August 28, 2014

Washington Budget Report: July 26, 2010

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Starting next week, the Washington Budget Report will be sent out on Tuesday rather than Monday.

Stuck in the Deficit Ditch

Projections released Friday by the Obama administration show that the nation’s finances remain in a deep deficit ditch. This was hardly “news,” says Concord Executive Director Bob Bixby, but it served as a pointed reminder that much hard work needs to be done to get us back on the road to fiscal sustainability.

The Mid-Session Review (MSR) optimistically assumes a swift economic recovery and a three-year freeze on non-security appropriations. Yet it still concedes that the nation’s current fiscal path threatens its future prosperity.

This year’s deficit is now projected to equal 10 percent of the economy (GDP), down from 10.6 in the February budget.  But Bixby argues in a blog post that this is hardly cause for celebration, and notes that the 10-year outlook is virtually unchanged. The projected deficit never gets down to a sustainable level of roughly 3 percent of GDP. Interest payments would rise from $185 billion this year to $831 billion in 2020 -- roughly one-third of all individual income taxes.

Despite enormous near-term deficits, Bixby says, the key message of the MSR is that our long-term structural deficit remains our biggest fiscal challenge. It is clear that improving the long-term outlook will require substantial changes in Medicare, Social Security, the defense budget, tax policies and other key areas.

Credible Long-Term Budget Plan Should Precede Any Permanent Tax Cut Extensions

In recent weeks the congressional Appropriations Committees made considerable progress on bills for the coming fiscal year. But the limited number of legislative days left and an increasingly partisan atmosphere have led to speculation that few of the bills will be completed before Congress goes home to campaign.

Debate is growing, especially among Democrats, about extending the Bush tax cuts. Concord believes the cuts should not be permanently extended without a solid long-term fiscal plan.

Four House Democrats introduced deficit-reduction legislation that would scale back tax breaks and cut spending in defense, agriculture and other areas. Meanwhile GOP Rep. Paul Ryan presented his plan to reduce the debt at a public forum. Concord commends policymakers from either party who are willing to put specifics on the table.

Concord Budget Counsel Cliff Isenberg provides details on these and other developments in Congress in a new blog entry.

U.S., Britain Take Different Approaches to Budget Deficits

Despite important political and economic ties, Britain and the United States are pursuing very different policies to deal with the tremendous fiscal challenges they face. Prime Minister David Cameron, who visited the U.S. last week, hopes to cut Britain’s budget deficits in half over five years, with some ministries losing up to 40 percent of their funding.

Concord’s Eric Pierce notes in a new blog post that these plans stand in sharp contrast to President Obama’s proposed three-year freeze on non-security discretionary spending. Many American policymakers contend that additional government spending is required to stimulate the economy.

Short-term differences aside, however, both Britain and the U.S. have their work cut out for them to eventually reduce unsustainable levels of debt that could otherwise cripple the global economy.

What is “primary balance” in the federal budget?

The President charged his bipartisan fiscal commission with making recommendations late this year to put the federal budget on a more sustainable path, including what is known as “primary budget balance” by 2015. This means the budget would be balanced except for interest payments on the federal debt. At that point, the nation’s economic growth would only need to keep up with interest rates in order to stabilize the debt. Most economists consider total deficits of around 3 percent of the Gross Domestic Product to be economically sustainable. The administration last week estimated the primary deficit for the current fiscal year at nearly $1.29 trillion, compared to a $1.47 trillion deficit figure when interest payments are included.