September 2, 2014

Washington Budget Report: Feb. 21, 2012

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Payroll Tax Cut Lacks Comprehensive Financing Plan

President Obama is expected to quickly sign legislation to extend the payroll tax cut, unemployment benefits and the “doc fix” on Medicare reimbursements through the end of the year, but unfortunately without an adequate financing plan.

After months of partisan jousting over the extensions – particularly how to finance them -- the bill on Friday passed on votes of 293-132 in the House and 60-36 in the Senate. Under a previous short-term deal, the extensions had been approved only through the end of February.

House Republicans set the stage for extending the policies through December when they indicated last week that they would no longer insist that the Social Security payroll tax cut be offset elsewhere in the budget. The Concord Coalition last week expressed concern about the lack of a more comprehensive financing plan, saying that “political convenience has again trumped the often-voiced desire to put the country’s budget on a more sustainable path.” Other advocates of fiscal responsibility expressed similar worries.

In an issue statement, Concord praised Congress for at least finding $50 billion in offsets for extending unemployment benefits and the doc fix, which once again postponed a sharp scheduled reduction in Medicare payments to doctors. But the $90 billion cost of extending the payroll tax cut could have been covered through budget offsets that would be phased in later, as the economy strengthened.

Instead, that cost is simply being added to the federal debt with a “Let’s worry about it later” attitude. While Social Security benefits are not affected, this additional borrowing underscores the connection between Social Security and the rest of the federal budget.

Concord said this deficit-financing set a worrisome precedent “heading into a year that will see the large tax cuts originally enacted in 2001 and 2003 expire.” Extending those tax cuts without offsets would add an estimated $3.3 trillion to the deficit.

Read more with In Payroll Tax Cut Extension, Political Convenience Wins Again

President’s Report Notes Economic Progress, Challenges

In this year’s Economic Report of the President, the administration describes a recovery that is picking up speed. But President Obama and his economic advisers warn that more must be done both to help the recovery continue and, in the longer term, to reduce federal borrowing.

“In the last 23 months, businesses have created 3.7 million jobs,” Obama writes in the report, which was released Friday. “Last year, they created the most jobs since 2005.” The report places particular emphasis on manufacturing, which the President describes as creating jobs for the first time since the late 1990s.

“The U.S. economy has been expanding for two and a half years,” the President’s Council of Economic Advisers says in the report, “but the pace of economic growth and job growth has not been fast enough given the deep hole that was created by the sharp recession that started at the end of 2007.”

The advisers say that “sustaining and strengthening the ongoing recovery remains a top priority” for the administration, and Obama describes the current situation as “a make-or-break moment for the middle class, and for all those who are working to get into the middle class.”

On the subject of long-term fiscal responsibility, Obama notes that elected officials last year agreed to more than $2 trillion in cuts and savings that will take effect over the next 10 years. But he acknowledges that more needs to be done – an assessment that The Concord Coalition and other advocates of fiscal responsibility, including members of Obama’s bipartisan fiscal commission, have repeatedly voiced in recent months.

The President’s advisers note that since 2001 the federal debt “has been growing unsustainably” and they blamed several factors: the 2003 and 2003 tax cuts, increased military operations, the unfunded Medicare prescription drug benefit, and slow job and economic growth.

The White House released this year’s Economic Report four days after it formally unveiled its proposed budget for Fiscal Year 2013.

Hearings Feature Sharp Differences Over Obama’s Budget

Administration officials defended the President’s budget at committee hearings last week that followed an all-too-familiar script: Democrats supported the budget, Republicans condemned it, and there appeared to be little room for bipartisan compromise in the near future.

At House and Senate Budget Committee hearings, Acting Office of Management and Budget (OMB) Director Jeff Zients said the budget would continue “policies that will shore up our economy and our fiscal situation.” He argued that the proposals, combined with legislation enacted last year, would cut deficits by $4 trillion in 10 years and put the country on a course to lower the deficit to only 3 percent of Gross Domestic Product (GDP) by 2018. Of the $4 trillion figure, over $1 trillion in savings is the result of discretionary-spending caps included in the Budget Control Act of 2011.

The President’s budget projects that spending will decrease from 24.3 percent of GDP in 2012  to 22.8 percent by 2022. Relative to GDP, revenues by that year will increase to 20.1 percent from 15.8 percent, deficits will decrease from 8.5 percent to 2.8 percent, and debt held by the public will increase to 76.5 percent from 74.2 percent.  

In comparison, the Congressional Budget Office’s January baseline, which assumes the continuation of current law, projects that spending will be 22.4 percent of GDP, revenues will be 21 percent, deficits will decrease to 1.4 percent, and debt held by the public will reach 62 percent by 2022.

Senate Budget Committee Chairman Kent Conrad said the budget moves in the right direction by substantially reducing the deficit, but also agreed that additional steps are needed to address long-term fiscal challenges. House Budget Committee Ranking Member Chris Van Hollen praised the “tough choices the administration made to protect and build upon the economic recovery, while putting in place a plan to steadily reduce the deficit over the next decade.”

House Budget Committee Chairman Paul Ryan, however, said that the budget “dodges the most difficult challenges our country faces” and he accused the President of breaking a promise to cut the deficit in half by the end of his term.

Senate Budget Committee Ranking Member Jeff Sessions has called the President’s budget “one of the most spectacular fiscal cover-ups in American history.” He criticized the budget for relying on tax increases, savings from last year’s Budget Control Act, and gimmicks such as savings from the winding down of military operations in Afghanistan -- a policy decision that has already gone into effect.

The Concord Coalition has given the President’s budget mixed reviews. Executive Director Robert L. Bixby praises its recommendations to broaden the tax base and achieve some Medicare savings, but he criticizes the lack of a commitment to broader structural reforms.

At another Senate Budget Committee hearing last week, Treasury Secretary Timothy Geithner said another increase in the debt limit may be required before the end of the calendar year. The debt is currently $15.4 trillion, and Treasury does not have the legal authority to issue debt above the $16.4 trillion statutory limit. One factor that will affect the timing of an increase is the additional borrowing that will be required for the payroll tax cut Congress approved last week.