November 27, 2014

Washington Budget Report: February 5, 2014

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CBO Warns of Harm From ‘Very High’ Federal Debt

The Congressional Budget Office released a new report Tuesday that includes some good short-term news on federal deficits but warns that they could add $7.9 trillion to the debt over the next decade.

The CBO’s Budget and Economic Outlook is “an important reminder that our elected officials must still address the country’s unsustainable fiscal policies and long-term economic challenges,” says Concord Coalition Executive Director Robert L. Bixby.

The budget office estimates that deficits will drop this year and next. After that, however, they will start rising again as Washington struggles with high health care spending, rising interest costs, a dysfunctional tax system and an aging population.

Even the estimated deficit total of $7.9 trillion over 10 years relies on a number of questionable assumptions based in current law. Under more plausible assumptions in certain areas, the deficits could total $9.4 trillion over the next decade.

Other key points in the report:

  • Federal debt held by the public will equal 74 percent of GDP at the end of this year and will climb to 79 percent over the next decade -- levels that are “very high by historical standards” and could hurt long-term economic growth.
  • Interest costs, major health care programs and Social Security will account for all of the projected growth in federal spending as a share of GDP over the next decade.
  • Despite the recent slowdown in the growth of health care costs, Medicare spending is expected to rise by more than 80 percent, and overall annual health expenditures are set to double, within 10 years.
  • More than 200 tax expenditures are projected to lower federal revenue in the current fiscal year by $1.4 trillion, which amounts to more than half of all federal revenues.

Debt Limit Returns on Friday; Reform Needed

“Like Frankenstein’s monster, the statutory debt limit will soon come back to life,” says Concord Coalition Executive Director Robert L. Bixby. But while swift congressional action to raise the limit is necessary, he writes in a recent blog post, it may not be as easy as many on Capitol Hill have been assuming.

A budget deal in October suspended the debt limit through this Friday, when the Treasury Department plans to begin using temporary measures to avoid defaulting on some of the government’s financial obligations. Meanwhile, Republicans say they will seek concessions but Democrats want no strings attached to a debt limit increase.

Earlier this week, Treasury Secretary Jack Lew again urged Congress to quickly raise the limit so that the government can meet all of its financial obligations on time. He says the government is likely to run out of alternatives by later this month, and that damage is already being done to the economy.

Bixby called for creation of a Debt Limit Reform Commission to come up with a way to tie the nation’s debt to an economically relevant standard such as the growth rate of the economy. In addition, he says debt limit increases should be aligned with the policy decisions that require more borrowing.

The continued partisan bickering over raising the debt limit illustrates the need for reform.

“It might get resolved without a crisis this time, but the risk is still there and will return whenever the debt limit needs to be raised again,” Bixby says. He also notes that “the real solution to unsustainable debt is not to risk default but to enact more fiscally responsible policies in the first place.”

Farm Bill Includes Some Disappointments

The Senate passed a 5-year farm bill Tuesday 68-32, after nearly 3 years of congressional conflict over future agriculture policy. The House passed the legislation last week with a 251-166 vote, and the President is expected to sign the bill this Friday.

The bill contains some improvements but does not go far enough in curbing overly generous subsidies, especially for wealthy individuals and large agribusinesses. In fact, the legislation increases some subsidies.

The Congressional Budget Office estimates the legislation will save $16.6 billion over 10 years. Some experts, however, say the bill’s subsidies could be more expensive than anticipated and could make the farm programs even more generous than ever.

After this year, direct payments to farmers -- including those made regardless of whether crops were even planted -- would end, saving nearly $41 billion over 10 years. Unfortunately, an estimated $27.2 billion will be spent on two new programs to subsidize farmers against revenue losses or price declines.

The bill also adds almost $6 billion to crop insurance subsidies over 10 years, increasing their total cost over that time period to nearly $90 billion.

About $8 billion in savings will come from the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps. Although this is less than House members originally sought, the legislation arguably demonstrates a leniency towards major industries that is not shown to SNAP recipients.

Elected officials should reconsider some of these overly generous features of the new legislation. It would make sense, for example to means-test crop subsidies and reduce the government’s financing of insurance.

State of the Union Address Fell Short on Fiscal Concerns

Although President Obama’s State of the Union Address last week covered a wide array of topics, it failed to focus on the critical topic of fiscal sustainability.

“When the President did mention fiscal issues in his speech it was mostly to promote new spending or tax cuts with no cautionary reminder that even a ‘pay-as-you-go’ standard will not be enough to correct the underlying structural deficit that already exists,” says Concord Coalition Executive Director Robert L. Bixby.

Obama’s tone, however, seemed to fit the prevailing mood on Capitol Hill.

“Many Democrats seem relieved that the President downplayed the deficit and, as a whole, Republicans seem no more interested in serious budget negotiations this year than he does,” Bixby wrote in a blog post after the speech.

While a “grand bargain” on fiscal issues may not be possible in this election year, Bixby says the public still deserves to hear from the President about what must be done to meet the fiscal challenges ahead. Obama will have another opportunity to discuss meeting those challenges when he releases his proposed budget for Fiscal 2015 early next month.