April 21, 2014

Washington Budget Report: April 9, 2013

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President’s Plan Could Move Budget Talks in Right Direction

With the federal budget season opening, President Obama will step up to the plate on Wednesday, when he plans to officially reveal his proposed budget for Fiscal Year 2014. While his proposals will stir vigorous debate, there is reason to be optimistic that they could also move budget discussions in the right direction.

Preliminary reports indicated the budget would include a mix of spending cuts and revenue increases that would bring the deficit down to 1.7 percent of GDP by 2023.

“That’s higher, but more realistic, than the House Republicans’ balanced budget goal, and more ambitious than the Senate Democrats’ goal of bringing the deficit down to 2.2 percent of GDP,” Concord Coalition Executive Director Robert L. Bixby says. “In other words, it aims for a compromise, albeit one closer to the Senate Democrats’ goal, which is hardly surprising.”

Among the critical questions about the President’s plan:  Will it keep the deficit on a downward track? Will it pay for new initiatives in a credible and sustainable way? Does it provide savings over time to meet the growing pressures from an aging population? Are its economic assumptions realistic?

“To make those assessments, we’ll have to see the details,” Bixby wrote in a blog Monday. “From what has been officially leaked, however, the President’s budget will at a minimum have the building blocks of a substantial deal on deficit reduction, if not the ‘grand bargain’ many have advocated.”

Elements of the plan, Bixby adds, will “test the seriousness of those in Congress who say they want a bipartisan compromise.” Such a compromise will require both higher revenues and cuts in projected entitlement spending, and the President’s plan will apparently have both.

“If so, it will break with the tradition of fantasy budgets recently embraced by the two congressional plans adopted in March,”  Bixby says in the blog. An accompanying infographic explains some of the problems in these congressional plans.

A Better Way to Measure Inflation

Annual inflation increases are an important part of many government programs, including Social Security. Inflation protection is also provided in many parts of the tax code. But several advocates of fiscal reform – including the bipartisan National Commission on Fiscal Responsibility and Reform (Simpson-Bowles) and the Bipartisan Policy Center’s Debt Reduction Task Force (Domenici-Rivlin) -- have recommended using a more accurate measure of inflation.

There is a strong case for using this measure, known as the “chained CPI.” While beneficiaries and taxpayers would still be provided with inflation protection, the chained CPI would reduce the likelihood of excessive increases and thus help put the federal budget on a more sustainable path. Excluding lower interest costs, the 10-year deficit reduction would total $340 billion, with two-thirds coming from reduced spending and one-third from increased revenue.

According to media reports, President  Obama will propose switching to the chained CPI in his Fiscal Year 2014 budget, which is expected to be released tomorrow. Opponents of the idea have already begun to ramp up their criticism of it. In a recent blog post, however, the Committee for a Responsible Federal Budget (CRFB) clears up some confusion about the issue and offers a persuasive response to the critics.

“Experts from across the spectrum agree that the chained CPI is the best available measure for overall changes in the cost of living,” the blog post says. “Improved accuracy of inflation measurement should be a goal even absent budgetary impact, but especially given the many tough tax and entitlement choices policymakers will be facing to put the debt on a clear downward path. That is why every serious bipartisan budget plan . . . has recommended it.”

The Concord Coalition agrees with the CRFB, the Simpson-Bowles commission and the Domenici-Rivlin task force that a system-wide switch to the chained CPI makes sense.

The switch would be sound on its technical merits while at the same time providing a gradual level of deficit reduction that would not be disruptive to the economy in the short-term and would grow larger with time. The proposal is also consistent with a “balanced” approach to deficit reduction since it would both reduce spending and increase revenues.

To be clear, the chained CPI is not a magic bullet. Even a more accurate measure of inflation would not be nearly enough to close the gap between current-law benefit promises and projected revenues. It is, however, a good place to start.

Concord Coalition/Fix the Debt Forums: Florida and Colorado

Political leadership from both parties is needed to take advantage of the window of opportunity that exists in the next few months to achieve a meaningful deficit-reduction plan. That was a common theme last week from federal budget experts, former lawmakers and others who spoke in “Fix the Debt” forums in Florida and Colorado that were co-sponsored by The Concord Coalition.

While speakers at the programs offered a wide variety of perspectives and suggestions, there was general agreement on the need to deal responsibly with fundamental challenges such as rising health care costs, the aging of the population and the need to promote a vibrant economy.

A number of the speakers also emphasized the importance of public engagement and bipartisan compromise. And several stressed the high stakes for younger Americans in deficit reduction in the years ahead.

Absent reforms, the federal debt will continue to rise even after a full economic recovery and the winding down of some overseas military commitments, Concord Executive Director Robert L. Bixby said at a forum last Tuesday at Eckerd College in St. Petersburg. He noted that the government’s interest costs alone are projected to total almost $1 trillion a year in a decade.

Last week’s programs were the latest in a series of forums around the country co-sponsored by Concord, the Campaign to Fix the Debt, and various local organizations and schools.

In addition to Bixby, other speakers at the Eckerd College program were Jim Davis, a former U.S. House member; Paul Stebbins, executive chairman of the board of World Fuel Services Corporation, and Paul D. Hernandez, a member of the Hialeah City Council.

At a program the following day in Tampa, they were joined by former U.S. Senator Mel Martinez, who is currently chairman of Southeast and Latin America for JPMorgan Chase & Co. Martinez also serves as a co-chair of the Florida steering committee for Fix the Debt.

Martinez said he thought elected officials in Washington had an opportunity to move forward on fiscal reform before early fall, when the political parties will start focusing on next year’s elections. Lack of progress this year, however, could mean a “grand bargain” might not be possible until 2017.

On Saturday two former Colorado state legislators -- Norma Anderson and Penn R. Pfiffner -- Colorado Fiscal Institute Executive Director Carol Hedges, and former U.S. Rep. Tom Tancredo discussed solutions to the nation’s debt at the Arapahoe Community College in Littleton. Paul Hansen, Concord’s western regional director, also presented a federal budget overview.

While there was some disagreement on the details, there was wide agreement that entitlement and tax reform are critical to a solution. “The politically impossible must become the politically inevitable… ,” Tancredo said. “This will require leadership that may mean you will not be reelected.”

Anderson, a former majority leader in both the Colorado House and Senate and a state Fix the Debt co-chair, emphasized listening to the perspectives of others: “If you want solutions, you need to listen to find out what other people really want so you can craft a compromise.”