December 22, 2014

Washington Budget Report: November 5, 2013

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Budget Committee Needs to Muster Will for Reform

With the budget conference committee facing a mid-December deadline to reach a bipartisan deal, the work has shifted to private discussions among various groups of lawmakers.

Expectations for the committee, which held its opening session Wednesday, have been low. But if the panel approaches its task with flexibility and a commitment to achieving results, it has an opportunity to put a framework in place for making substantial progress toward solving our nation’s fiscal challenges.

The conference committee’s most immediate task is to develop a budget for Fiscal 2014, which began Oct. 1. Current funding will run out by Jan. 15. A budget agreement would, in turn, pave the way for a debt limit increase, which will be needed sometime beyond Feb. 7.

As The Concord Coalition explains in a new issue brief, the key fiscal issues are so intertwined that anything beyond a very short-term fix will require some type of “grand bargain” between the parties.

For example, many lawmakers want to relieve the pressure that sequestration is putting on “discretionary” spending (programs that Congress approves on an annual basis).

To avoid increasing the deficit, though, Congress must find corresponding offsets. That would mean new revenues, which Democrats advocate, and cuts in mandatory spending (entitlement programs), which Republicans want. It is hard to imagine any substantial agreement that does not draw from both sources.

The basic question is whether the conference committee can muster enough political will to go beyond the usual partisan rhetoric and crisis-centered fiscal policy to start the country on a more sustainable path.

Deficit Falls to $680 Billion But Key Fiscal Problems Remain

Although the federal deficit fell sharply over the last year as the economic recovery continued, this good news should not be used as an excuse to ignore the serious fiscal challenges that Washington still needs to confront.

The deficit for Fiscal 2013, which ended Sept. 30, was $680 billion. That’s down from nearly $1.09 trillion the previous year, and it marks the first time since 2008 that the annual deficit has been below $1 trillion.

Projections by the Congressional Budget Office, however, show that under current law the deficit will begin rising again within a few years. Key factors in this are entitlement spending increases and excessive tax expenditures.

In addition, the $17.1 trillion debt is expected to rise throughout the coming decade because of the additional borrowing and rising interest rates.

Federal deficits are closely linked to the state of the economy, a simple fact that is often ignored by politicians in both parties. The improving economy was a large factor in the lower 2013 deficit, just as the recession and slow recovery were critical factors in the previous trillion-dollar-plus deficits.

Treasury Secretary Jacob J. Lew and Office of Management and Budget Director Sylvia Mathews Burwell released the $680 billion deficit number along with other final budget figures for Fiscal 2013 last Wednesday.

They noted that the 2013 deficit fell to 4.1 percent of the Gross Domestic Product (GDP), a reduction of more than half since 2009.

Government receipts in Fiscal 2013 approached $2.8 trillion – or 16.7 percent of GDP, which is 1.5 percentage points higher than the previous year. Spending was a little under $3.5 trillion -- or 20.8 percent of GDP, which was 1.2 percent lower than the year before. Spending fell even in absolute terms, by $84 billion.

Social Security Benefits Rise 1.5% to Offset Inflation

A cost-of-living adjustment (COLA) will increase Social Security benefits by 1.5 percent in January, resulting in an average monthly raise of $19 for millions of disabled and retired workers.

The adjustment, announced last week by the Social Security administration, is based on the consumer price index (CPI) for urban wage workers and clerical workers. The COLA announced in 2012 was a 1.7 percent raise, preceded by 3.6 percent in 2011. Negligible inflation meant no increases in the two years before that.

The government relies on the traditional CPI in a number of other ways, including indexing in the tax code and with pensions for federal workers and veterans’ benefits. Many economists and budget experts, however, say this CPI overstates inflation.

A reasonable alternative suggested this year by President Obama is “chained CPI,” which accounts for consumers substituting for products that become more expensive. Over time, switching to the chained CPI could produce substantial budgetary savings.

The Social Security news came on the heels of the government’s announcement that premiums for Medicare Part B would not increase in 2014. Part B covers services such as doctor visits, lab tests and surgeries. It is partly funded by premiums, but Medicare benefits are also heavily subsidized by general tax revenue.

The Center for Medicare and Medicaid Services says the premium freeze is due to reduced growth in health costs; savings from fighting fraud and abuse, and discounts from drug makers for premium and generic drugs.

Congress Cuts Food Aid, Not More Costly Programs

While Social Security benefits are going up automatically, the government’s nutritional assistance benefits are going down – and have been targeted for even further reductions.

Last Friday a recession-related increase in the Supplemental Nutrition Assistance Program (SNAP) was allowed to expire. Funding for the program – widely known as food stamps -- is estimated to be about $76.3 billion in Fiscal 2014, down from $82.6 billion the previous year. A family of four could see a reduction of up to $36 a month because of this month’s change.

SNAP benefits will now average less than $1.40 per meal, according to the Center on Budget and Policy Priorities. Nearly 48 million people, including 22 million children, receive assistance through the program.

Further reductions in it are likely, however. Senate Democrats have called for $4 billion more in cuts to the program over the next decade while House Republicans want more than $39 billion cut.

The contrast with Social Security’s 1.5 percent cost-of-living increase for the coming year is instructive.

It illustrates what happens when Congress continues to focus its deficit-reduction efforts on the same parts of the federal budget – often, as with SNAP, a relatively small part -- while the big federal entitlement programs costing hundreds of billions of dollars a year remain on automatic pilot.