November 26, 2014

Washington Budget Report: June 28, 2011

« Back to WBR Issue List

Sign Up to receive the Washington Budget Report »


President Opens New Phase in Budget Talks

President Obama began his direct involvement in budget negotiations Monday by meeting separately with Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell. The White House called for a “balanced” approach that would include some additional revenue from changes in the tax code, but McConnell reiterated his party’s opposition to tax increases before meeting with Obama.

The White House meetings came after Republican negotiators last week dropped out of bipartisan talks led by Vice President Joe Biden, complaining that the Democrats continued to talk about tax increases as part of a deficit-reduction package.

Another point of conflict has been GOP opposition to cuts in military spending, although some Republicans are now hinting at greater flexibility in that area. Many Democrats, meanwhile, remain wary of entitlement reform.

To avoid default and the resulting economic turmoil, Congress must raise the federal debt limit soon – ideally with some measures that will start to put the country on a more responsible fiscal path. The Treasury Department says that on Aug. 2 it will run out of options to avoid default. Even before then, however, a stalemate in Washington could cause turmoil in financial markets.

Elected officials should keep all options, including those that would raise additional revenue, on the table for discussion. We need bipartisan cooperation in developing a plan that, while not jeopardizing the current economic recovery, will substantially curb projected deficits over the next decade and beyond.

CBO Projections Should Spur Action

The Congressional Budget Office (CBO) released projections last week that Concord Coalition Executive Director Robert L. Bixby said confirms that federal finances “are on an unsustainable course that threatens our economic future, risks turmoil in the financial markets, and burdens generations to come with massive amounts of debt.”

Focusing on the next 25 years, CBO says the budget outlook under current law is “daunting” but warns that it is “much bleaker” under an alternative scenario that many analysts consider more realistic.

CBO’s current-law baseline assumes that by 2021 non-defense discretionary spending will be 3.1 percent of GDP, which is lower than it has ever been in the last 50 years. Current law also assumes that the 2001 and 2003 tax cuts will expire, Medicare physician payments will decrease, and Alternative Minimum Tax relief will not be extended.

Because these policies may well change, elected officials should pay close attention to CBO’s “bleaker” scenario. It shows debt rising to above 100 percent of GDP over the next decade. Federal debt would exceed its historical peak of 109 percent by 2023 and approach 190 percent in 2035. Interest costs would become the government’s largest expense.

CBO cautions that the long-term fiscal policies in the two scenarios could have more negative economic impacts than it projects. Under the current-law scenario, increasing debt and higher marginal tax rates could decrease gross national product (GNP) by as much as 2 percent in 2035. Under the alternative scenario with lower marginal tax rates and much higher debt, GNP could be 2 percent to 6 percent lower by 2025 and 7 percent to 18 percent lower by 2035.

The budget office also warns that waiting to close the fiscal gap will make more drastic remedies necessary.

Many Benefits to Cutting Subsidies in Tax Code

Scaling back government subsidies in the tax code, as recommended by a number of bipartisan panels, remains a central issue in the debate over federal deficit reduction.

In her latest column for Tax Notes, Concord Coalition Chief Economist Diane Lim Rogers – referring to an old beer commercial -- explains why reducing these subsidies, known as “tax expenditures,” is a “tastes great, less filling” way to reduce the deficit. It would improve tax and spending policies, she says, in ways that should appeal to people across the political spectrum -- without the negatives that might come with other policy choices.

Democrats often oppose cuts in direct spending because they would disproportionately hurt the poor. But Rogers notes that cutting tax expenditures would make the tax system more progressive by reducing subsidies that largely benefit people with higher incomes.

Meanwhile, she argues, Republicans should appreciate that reducing tax expenditures would lead to smaller government in that  people and businesses would worry less about the tax consequences of their actions. Reducing the economic distortions of the tax system would promote efficiency and encourage long-term economic growth.

Debits & Credits

Good Worries to Have: Sen. John McCain (R-Ariz.) shrugged off the concerns of lobbyists who fear Congress could start doing away with many loopholes in the tax code: “I hope they are worried . . . The debt and the deficit (are) obviously having an impact on what otherwise used to be sacred cows."

Passing the Buck: House Majority Leader Eric Cantor said last week that he thought budget talks had identified “trillions in spending cuts” and established a blueprint for “getting our fiscal house in order.” Yet as the time came to nail down a bipartisan deal, he and Sen. Jon Kyl (R-Ariz.) suddenly dropped out of the negotiations – leaving the toughest decisions to others.