October 21, 2014

Washington Budget Report: June 11, 2013

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Victory Declarations on the Deficit Are Premature

Some in Washington are ready to declare victory over the deficit problem, and on Monday Standard & Poor’s said it would revise its credit rating outlook for the government from negative to stable. But the deficit problem is actually still far from being solved and its lengthy shadow will hang over every other issue until a fiscal sustainability plan is in place.

While the deficit is coming down in the short term, the most responsible factors are the recovering economy, allowing tax cuts to expire and assuming that improbable cuts in discretionary spending and Medicare provider payments will actually occur.

Even if all that happens, however, the budget would still be on an unsustainable track. The Congressional Budget Office estimates that under current law the deficit will be rising again in 2015 -- and that both the deficit and debt will continue to outpace economic growth in the decades ahead.

While annual appropriations, including defense, have been capped, mandatory spending (entitlements) and interest on the debt will continue to grow on autopilot as the population ages. Projected revenues will grow, but not by enough to keep up with spending.

The president, the House and the Senate have each presented budgets that would improve the current outlook. But none of them will be enacted as written, and lawmakers have not moved to reconcile their differences.

“Thus, the ‘declare victory’ strategy is really a surrender to political fantasies,” says Robert L. Bixby, executive director of The Concord Coalition. “A comprehensive approach looking at all the government’s commitments and sources of income is still needed as much as ever. Ignoring the deficit won’t make it go away.”

‘Tax Extenders’ and Hidden Revenue Losses

One big reason why pundits and policymakers should exercise caution about declaring “mission accomplished” based on near-term deficit projections by the Congressional Budget Office: When projecting future taxation and spending levels, the CBO is legally required to assume that current laws will remain in effect -- even if Congress is widely expected to change some of them.

This allows lawmakers to use several gimmicks to hide the true cost of the policies they support. So-called “tax extenders” are one of the many ways Congress toys with the budget math. These are tax expenditures with set expiration dates that Congress nonetheless renews year after year.

For example, tax credits for renewable energy and for research and experimentation are among those that are technically supposed to expire at the end of this year but that Congress is very likely to extend, as it has done in the past.

It is unrealistic to assume that politicians will let the vast majority of tax extenders like these expire on schedule in the next couple years. CBO estimates that extending them would add $938 billion to deficits over the next decade.

Washington must enact tax and spending reforms that would eventually set the debt on a downward path as a percentage of GDP. Hiding tax expenditure revenue losses behind false promises to phase them out won’t get the job done.

Playing the Blame Game Over a Possible Shutdown

The blame game over a possible government shutdown has begun three and a half months before the end of the fiscal year.

That much, but little else, became clear last week as President Obama and House Speaker John Boehner traded accusations over FY 2014 funding levels.

As the House readied to pass the Homeland Security and Military Construction/Veterans Affairs appropriations bills for FY 2014, the President threatened to veto them both along with Republican plans for all of the other appropriations bills. The House passed the two bills anyway.

At issue is both the overall spending level and the distribution of funds in the House Republican bills. Total spending is being set in accordance with the sequester but the mix of funding is being altered to boost defense-related accounts and set up deeper cuts to domestic programs.

Boehner responded to the President in a sharply-worded letter accusing him of “raising the specter” of a government shutdown.

Without a congressional budget resolution to guide the process, Senate appropriators are writing bills with a total funding level $90 billion higher than in the House -- assuming the sequester doesn’t take place.

Such a large difference between the two chambers dramatically increases the possibility of a government shutdown in the fall.

With both parties wanting to alter the sequester, the obvious solution would be for them to agree to new funding levels in the course of a larger agreement on a budget resolution and the long-term direction for government spending and revenues.