December 22, 2014

Washington Budget Report: Aug. 24, 2010

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Budget Projections Show Washington Must Re-examine Fiscal Priorities

New federal budget projections paint an alarming picture of the need for Washington to set better priorities and resist the temptation to dig the government into even deeper trouble with more deficit-financed spending and tax cuts.

Our analysis, discussed in a statement last week on the new budget numbers from the Congressional Budget Office (CBO), shows that things could easily turn out to be even worse than the government numbers indicate. Our “plausible baseline” projections, plugging in certain reasonable assumptions, show that deficits could total $15.2 trillion over the next decade.

“Unfortunately, as the election draws nearer, partisan rhetoric is getting as ugly as the numbers,” said Bob Bixby, Concord’s executive director. “This threatens to undermine the work of the president’s bipartisan fiscal commission, which will need to produce recommendations that deviate from strict party orthodoxy if they hope to achieve success.”

The CBO report shows that this year’s health care reform legislation – even with politically difficult cost controls – will provide only a small amount of deficit reduction. Joshua Gordon, Concord’s policy director, says the projections “point out that we must continually revisit reform and build in more cost controls.”

The struggling economy is still the most dominant force in continued large deficits. "The CBO clarifies that although our current deficit-financed fiscal policies might help our weak economy in the short term, they quickly become detrimental to our economy if continued beyond the next two years," said Diane Lim Rogers, Concord’s chief economist.

Cliff Isenberg, Concord’s chief budget counsel, notes that the CBO projections also assume that federal discretionary spending will decline significantly over the next 10 years. That, he says, would require “a commitment to fiscal responsibility which has rarely occurred during the appropriations process.”

No Joke: “Deficit Reduction” Requires Actual Deficit Reduction

Could you loan me ten dollars but just give me five? That way you’ll owe me five, I’ll owe you five, and we’ll be even.

That old joke reminds Concord Chief Economist Diane Lim Rogers of a current policy issue: Whether to extend the Bush tax cuts. President Obama seeks an extension of the cuts for the middle class. But he does not want to extend the cuts for upper-bracket taxpayers, a stance that the administration describes as around $700 billion in deficit reduction over 10 years.

In a new blog post, Rogers challenges that terminology. Relative to current law, she says, the president’s plan for upper-bracket taxes would not reduce the deficit at all. Meanwhile, Congressional Budget Office figures show that extending the other parts of the Bush tax cuts would increase the deficit by $2 trillion over 10 years.

To bring federal deficits down to sustainable levels, Rogers argues, we need to pay for things as we go along. That includes paying for the extension of any policies that aren’t already continued under current law.

How do interest payments fit into the federal budget?

Discretionary Spending, FY 2011

The federal budget consists of three broad categories: discretionary spending, mandatory spending, and interest payments on the public debt. Congress decides each year how much funding it will provide for discretionary programs. Mandatory spending, on the other hand, is generally determined by current law and thus requires no action by Congress for the funds to be paid. Similarly, the Treasury Department makes interest payments on the debt automatically.

Those interest payments underscore why deficits and debt matter to the American public. Excluding mandatory programs, interest payments on the debt are second in cost only to defense spending, which towers over all other discretionary programs. And this is at a time when interest rates are at historically low levels. Absent policy changes, federal interest costs are expected to snowball in the years ahead as interest rates rise and large federal deficits continue.