October 25, 2014

Washington Budget Report: March 5, 2014

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Obama Budget Unlikely to Foster Progress on Key Challenges

President Obama unveiled a proposed 2015 budget Monday that falls short of the credible framework he offered last year for comprehensive, bipartisan fiscal reform.

“While there are some positive elements in the President’s plan this year, overall it seems to ratify the consensus in both parties that there will be no far-reaching budget deals in the coming year,” said Robert L. Bixby, The Concord Coalition’s executive director. “This is a campaign-year document and should be assessed as that.”

A proposal last year to use a more accurate measure of inflation known as “Chained CPI,” for example, has been dropped in the new budget plan, although Obama says it is still “on the table” for negotiation. Using Chained CPI would raise government revenue and reduce spending on Social Security and other programs with cost-of-living increases.

The administration proposed roughly $400 billion in additional “investment” spending over 10 years, and suggests ways to pay for it through higher revenues and mandatory spending reforms. But these offsets would then no longer be available to reduce the large federal deficits projected for the years ahead.

The administration is also considerably more optimistic than the nonpartisan Congressional Budget Office on certain economic and revenue assumptions.

Obama continues his efforts to restrain some Medicare spending and suggests reducing costly and inefficient provisions in the tax code that favor some individuals and businesses. The administration’s proposals in these areas have the potential to draw bipartisan interest and support.

In addition, the Treasury Department issued its annual Financial Report on the United States, providing a detailed look at federal spending and Washington’s fiscal challenges. Given the coming elections and the complacency in Washington on the budget, however, any substantial progress on fiscal reform is likely to be extremely difficult in the year ahead.

Budget Process Needs Greater Long-Term Focus

Concord Coalition Executive Director Robert L. Bixby offers two key suggestions for improving the congressional budget process: Plan ahead and pay the bills.

Congress could start by simply following the rules and statutory requirements that are already in place, including the “Pay As You Go” standard that requires offsets for new spending or tax cuts.

But more should be done to instill the budget process with a longer-term focus. In an interview and guest column for Federal News Radio, Bixby offers suggestions that include:

  • Congress should switch from an annual budget cycle to a 2-year cycle that would enable lawmakers to spend more time on oversight and longer-term challenges.
  • Instead of simply focusing on the next five or ten years, the budget process should include setting GDP-related targets at 5-year intervals through 2040 for total revenues, defense spending, domestic discretionary spending, Social Security, Medicare, Medicaid, other entitlements and net interest.
  • For enforcement purposes, triggers could be added that would either trim spending down to the targeted levels or raise revenues.

In addition, the debt limit should ideally be tied to some relevant economic measure like GDP growth and to fiscal decisions that require more borrowing.

Camp’s Tax Plan: A Good Starting Point for Reform

The recent release of House Ways and Means Chairman Dave Camp’s detailed plan for comprehensive tax reform was unfortunately met with a collective shrug by his congressional colleagues in both parties.

“By adding specifics to what is usually a hypothetical discussion, Camp’s proposal could serve as a suitable starting point for a substantive debate on tax reform,” Concord Coalition Policy Director Joshua Gordon says in a blog post. “Unfortunately the plan seems unlikely to be treated that way.”

The plan uses all the revenue it would raise to lower marginal rates instead of using some of the money for deficit reduction. But it would eliminate or pare back scores of tax expenditures -- special provisions that favor certain behaviors, individuals and businesses -- that make the code the complicated mess it is today.

Gordon writes that Camp’s proposal, by eliminating or reforming these tax expenditures, “grapples with the reality that fiscal reform must contain unpopular provisions.”

Yellen Decries Fiscal Drag in Recent Testimony

In testimony to lawmakers last week, Federal Reserve Chair Janet Yellen criticized current fiscal policy, saying budget cuts have put a drag on the economy while longer-term deficit projections still need to be addressed.

During her testimony to the Senate Banking Committee, which focused mainly on monetary policy, Yellen said fiscal policy “has been quite tight and has imposed a substantial drag on spending in the U.S. economy over the last several years.”

She noted that this had put a greater burden on monetary policy to support the economy. But Yellen added that the fiscal drag this year will be less than in the past. This is partly because the Ryan-Murray budget agreement in December raised the caps on discretionary spending.

On the same day as Yellen’s testimony, the Bureau of Economic Analysis indicated that GDP growth in the last quarter was at an annual rate of 2.4 percent, well below the 3.2 percent that was initially thought. The economy has faced numerous headwinds recently, including the government shutdown last fall and an unusually cold winter.