April 24, 2014

Washington Budget Report: May 29, 2012

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Facing the ‘Fiscal Cliff’

The Congressional Budget Office (CBO) has released an excellent analysis of the “fiscal cliff” facing the country in the form of large policy changes that are scheduled to take effect at the end of this year.

The CBO warns that policymakers face difficult trade-offs because of the weak economic expansion and the high projected federal deficits in coming years. The agency found that reducing or eliminating the fiscal restraint now scheduled to happen “would boost economic growth in 2013, but . . . adopting such a policy without imposing comparable restraint in future years would have substantial economic costs over the longer run.”

Diane Lim Rogers, chief economist for The Concord Coalition, praised the CBO report in a recent blog post for its analysis of the policy choices that need to be considered. She notes that the CBO warns of a dramatic fall-off in consumer demand and in overall economic activity if all of the scheduled policy changes were to take effect at year’s end.

The main changes include the expiration of the 2001 and 2003 tax cuts, the expiration of the payroll tax cut, and the beginning of automatic spending cuts that are required by the debt limit law passed last August.

The CBO’s work, Rogers writes, points in the same direction as the recommendations that emerged from the bipartisan Bowles-Simpson and Rivlin-Domenici fiscal commissions: a combination of policies that would support the economy in the short run while putting measures in place that would reduce projected deficits later in the decade and beyond.

Concord has strongly supported efforts such as the Cooper-LaTourette budget plan in the House and the “Gang of Six” discussions in the Senate that would follow up on the Bowles-Simpson proposals.

“Ultimately, we must reduce the deficit,” Rogers writes. “Plowing straight ahead over the cliff in January 2013, however, would be bad fiscal policy.” On the bright side, she says, dealing with the policies comprising the cliff this year provides “an opportunity to take a more constructive attitude toward deficit reduction.”

Read more with CBO Warns About Fiscal Cliff

Panetta Urges Congress to Avoid Automatic Cuts

Defense Secretary Leon Panetta said this week that the nation does not have to “choose between national security and our fiscal security,” but he urged Congress to avoid what he called “disastrous”  cuts scheduled to start in January in both defense and domestic programs.

“My view is that when you're facing the size deficits and debt that we're facing, that obviously defense has to play a role in trying to be able to achieve fiscal responsibility,” Panetta said on ABC’s “This Week.” He added that the defense budget had already been pared back to meet congressional requirements in a way that “meets not only the goal of savings but also, more importantly, protects a strong national defense for this country.”

But Panetta, whose previous positions included White House budget director in the Clinton administration, expressed strong concern about the automatic cuts that were included in the 2011 law increasing the debt limit. These “automatic” cuts – also called “sequestration” -- are scheduled to start in January because the congressional super committee last year failed to agree on a deficit-reduction package.
   
“I think what both Republicans and Democrats need to do, and the leaders on both sides, is to recognize that if sequester takes place, it would be disastrous for our national defense and very frankly for a lot of very important domestic programs,“ Panetta said. “They have a responsibility to come together, find the money necessary to de-trigger sequester. That's what they ought to be working on now.”

The Concord Coalition encourages elected officials to look for savings in all parts of the federal budget, including defense. Concord also urges Congress not to abandon the automatic cuts without approving sufficient alternative measures to curb future deficits.

‘Fast-track’ Plan for Tax Reform

House Republican leaders are suggesting the use of “fast-track” legislative procedures to revamp and simplify the federal tax code next year. In remarks last week, however, House Ways and Means Committee Chairman Dave Camp tied the proposed overhaul to an extension of all the Bush-era tax cuts that would sharply increase projected deficits in the years ahead.

The Concord Coalition and many other bipartisan groups have advocated comprehensive tax reform as part of larger deficit-reduction plans. The proposed changes would eliminate many “tax expenditures,” which are essentially government spending programs embedded in the tax code – often with little public scrutiny.

Reducing these tax expenditures would enable the government to reduce future deficits, lower tax rates or both. Many Republicans and Democrats support reducing tax expenditures although Republicans generally oppose using any of the resulting revenue to reduce deficits.
The two parties also differ over extending the Bush-era tax cuts to the country’s wealthiest households, posing a difficulty for the scenario outlined by Camp last week.

In prepared remarks, he said there was strong Republican support to use the scheduled expiration of the Bush tax cuts this year “as leverage to force action in 2013 on comprehensive tax reform.  How?  Simple: In addition to extending current low-tax policies originally enacted in 2001 and 2003, we should enact fast-track procedures to compel comprehensive tax reform next year.”

House Speaker John Boehner supports the fast-track plan, which Camp is still developing. There are 34 examples of fast-track procedures in the law,  the chairman said. That includes trade agreements that Congress has 90 days to accept or reject without amendments.