bixby.

        The House budget resolution calls for a 10-year tax cut of $1.6 trillion, but holds the line on spending. The Senate budget resolution contains a somewhat smaller tax cut but approves of roughly $600 billion in new or expanded entitlements over 10 years. It also allows discretionary spending to increase by 8 percent next year, which would likely add about $240 billion to discretionary spending over 10 years even if increases were held to the level of inflation for the rest of the decade. Along with higher debt service costs of about $550 billion, all of this comes to $3 trillion over 10 years -- approximately the size of the non-Social Security surplus.

        It is unlikely that discretionary spending will go up by 8 percent in FY2002 and fall back to the inflation-only increases of roughly 2.8 percent assumed in the CBO baseline. For that reason, it is impossible to fully assess the 10-year level of spending implied in the Senate budget resolution.  But given the increase approved for next year, it appears that the 6 percent average annual growth rate experienced since budget surpluses first materialized in FY1998 will likely continue. Assuming a 6 percent annual growth rate in discretionary spending over 10 years wipes out $1.2 trillion of the surplus -- nearly as much as the tax cut.Adding the tax cut, $600 billion in new entitlement spending and debt service costs to a 6 percent annual growth rate in discretionary spending knocks off about $4 trillion of the $5.6 trillion total surplus, which would dig deep into Social Security.

        "Clearly, excessive tax cuts are not the only threat to fiscal discipline. Budget conferees should avoid both a spending spree and a large escalating tax cut. We need to remember that we're dealing with highly uncertain 10-year projections. We also need to remember that looming out beyond the 10-year budget window is the challenge of paying for the retirement and health care costs of a much older population. Rather than making commitments based on a surplus that may never materialize, policy makers should preserve any surpluses that do materialize to help meet long-term challenges. For example, members of both parties have expressed support for a system of individually owned retirement accounts, either as part of Social Security or as a supplement. There will be no money left to fund this promising idea if the entire projected surplus is devoted to other purposes,” Bixby said.

FIVE STEPS THAT COULD WIPE OUT THE NON-SOCIAL SECURITY SURPLUS

Total Surplus:  $5.6 trillion
Non-Social Security Surplus:  $3.1 trillion
Step One
House-approved tax cut:

-$1.6 trillion
Step Two
Senate-approved mandatory spending:

-$600 billion
Step Three
6% annual growth in discretionary spending 2002-2011:

-$1.2 trillion
Step Four
Additional tax cuts:*

-$400 billion
Step Five
Increased debt service costs:

-$750 billion
Grand Total: -$4.5 trillion
Total Social Security Surplus Used For Other Purposes:  $1.4 trillion
* assumes $300 billion for alternative minimum tax reform and $100 billion for extension of expiring tax breaks