October 21, 2014

Washington Budget Report: May 17, 2010

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Defense Secretary Gates Warns Military That "Gusher of Spending" Is Over, Making Reforms Essential

Holding up Dwight D. Eisenhower as a model, Defense Secretary Robert Gates is urging the American military to cut bureaucracy, improve its efficiency and “make every dollar count” as the country struggles with its fiscal challenges. 

Pentagon reform is critical, Gates argues, if the military is to retain its current force structure. That is because the military cannot expect a repeat of the “gusher of defense spending” that nearly doubled the Pentagon’s basic budget in the last decade (not counting additional appropriations for the conflicts in Iraq and Afghanistan). 

“Given America’s difficult economic circumstances and parlous fiscal condition, military spending on things large and small can and should expect closer, harsher scrutiny,” Gates said in a recent speech at the Eisenhower Library in Abilene, Kansas. “The gusher has been turned off, and will stay off for a good period of time.” 

The Governmental Accountability Office, which has issued many reports suggesting improvements at the Pentagon, criticizes it for unrealistic planning, inefficiency and "lack of a strategic approach to investment decision-making." Gates offers some striking examples to bolster his case for significant changes and reforms:

  • The U.S. battle fleet is larger than the next 13 navies in the world combined -- and 11 of those belong to "allies and partners" of the United States.
  • Health care costs are "eating the Defense Department alive," rising to $50 billion from only $19 billion a decade ago. Yet premiums for the military's health insurance program have not been raised in more than a decade, with many working age military retirees relying on the government rather than their current employers' health plans. 
  • A request for a dog-handling team in Afghanistan must go through at least five "four-star headquarters" to be processed and eventually dealt with.
  • Two decades after the United States sharply reduced its forces in Europe with the end of the Cold War, more than 40 generals, admirals, or civilian equivalents are still based there.

The defense secretary said Eisenhower believed the United States “could only be as militarily strong as it was economically dynamic and fiscally sound.” Consequently, Gates said, the World War II general who later became president pushed the military to set priorities and make difficult budget choices. 

Gates places some of the blame for military inefficiency on Congress and political pressures. Lawmakers and veterans groups, for example, have repeatedly rejected even modest increases in premiums and co-pays in the health insurance program. Gates also complains that Congress routinely increases military pay beyond Defense Department requests. 

Congressional Budget Office data support Gate’s caution on those pay increases. The agency found that in 2006, average cash compensation for service members exceeded that of more than 75 percent of civilians of comparable age and education. Since 2006 military pay hikes have continued to outpace civilian increases. 

In a speech earlier this month, Secretary of the Navy Ray Mabus also addressed military inefficiencies and promised specific steps that the Navy would take to improve. 

The Concord Coalition commends military and political leaders who recognize that military spending -- like everything else -- should be on the table in discussions about dealing with the nation's fiscal difficulties.

Policy Extensions Will Test Congressional Resolve on New Pay-As-You-Go Law

A key test of the new pay-as-you-go (PAYGO) law is taking shape as Congress considers how, or whether, to pay for the extension of major tax and spending policies. In recent years, the list of expiring policies has grown as Congress has adjusted the expiration dates of legislation to comply with budget rules and limit the recognized costs. 

This week the House may take up a small portion of these policy extensions. The details have not been announced but two things are certain: 1) the package will not be fully paid for and; 2) more expensive extensions are yet to come.

Among the policies likely to be included in the House bill (H.R 4213) are extension of several expired tax breaks such as the credit for research and experimentation, and deductions for state and local taxes. Over ten years, this group of “extenders” would cost roughly $30 billion. 

Because extension of these policies must be deficit-neutral under the PAYGO law, one thing to watch for is whether the bill also includes sufficient credible offsets. The alternative, which should be avoided, would be to declare them “emergencies” and thus exempt from PAYGO.

Two other policies that may be included are extended unemployment compensation and health care insurance assistance for workers who have recently lost their jobs (COBRA). The emergency exemption from PAYGO is likely to be invoked for these. If so, the cost will add to the deficit.

Lawmakers are also considering an adjustment to scheduled cuts in Medicare reimbursements for physicians. The PAYGO law granted this policy a five-year exemption at an estimated cost of $88.5 billion. However, any further extension of this “doc fix” requires PAYGO offsets.

Other policies that have been proposed could push the total cost of the “extenders” legislation toward the $200 billion mark, with most of it exempt from PAYGO either because of an explicit provision in the law or through use of the emergency designation. The resulting sticker shock is causing some justifiable concern in the face of deficits that are already unsustainable.

These are merely temporary extensions; the most expensive extensions are yet to come. Waiting in the wings is the planned extension of the 2001 and 2003 tax cuts for middle class taxpayers, at an estimated cost of $2 trillion over 10 years. This entire sum has been exempted from PAYGO by law. 

Associated with this is the cost of providing continued relief from the Alternative Minimum Tax (AMT) and consideration of various ways to reduce the scheduled estate tax revival in 2011 to its level before the 2001 tax cut ($1 million exemption; 55 percent rate). While both were granted PAYGO exemptions through 2011, it will require hundreds of billions in offsets to extend them further.

It seems extremely unlikely that the full cost of policy extensions can be paid for entirely through traditional “loophole closings” and efficiencies. At some point very soon, Congress must confront the fact that it has promised more than it is willing to pay for. The new PAYGO law, even with its generous exemptions, will help to clarify the need for trade-offs. Whether through the President’s fiscal commission or the routine budget process, fundamental adjustments in tax and spending policies must be made.

Senate Appropriations Committee Approves Additional Spending on War Efforts, Oil Spill and Disaster Relief

The Senate Appropriations Committee has approved a supplemental appropriations bill which, according to its preliminary estimates, will provide $58.8 billion in additional funding for this fiscal year.

The bill includes $33.5 billion for military operations in Afghanistan and Iraq, counter-terrorism, and earthquake relief in Haiti. Approximately $6.2 billion was included for the Department of State to support these efforts and related activities. 

The Federal Emergency Management Agency (FEMA) would receive $5.1 billion for disaster relief and prevention efforts. The Department of Veterans Affairs would get $13.4 billion for disability compensation. 

The committee approved an amendment to provide $68 million in additional funding for agencies to respond to the Gulf oil spill. 

As the full Senate considers potential amendments to the bill, The Concord Coalition urges policymakers to find offsets wherever possible and to resist attempts to add extraneous items.

President's Bipartisan Fiscal Commission Gears Up, Looks to Public for Suggestions

The President’s fiscal commission is dividing its work among three subgroups that will focus on taxes, discretionary spending, and mandatory spending for programs such as Social Security and Medicare.

These working groups will meet on Wednesdays, on a rotating basis. The full commission, which consists of presidential and congressional appointees from both parties, plans to meet once a month until Dec. 1, when its recommendations to Congress and the White House are due.

The commission is soliciting comments and suggestions from the public, as explained on its website at fiscalcommission.gov. Email comments can be sent to commission@fc.eop.gov. 

The commission is charged with finding solutions to both the short-term and long-term fiscal challenges facing the country. Concord has urged the panel to concentrate on the long-term issues, which are where the commission stands its best chance of having an impact.

The importance of the commission's work was underscored last week when the International Monetary Fund released a report on the fiscal difficulties facing countries around the world, including the United States. The IMF warned that gross government debt could exceed 100 percent of the U.S. Gross Domestic Product by 2015. 

The next meeting of the president's commission is scheduled for May 26. Any final recommendations will need support from 14 of the panel's 18 members, a high hurdle that will require a focused effort and willingness to compromise.