October 21, 2014

Washington Budget Report: Feb. 20, 2013

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Updated Simpson-Bowles Plan ‘Right on Target’

Erskine Bowles and Alan Simpson, who co-chaired the National Commission on Fiscal Responsibility and Reform, proposed a new fiscal framework Tuesday that would put the nation’s finances on a sound and responsible path.

“It is time to replace crisis-management budgeting with a strategic framework that deals with the real problems facing the budget and the economy,” said Concord Coalition Co-Chair Sam Nunn. He said the recommendations  from Bowles and Simpson were “right on target” and “should be put to use immediately as a guide to this year's budget process.”

Bowles and Simpson said their framework was not meant as a revision of their commission’s 2010 plan but “builds upon where elected leaders were in their negotiations last year.” The framework calls for an additional $2.4 trillion in deficit reduction over the next 10 years as well as long-term reforms to entitlement programs and health care.

A key feature of the framework is that it requires broad sacrifice. It does not attempt to rely on either spending cuts or tax increases alone to reduce deficits. It puts all parts of the budget in play and does not pretend that popular programs can be exempted from scrutiny or that no new revenues are needed.

“This is a credible, responsible and comprehensive framework for addressing the nation’s growing debt burden, which will reach unsustainable levels if no action is taken,” said Robert L. Bixby, Concord’s executive director. “It cuts through partisan rhetoric and confronts the hard trade-offs that must be made between spending, taxes and debt. For those who are afraid to ‘go first,’ it offers a way forward.”

Some Good News, Many Worries in CBO Projections

Although recent projections from the Congressional Budget Office offer some encouraging news in some areas, they also show why comprehensive fiscal reforms are badly needed.

On the positive side, the CBO expects the annual deficit to drop below $1 trillion for the first time in four years. With an improving economy, federal revenues are expected to rise. In addition, a welcome slowdown in health care cost growth in recent years could continue.

Beyond this reassuring surface, however, there are many significant fiscal and economic concerns. The CBO warns that the government’s debt-to-GDP ratio remains “very high by historical standards.” Federal deficits and debt will be higher than projected if policymakers decide – as they have often done in the past -- to change certain policies that are currently scheduled to take effect.

Caps imposed on annual appropriations, which are assumed in current projections, will be quite difficult to achieve in practice. And the government’s standard 10-year projection period does not fully reflect the pressures that will be building on the budget toward the end of that time as the result of an aging population, rising health care costs and higher interest payments on the debt.

A new Concord Coalition issue brief analyzes these and other concerns raised by the CBO’s annual Budget and Economic Outlook as well as other recent studies. These include looming challenges for the U.S. economy, with slow growth forecast again for this year and unemployment expected to remain above 7.5 percent through 2014. And while the economy could do better in 2014, CBO suggests that economic growth could be more moderate several years down the road – another reflection of an aging population.

While policymakers can claim some credit for beginning to bring the nation’s finances under control, the most difficult decisions -- those involving health care, Social Security and tax reform -- remain to be made. That task must be the focus of the coming budget debate.  

Partisanship in Full Swing on Sequester

With the automatic spending cuts required by the Budget Control Act (BCA) scheduled to begin taking effect next week, both parties have continued to make partisan speeches while making no apparent progress on a potential compromise.

The BCA required total cuts of $1.2 trillion over 10 years that were originally scheduled to begin taking effect last month. The “fiscal cliff” agreement signed into law by President Obama in January delayed the cuts for two months and reduced them by $24 billion. If policymakers do not act prior to March 1, the Congressional Budget Office estimates that the cuts will now total $85 billion in 2013.

In a speech yesterday, Obama raised concerns about the impact that the cuts would have on priorities such as jobs, emergency responders, military readiness and investments in education, energy, and medical research. If a budget agreement is not reached before the cuts are scheduled to go into effect, Obama said, Congress should pass a smaller package of spending cuts and tax reforms to prevent the automatic cuts and allow additional time to reach a broader agreement.

In response, House Speaker John Boehner agreed that the sequester is the “wrong way to cut spending” but also said that replacing it “will require a plan to cut spending that will put us on the path to a budget that is balanced in 10 years.”

Senate Democrats last week unveiled a proposal to replace the automatic cuts through Jan. 2, 2014 with $110 billion in revenue increases and spending cuts. The proposal includes $55 billion in increased taxes on wealthy individuals and corporations, $27.5 billion in defense cuts phased in through 2021, and $27.5 billion in cuts to domestic spending programs such as agriculture subsidies.

Prior to this week’s recess, the Senate reached an agreement to consider both the Democratic proposal and a proposal by Senate Republicans during the week of Feb. 25. Senate Republicans have yet to publicly release details of their proposal.

Also last week, the Senate Appropriations Committee heard testimony from agency officials on the specific effects that the automatic cuts would have on their budgets.

The Concord Coalition supports replacing the automatic cuts with a targeted proposal that makes fiscally responsible trade-offs between specific revenue and spending priorities. Concord Co-Chair Sam Nunn this week called the sequester “misdirected and ill-timed” and urged lawmakers to replace it using the framework proposed this week by Erskine Bowles and Alan Simpson.