October 25, 2014

Washington Budget Report: Aug. 6, 2013

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The Washington Budget Report will publish periodically during the congressional recess (through September 8).

Though Difficult, a Grand Bargain Is Still Possible

Recent developments in Washington have demonstrated both the difficulty of achieving a grand bargain on fiscal reform and why it may still be possible.

It became apparent last week that the House and Senate have made no progress on resolving their differences over Fiscal Year 2014 appropriations. (See next story for details.)

Meanwhile, President Obama floated a new kind of “grand bargain”: one aimed at short-term job creation rather than long-term fiscal sustainability. But his speech on the subject broke no new ground, essentially proposing to pay for a package of jobs programs with “transition revenue” from base-broadening corporate tax reform ideas that he proposed last year.

Robert L. Bixby, executive director of The Concord Coalition, points toward two main problems with Obama’s proposal: “It would remove corporate tax reform from the mix of options that could be used to help strike a long-term deal, decoupling it from individual tax reform, and it would require all the political pain of corporate tax reform for no gain in long-term deficit reduction.”

Republicans quickly dismissed the President’s proposal. But shortly after the speech he met with eight GOP senators who are still interested in a “go big” grand bargain that would replace the sequestration cuts and perhaps move further towards a fiscal sustainability plan.

With no funding plan yet adopted for the fiscal year that begins Oct. 1 and the debt limit looming shortly after that, Bixby says, “an agreement of some sort will have to be reached soon after Congress returns from its August recess. The issues are so intertwined that a comprehensive grand bargain is still the best way to resolve them.”

A Sorry Story on Congressional Appropriations Work

Congress has begun a recess that runs through early September despite completing no appropriations bills and making no progress towards a budget resolution conference.

Lawmakers have failed to reconcile the overall spending levels set by the Democratic-controlled Senate and Republican-controlled House. Earlier this year, the House adopted a budget resolution that promised to cap spending at sequestration levels while the Senate passed one that would exceed those levels by $90 billion.

The Senate has only brought one appropriations bill to the floor, and even that was stalled by a filibuster. The House has passed only 5 of the 12 appropriations bills. Republican leaders there have struggled to win support for the deep cuts needed to reach the overall spending levels set in the House budget resolution.

Lawmakers are now widely expected to either enact a continuing resolution for the start of the next fiscal year Oct. 1 or force a government shutdown. A continuing resolution is a poor way to fund the government, and a shutdown of the government over partisan squabbles would be completely irresponsible.

 

A New, Improved Definition of GDP

The independent Bureau of Economic Analysis (BEA) has released a completely revised look at the size of the U.S. economy from 1929 to the first quarter of 2013. This comes after an accuracy review of its key economic measurements suggested a new definition for the nation’s Gross Domestic Product (GDP).

This new definition treats research and development and the production of entertainment -- among other things -- as investments rather than expenses. As a result the GDP for 2012 increased by $560 billion, to $16.2 trillion. About $400 billion was related to R&D and $74 billion to entertainment.

Because the accrual of defined benefit programs was also added ($13 billion in 2012), the personal savings rate is now higher than previously thought.

For budget wonks, a key change is that the 40-year average size of government was adjusted from 21.0 percent of GDP to 20.4 percent. In addition, average government revenues went from 17.9 percent of GDP to 17.4 percent, and average deficits from 3.1 percent to 3.0.

While “debt held by the public” also shrank as a percentage of the economy, the fundamental fiscal challenge -- the projected increase of the debt-to-GDP ratio in the future -- remains unchanged. Any undue focus on small percentage changes in GDP would be a distraction from the real action needed on fiscal policy.

Pentagon Warns of Severe Budget Constraints

Last week Defense Secretary Chuck Hagel released a four-month Pentagon review that said the budget sequester cuts would jeopardize some areas of military strategy. Under sequester-level spending reductions, he said, “our military options and flexibility will be severely constrained.”

The Strategic Choices and Management Review scrutinized every aspect of the military budget and suggested possible alternative spending reductions. But the review said defense officials could find no strategically or managerially sound approach to make the cuts that could meet the sharp annual spending reductions required by the sequester.

Hagel said that roughly half of the defense budget -- including areas like veterans’ compensation and critical missions -- is off-limits to quick reductions, requiring military leaders to make cuts elsewhere that would “damage military readiness, disrupt operations, and erode our technological edge.”

The Pentagon has already implemented $37 billion in cuts this year due to the sequester. If Congress does not replace or lift the sequester, defense spending will be cut by $52.1 billion next year, which the Department of Defense says will mean more furloughs and layoffs.

Defense spending is scheduled for nearly $500 billion in reductions over the next 10 years if the sequester remains in place. Together with other planned cuts, this would reduce planned defense spending by nearly $1 trillion.