I. Introduction

I. Introduction

The annual congressional budget process kicked-off last week with the House and Senate Budget Committees adopting similar blueprints for Fiscal Years 2009-2013 along party line votes. This week, the full House and Senate are considering the respective plans approved by the Budget Committees. Both plans, like the President’s budget proposal, show large deficits in 2008 and 2009 followed by declining deficits turning to surpluses by 2012 and 2013. With each, the assumption of emerging surpluses within the budget window seems unduly optimistic. There is a distinct sense of déjà vu about these budget plans. For the most part, the main points of contention between Democrats and Republicans are identical to last year’s budget debate and, if possible, the parties seem even more dug in. Major decisions on how to address the nation’s unsustainable long-term fiscal outlook are clearly on hold until the next President and Congress take office. Some decisions, however, cannot be avoided. These include:

• Setting a top line level of appropriations (i.e., discretionary spending)

• Whether to strictly enforce the pay-as-you-go (paygo) rules adopted last year for entitlement expansions and tax cuts, including for popular items such as relief from the Alternative Minimum Tax (AMT) and preventing a scheduled cut in Medicare physician payments, and

• Whether to use “reconciliation” instructions for certain spending and tax legislation to avoid a filibuster in the Senate

II. Highlights of the Budget Committees’ plans

Deficit path

In the Senate, Budget Committee Chairman Kent Conrad’s (D-ND) budget plan shows three years of steadily declining deficits, from $366 billion in FY 2009 down to $49 billion in FY 2011.[1] It then projects surpluses of $177 billion in FY 2012 and $160 billion in 2013, the last year of the plan’s five-year window. As a percentage of the economy (GDP), spending and debt would decline over the five-year period while revenues would increase. Outlays would average 19.7 percent of GDP while revenues would average 19.4 percent. These numbers are below the average level of outlays since 1980 (21 percent of GDP) and above the average level of revenues (18.3 percent of GDP) over that time.

The House plan drafted by Budget Committee Chairman John Spratt (D-SC) shows a similar path. It projects a deficit of $340 billion in FY 2009, followed by deficits of $201 billion in 2010 and $48 billion in 2011.[2] Surpluses of $178 billion in 2012 and $158 billion in 2013 round out the five-year window. As a percentage of the economy, spending and debt would decline over the five-year period while revenues would increase.

Discretionary spending

The Budget Committee plans reject President Bush’s proposed funding cuts in domestic programs. Instead, Democrats again seek increases of $18 billion to $22 billion above the President’s request, which amounted to a freeze for domestic appropriations. Those numbers increase to $22 billion in the Senate and $24 billion in the House when including advanced appropriations. Filling in the details of the spending bills will be up to the Appropriations Committees later this year.

The President’s budget director did not wait to see the details of the House or Senate budgets, let alone any actual appropriations bills, before threatening vetoes if Congress tries to spend more than the President’s overall discretionary funding amount, or fails to reduce the number and cost of earmarks by half. This portends another year of gridlock on appropriations with a huge omnibus bill to come after the November elections.

Domestic discretionary outlays would be $210 billion higher over five years in the Senate and $276 billion higher in the House, than in the President’s budget as scored by CBO. While on the surface this may seem to be a surge in spending, the higher amounts need to be viewed in the context of the President’s budget, which assumes a freeze not just for 2009 but for the next four years as well. Under the President’s budget, non-defense discretionary spending would sink to an historic low of 2.8 percent of GDP by 2013. That compares with 3.7 percent of GDP in 2007. The President’s budget is thus not a realistic standard for comparison.

Even the Democratic Budget Committee plans rely on assumptions of spending restraint in the future that seem overly optimistic. In the final three years, 2011-2013, non-defense discretionary spending grows by an average annual rate of 1.5 percent in the Senate and 2.1 percent in the House plan—both numbers below inflation. Under either plan, non-defense discretionary spending would substantially decline as a percentage of GDP, from 3.7 percent in 2009 to 3.1 percent in the Senate plan and 3.2 percent in the House plan.

Defense spending tracks identically with the President’s request, including the “placeholder” request for only $70 billion in spending for the wars in Iraq and Afghanistan for FY 2009, and no spending on the wars in later years. This assumption is widely acknowledged to be unrealistic. It is also worth noting that in the later years, defense spending outside of the wars is also budgeted to only increase an average of 1.6 percent a year—below inflation and well below recent defense spending trends.

Mandatory spending

The House Budget Committee plan maintains last year’s fiscally responsible commitment to pay-as-you-go budgeting for mandatory spending. Any expansions must be offset with commensurate spending cuts or tax increases — even for politically popular items such as expansion of the State Children’s Health Insurance Program (SCHIP). The committee has again provided numerous reserve funds for this purpose. The President has already threatened to veto any paygo offset that increases taxes.

The Senate plan also maintains the overall commitment to paygo for mandatory spending but carves out an exemption for up to $35 billion in additional economic stimulus legislation. The ink is barely dry on the stimulus bill approved in February, which will increase the deficit by $168 billion in 2008 and 2009. Given the large amount of fiscal and monetary stimulus that is already in the pipeline, allowing another $35 billion of spending or tax initiatives that are not offset over the five-year budget window seems premature.

Both budget proposals reject the President’s recommendations for savings in mandatory spending. Some of those proposals, particularly with regard to Medicare, merit consideration or at least counter-proposals in the congressional budget resolution. Even if paygo is strictly applied to expansions of mandatory programs, this would still leave autopilot mandatory spending growth under current law on an unsustainable path. Thus, treating the President’s proposals as “dead on arrival” is not enough.

A complete strategy to restore fiscal discipline must include affirmative steps, beyond paygo, to achieve a sustainable long-term fiscal policy path. The explosion in health care and retirement benefits looms on the horizon as the single biggest threat to our nation’s fiscal health. Including savings in the mandatory spending category as a regular part of the annual budget process is an important step in addressing our long-term challenges. The lack of any such provisions in these budget plans is their weakest aspect.

One often used method for achieving savings in mandatory programs is through “reconciliation” instructions. Reconciliation bills enjoy special procedural protections, such as exemption from a Senate filibuster.

There are no reconciliation instructions in the Senate plan. The House plan includes a spending reconciliation instruction directing the Ways and Means Committee to find $750 million (not billion) of savings over five years. It is clear that the main purpose of this instruction is not to achieve deficit reduction, but to accomplish a shift in spending priorities that could prove controversial in the Senate. This could, however, be the functional equivalent of deficit reduction if it is used to ensure that paygo offsets are attached to legislation preventing a scheduled cut in Medicare physician fees. Current law requires such cuts under a predetermined formula (Sustainable Growth Rate) and the “savings” are built into Medicare cost projections. However, Congress has routinely acted to prevent these cuts from taking place or mitigated their size. It is perfectly legitimate for Congress to do this, but savings should be found elsewhere within the Medicare program.

In the usual course of events on Capitol Hill, it is far easier to increase spending on items with strong bipartisan support than to find acceptable offsets, particularly if the bar is set at 60 votes in the Senate. Because it is a virtual certainty that Congress will again adjust the Medicare physician fees, using reconciliation instructions would make it more likely that legislation could pass that includes offsets rather than simply adding to the deficit.

Revenues

For the most part, the Budget Committees again assume a level of revenue consistent with current law. Under current law, the tax cuts enacted in 2001 and 2003 are scheduled to expire on December 31, 2010. Moreover, current law does not assume further relief from the AMT. Thus, the level of revenue that comes from these provisions is assumed in the CBO baseline, which Congress uses as the starting point for the Budget Resolution. Because it will take an act of Congress (i.e., a tax cut) to change current law, a key issue is whether paygo should apply to such legislation so that it does not increase future deficits or decrease future surpluses. Applying paygo to expiring tax cuts does not constitute a tax increase. It constitutes a policy decision requiring a balancing of priorities. That is what budgeting is all about.

To be clear, revenues under the Budget Committees plans would go up. However, the budget committee plans do not include new taxes. All revenue increases contained in the plans are the result of “sunsets” that were included when these tax cuts were originally enacted to avoid a full accounting of their costs.

The most significant difference between the House and Senate plans is the application of paygo to a one-year patch of AMT relief in 2008. Paygo would apply to AMT relief under the House plan, but paygo would be waived in the Senate plan. If the Senate position prevails in an eventual joint budget resolution it will call into question whether paygo can ever be enforced for AMT relief, not just this year but in the years to come.

Overwhelming bipartisan support exists in both the House and Senate to provide AMT relief. The question is not whether to provide such tax relief but whether to do in a fiscally responsible manner by finding offsets so that it does not add to the national debt. Last year’s budget resolution assumed that any AMT relief would be deficit neutral. The House was able to meet this goal, but its plan died in the Senate.

This year, the House Budget Committee has again chosen the fiscally responsible route of insisting that paygo apply to AMT relief. It would do so through a reconciliation instruction to the Ways and Means Committee that would cut revenues by $70 billion in 2009 and make up the lost revenues over subsequent years of the budget window. Total baseline revenues over the five-year window would remain exactly the same. More importantly, the House plan would provide AMT relief without dumping the cost on future generations.

Using reconciliation instructions to achieve this purpose is perfectly legitimate. As noted above, reconciliation is designed to avoid Senate filibusters. Because it lowers the bar for passage of legislation, it should only be used to facilitate tough choices such as deficit reduction or, in this case, making sure that an initiative with wide bipartisan support does not add to the deficit.

Failure to enact a permanent AMT “fix,” which nearly everyone believes is the right thing to do, has made the cost of these one-year patches increasingly expensive. While the 2006 patch was estimated to cost $31 billion, the 2007 patch cost $50 billion and this year’s patch will cost $70. According to CBO, extending the AMT relief enacted in 2007 and indexing it for inflation would add $313 billion to the deficit over the next five years (2009-2013) — $461 billion if the other tax cuts are also extended. The increasing cost makes it all the more important that offsets be found for any additional incremental relief and that policy makers find a revenue neutral reform of the system.

Acknowledgment of long-term challenges

While the Budget Committee plans do not tackle the tough job of reining in long-term entitlement costs, they do at least acknowledge that there is a problem. Specifically, the House plan contains a Sense of the House provision stating that:

immediate policy action is needed to address the long-term fiscal challenges facing the United States, including the rising costs of entitlements, in a manner that is fiscally responsible, equitable, and lasting, and that also honors commitments made to beneficiaries, and that such action should be bipartisan, bicameral, involve both legislative and executive branch participants, as well as public participation, and be conducted in a manner that ensures full, fair, and timely Congressional consideration.

If members are serious about this Sense of the House provision, they could adopt the bipartisan plan of Representatives Jim Cooper (D-TN) and Frank Wolf (R-VA) to create a commission to hold public hearings, develop reform proposals to ensure a more sustainable fiscal outlook and guarantee a vote on these proposals. A similar proposal has been put forward by Senate Budget Committee Chairman Kent Conrad (D-ND) and Ranking Member Judd Gregg (R-NH).

For its part, the Senate plan includes a long-term deficit point of order against legislation that would increase projected current law deficits in any of the four 10-year periods following the next 10 years, i.e., 2019-2028, 2029-2038, 2039-2048, and 2049-2058.

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