April 19, 2014

Congress might pass a bill to increase the deficit by over $4 trillion

Imagine if Congress held a vote in the next few months on a bill that cut nearly $3.7 trillion in income taxes, added $350 billion worth of loopholes and deductions to the tax code, and increased Medicare spending by $236 billion.

There might be quite an uproar. After all, we are experiencing the largest deficits in history with increasing awareness of our clearly unsustainable long-term outlook.

Yet, this bill is effectively being passed by Congress, sometimes in decisions made on a month-to-month basis and sometimes annually, through multiple bills that contain Medicare doctor payment "fixes," extenders, Alternative Minimum Tax (AMT) patches, and through the big upcoming push to extend some or all of the Bush tax cuts. Members from both parties have voted time and again over the last 10 years for this bill.

Today's release of the Congessional Budget Office (CBO) long-term outlook highlights the deleterious effect of these decisions on the budget outlook both over the short term and the long term. In it, CBO constructs a baseline of where current law would take us and a baseline of where current policy would take us. There are dramatic differences between the two scenarios.

Yet, these differences, which represent actual choices that are made and will have to be made by Congress, are often treated differently than new legislation. But as Concord has long argued, deviating from the CBO baseline, and from current law -- is itself a policy choice. It shouldn't be taken lightly just because it involves the extension of some current policies. 

How would that single piece of legislation look over the next 25 years instead of the ten-year estimate of over $4 trillion (or more than two percent of GDP)?

According to CBO's new report, the "legislation" appears even more irresponsible -- leading to revenues in 2035 four percent of GDP lower than current law, while having increased 2035 non-interest spending by 2.7 percent of GDP. The difference in the publicly held debt resulting from this costly bill represents an amount of money larger than the country's total economic output in 2035. Debt held by the public would be 185 percent of GDP instead of the 79 percent it would be under current law. (To make matters worse, the CBO estimate is generous, in that it assumes Congress actually lets upper-income tax cuts expire and it doesn't take the economic effects of larger debt into account.)

Now, none of this is to suggest policymakers should have to stick to the policies explicitly in the CBO baseline. They just have to stick close to the revenue and spending levels.

In testimony delivered today to the National Commission on Fiscal Responsibility and Reform, Concord Coalition Executive Director Bob Bixby made exactly this point. On taxes, sticking to the CBO baseline

. . . legislatively, represents the easiest option, as policymakers simply need to do nothing and let current law play out. However, that does not mean current law represents the most desirable policy path to achieve the baseline level of revenues. If reverting to the pre-2001 era tax policy (with its higher marginal tax rates) at the beginning of 2011 is deemed undesirable for political reasons, or out of economic concern for raising marginal tax rates during the early stages of economic recovery, tax policy could be reformed to achieve the same revenue levels without raising marginal tax rates.

The commission might find fertile common ground on steps to improve the tax code in ways that would increase efficiency and thus increase revenues. A thorough scrubbing of the system to identify preferences that serve no compelling use or that could be altered in a resetting of priorities is long overdue.

Importantly, I am not claiming that just sticking to current law is the ticket to sustainability over the longer term -- we still need major reforms of our mandatory spending programs which are driven by health care cost inflation and an aging population.

As CBO highlights:

"[O]ver the long term, the budget outlook is daunting. The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many years (although the magnitude of that gap is very uncertain). Without significant changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future trends in the economy, demographics, and health care costs."

One of the main lessons from this CBO report, the first official long-term analysis done since passage of health care reform, is that even if Congress follows its provisions, that would not be enough to restrain the growing costs of Medicare and Medicaid to a sustainable level. More health care reform is needed and the sooner the policial system is able to build on the reforms, the better.

One avenue, suggested in Bob's testimony to the President's commission, would be to:

...build more cost control into government health care programs by recommending a budget for these programs with triggers to keep spending and taxes in line with targeted levels. The most efficient way to enforce this budget is to move more decisively away from fee-for-service reimbursement and toward capitated prepayment.

The commission could also prod members of Congress into expanding the scope of the newly created Medicare commission, or Independent Payment Advisory Board (IPAB). Currently, most physician payments, which are made based on the Sustainable Growth Rate (SGR) formula, are exempt from IPAB review and were left untouched by health care reform. This needs to change if we ever hope to reduce the volume and complexity of physician services in order to lower health care costs." [Note: the SGR formula is also the cause of the problems leading to the expensive "doc fix" increase in Medicare spending included in the hypothetical legislation mentioned above]

Ultimately, Congress will need to enact major reforms to the tax code and to the big entitlement programs in order to secure the fiscal future. However, instead of focusing on those reforms, policymakers are committed to numerous future battles simply around how to extend current policies, and what their costs will be. At worst, these decisions have the potential to dramatically worsen the fiscal outlook. At best, we are still on an unsustainable path -- but with much less time to focus on real reforms.

Update: I initially stated debt held by the public in 2035 under CBO's alternative scenario was 187% -- I have corrected it to 185%. You should also read this post by The Washington Post's Ezra Klein which refers to Bob's testimony and this blog post.