In 1990, on the brink of a recession, Democrats and Republicans came together for two weeks at a “Budget Summit” at Andrews Air Force Base and produced a historic budget agreement.  In this agreement, Democrats and Republicans agreed to cut spending, increase taxes, and enact into law a “Budget Enforcement Act” that would set the nation on the road to fiscal responsibility.
 

President Bush (41) suffered a great deal of criticism for the 1990 Budget Summit Agreement because it included tax increases as well as spending cuts, but the economic facts are that this politically courageous bipartisan agreement laid the foundation for subsequent deficit reduction laws that moved the Treasury from the huge deficits of the early 1990s to the booming economy and surpluses of the late 1990s.

In 1993, during the first year of the Clinton Administration, another milestone budget bill was enacted—cutting spending and raising revenues by more than $500 billion—and further extending the pay-as-you-go rules of the Budget Enforcement Act.  However, unlike the 1990 Agreement, the 1993 budget bill was enacted by Democrats without a single Republican vote.

Under normal circumstances, Republicans could have blocked the 1993 deficit reduction bill by “filibustering,” which prevents legislation from coming to a vote by engaging in continuous debate. (The Senate has a time honored tradition of unlimited debate and votes in the Senate cannot occur until all debate has concluded.) The procedure to bring debate to an end—known as “cloture”—requires 60 votes.  Since Democrats in 1993 had only 56 votes, the Clinton deficit reduction bill would have been doomed under normal proceedings.

However, the Congressional Budget Act provides for a special filibuster-proof procedure.  The majority party can elect to assemble budget-related provisions into a “Budget Reconciliation bill” which is limited to 20 hours of Senate debate and is therefore immune from filibuster. (In addition, amendments to Reconciliation bills must be strictly “germane,” which further expedites consideration.)

As a consequence of using Budget Reconciliation procedures, Senate Democratic leaders in 1993 were able to preclude a filibuster and President Clinton’s major deficit reduction bill became law in August of 1993.

President Obama and congressional Democratic leaders face a critical budget decision in the next few weeks. The President’s bold 2010 budget calls for major new public investments in health care, energy, and education. The budget blueprint would pay for these initiatives by raising taxes on upper income earners, closing tax loopholes, reforming Medicare and Medicaid, and raising revenues from auctioning carbon emission allowances.

Initial reactions to the Obama budget plan suggest a major partisan battle. House Budget Committee Republicans characterized the budget as an “attempt to spend, tax and borrow our way into prosperity.”  Senate Republican Budget Chairman Judd Gregg (R-NH) dismissed the plan, saying it’s “a missed opportunity for American taxpayers—it raises taxes...implements massive new spending, and fails to make any tough choices to control the deficit and long-term fiscal crisis posed by the huge entitlement programs.” 

With partisan battle lines already being drawn on his FY 2010 budget plan, the budget reconciliation process may be the likely path forward for the Obama budget. 

However, Republicans are already pushing back on the possible use of the reconciliation process. In a March 4 letter to the President, Senate Republican Leader Mitch McConnell (R-KY) and several key Senate Republicans said "any successful health care reform proposal must include both Republicans and Democrats....(and) using the budget reconciliation process to curtail Senate debate and limit amendments would make it difficult to gain broad bipartisan support...."

In the coming days, the possible use of budget reconciliation will be a key decision as the House and Senate Budget Committees draft their FY 2010 budget resolutions.

Senate Republican Letter on Budget Reconciliation

New Housing Initiative: 

• On March 4, the Obama Administration released further details of an ambitious plan to reduce foreclosures and stabilize the collapsed housing market.  The plan is designed to assist 7 to 9 million homeowners.
• The program has two elements: (1) a refinancing program to help borrowers who are current on their loans; and (2) a $75 billion loan modification program to help reduce mortgage payments for borrowers in danger of default.
• The refinancing portion of the program is expected to help reduce mortgage payments for up to 5 million homeowners, who can apply through June of 2010. It is designed to help homeowners who are current on their payments but have been shut out of refinancing because their homes have lost value. The Treasury has instructed Fannie and Freddie to refinance homeowners at today's low rates even if the owners have less than the standard 20% equity. Under the plan, homeowners could also convert from adjustable rate to fixed rate mortgages.
• The loan modification portion of the program offers incentive payments to lenders to modify loans for at-risk homeowners before they become delinquent. The program will help up to 3 to 4 million homeowners and is available until 2012.
• Extent of the housing crisis: According to First American CoreLogic, nearly 1 in 5 U.S. homeowners with mortgages owed more on their mortgages than their homes were worth by the end of 2008.
• Treasury Department Statement

More Aid for AIG:

• Last week the Federal Reserve and the Treasury Department moved again to infuse cash into the ailing American International Group Inc. (AIG). 
• Thus far the government has committed $162.5 billion to keep AIG afloat.
• AIG's sale of credit default swaps -- an insurance-like product AIG sold to buyers that covered losses on mortgage-backed securities -- are central to AIG's crisis.
• New York Times Most Recent Bailout Tally
• Washington Post Most Recent Bailout Tally

Congress passed a short-term continuing resolution on March 6 to keep government agencies operating through March 11 while the Senate works to complete action on a $410 billion omnibus appropriations bill for the remainder of FY 2009.

Completion of the bill has been delayed by amendments seeking to freeze spending at FY 2008 levels, reduce earmarks, and other hot button political issues.  Thus far, no amendments have passed.

On February 25, the House passed the omnibus appropriations bill by a vote of 245-178. Speaker Pelosi has said the House will not accept any amendments to the package, which was negotiated with appropriators on both sides of the aisle.  However, passage of a full-year CR in lieu of an amended omnibus bill would seem an unlikely move for Democrats.

Reason for the omnibus bill:  Last fall, Congress completed action on only 3 of the 12 regular FY 2009 appropriations bills. 

The pending omnibus bill passed the House on a close to party-line vote.  House Republicans argued that the measure should have frozen 2009 spending at 2008 levels, rather than providing adjustments for inflation and other increases.

Congressional Quarterly reported that the bill increases spending by about $31 billion -- 8 percent, more than the total funding in the FY 2008 versions of the spending bills.

Senate Democrats need to find several moderate Republican votes to reach the 60 votes needed to avoid a Republican filibuster of the appropriations measure. Senate Republican Leader Mitch McConnell (R-KY) said his colleagues want to "shrink the overall size of the pie."

Background -- Last year's FY 2009 appropriations process was one of the worst on record. Only one FY 2009 appropriations bill made it to the House Floor.

There were two reasons for the serious disruption of the regular appropriations process. First, President Bush threatened to veto any appropriations bills that exceeded his requests, and Democrats--as reflected in the Budget Resolution--called for nearly $25 billion more than the President requested. Second, House Republicans attempted to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats.

Consequently, in late September, Congress enacted a stopgap measure to keep Federal programs operating. The stopgap measure: 

• included detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs (based upon provisions informally negotiated by House and Senate Appropriators); and

• included stopgap funding through March 6, 2009 for all other departments and agencies of government at FY 2008 levels.

Impending $76 Billion War Supplemental:  The Administration will send to Congress, within the next few weeks, a $76 billion war supplemental for the remainder of FY 2009.  This would bring total war spending for the current fiscal year up to $143 billion.

Link to March 11 Short-Term Continuing Resolution

Legislative Text and Joint Explanatory Statement of FY 2009 Omnibus Appropriations   

Link to late September Continuing Resolution

 

With rollout of the President's Budget and last week's White House Summit on Health Reform, a major push to (1) expand health coverage and (2) reduce the rapid growth of health care costs is under way. 

Reducing the rapid rate of growth in health care costs is a fiscal policy imperative. Rapid cost growth is dramatically boosting government spending on Medicare, Medicaid, Veterans Health Care, TRICARE coverage for military families, and the Children's Health Insurance Program (SCHIP). 

The rapidly rising costs of these programs -- especially Medicare and Medicaid -- has led to broad agreement among our nation's top economic officials that the United States is currently on a perilous fiscal path that threatens the long-term stability of the U.S. economy.

Earlier this year, Peter Orszag -- current OMB Director and former CBO Director -- warned the Senate Budget Committee  that "over the long term, the federal budget is on an unsustainable path....the principal driver of our long-term deficits is rising health care costs....If costs per enrollee in our two main federal health programs, Medicare and Medicaid, grow at the same rate as they have for the past 40 years, those two programs will increase from about five percent of GDP to 20 percent by 2050. That's roughly the entire size of the federal government today."

Treasury Secretary Geithner has emphasized that rapidly rising U.S. health care costs harm competitiveness in the global market.  Health costs in 2009 are projected to consume 17.6% of the U.S. economy (GDP), nearly double spending in other mature (OECD) economies.  (Organization for Economic Cooperation and Development)

To begin the health reform process, President Obama's budget proposes to spend at least $634 billion over 10 years on health care reform aimed at making health coverage affordable, researching comparative effectivness of treatments, investing in prevention and wellness, and improving quality of care. The initiatives would be contingent on securing funding from: (1) placing a 28% cap on the tax deductions that upper-income earners can claim; and (2) making $316 billion in reforms to Medicare and Medicaid. 

Politically, health care reform will be a heavy lift. The Washington Post reports that opposition to details of the Administration plan have already emerged: strong opposition has emerged to the proposal to cap itemized deductions for upper income earners; AARP opposes raising Medicare prescription premiums on wealthy retirees; major insurers oppose switching the Medicare Advantage program (which markets managed-care plans to seniors) to a competitive bidding process; and home health care providers object to cuts in their Medicare reimbursements.

On limiting itemized deductions, the Administration has asserted it would impact only 1 percent of taxpayers and would have only a modest negative impact on charitable giving.

Tentative Schedule:  According to Congress Daily, Senate Finance Chairman Max Baucus (D-MT) is aiming for a June mark-up of health reform legislation in close coordination with HELP Committee Chairman Edward Kennedy (D-MA). The two chairmen are aiming for their respective committees to produce one comprehensive bill. 

New White House Health Reform Website

White House Health Care Summit

On Feb. 26, 2009 President Obama released a general outline of his FY 2010 budget (with further details to be released in April). The budget plan covers the next 10 fiscal years. Following are highlights of the budget plan:

• Overview:  The budget includes deficit reduction from reducing war costs; allowing tax cuts for high income earners to expire; closing corporate "loopholes"; undertaking program integrity initiatives; and eliminating non-performing programs. At the same time, the budget proposes to invest heavily in health care, energy, and education initiatives. 

• Rosy Scenario?  In view of last week's bleak economic news (8.1% unemployment rate and the continuing decline of the stock market) the Administration's projection of 3.2% growth in real GDP in 2010 is increasingly unrealistic.  This may force the Administration to revise their budget projections when budget details are released in early April.

• Halving the Deficit: Based on the  projections of 3.2% growth next year, the proposed budget estimates that projected deficits would be "cut in half" over the next four years from more than a trillion dollars at the start of the Administration to $533 billion by FY 2013.  At that level, the deficit would be equivalent to 3% of GDP.  

• Tax Proposals: 

• For taxpayers with incomes over $250,000, the Bush tax cuts would be allowed to expire. The top rate would jump from 35% to 39.6%; the tax on capital gains would jump from 15% to 20%, and the tax on estates worth more than $3.5 million would be taxed at the current rate of 45%. Also, the earnings of hedge fund managers would be taxed as normal income, rather than the lower 15% capital gains rate. These provisions would generate more than $600 billion in revenues over 10 years. 

• For all other taxpayers, the budget would extend the Bush tax cuts--including the 10, 15, 25, and 28 percent brackets, the child tax credit, and marriage penalty relief--at a cost of more than $2 trillion over 10 years. The budget would also make permanent the stimulus bill's annual $800 per family tax cut at a cost of $526 billion over 10 years (paid for by new "cap & trade" revenues -- see below).

• Health Care Reform: The budget proposes to spend at least $634 billion over 10 years on health care reform aimed at controlling costs and expanding coverage.  Health reform would be contingent on securing funding from: (1) placing a 28% cap on the tax deductions that upper-income earners can claim (instead of the current 35%); and (2) making $316 billion in reforms to Medicare and Medicaid.

• Defense Spending:  For the FY 2010 defense budget (excluding war costs), the budget proposes a 4% increase over FY 2009 levels.
• Veterans:  The budget proposes to increase VA funding by $25 billion over the next 5 years.  

• Global Warming and Investments in Renewable Energy: The Obama Administration proposes selling carbon emission allowances through auction as part of a "cap-and-trade" system to cut greenhouse gases dramatically by 2050.  Sale of the emission allowances (estimated at $646 billion over 10 years) would be used to pay for $15 billion per year in renewable energy investments and offsetting the cost of making the stimulus bill's middle class tax cuts permanent (the theory being that the tax cuts will help to offset price increases resulting from higher utility costs).  At the same time, many in Congress are seriously considering a more simple "carbon tax" as an alternative to the more complex "cap-and-trade" proposal.

• Education:  The Budget would make Pell grants (for college) an entitlement and would increase and expand maximum awards, spending $117 billion over 10 years. This would be partially offset by originating all new student loans in the Direct Loan program, thus eliminating bank subsidies.

• TARP/Financial Stabilization:  The budget includes a $250 billion "placeholder" for further efforts to infuse capital into shaky banks.

• Federal Employees: The budget would impose a 2% cap on civilian pay raises and a 2.9% cap on military pay raises.

• A Return to Honest Budgeting? 
  
  On the positive side: (1) the budget includes war funding for FY 2010 and beyond (as opposed to recent practices of funding the war in later supplemental bills); (2) the budget no longer assumes drastic reductions in Medicare payments to physicians (that are technically required by a 1997 law but have not been allowed to take effect in recent years); (3) the budget baseline assumes funding for disaster assistance; (4) the budget no longer assumes phony revenues from letting the Alternative Minimum Tax (AMT) extend to middle income Americans (which Congress never permits); (5) the budget includes permanent funding for the R&D tax credit (as opposed to the previous practice of assuming expiration); and (6) the budget proposes to re-enact the PAYGO law that established fiscal discipline in the 1990s (after making the baseline adjustments called for in this budget).

On the negative side: (1) the budget assumes economic growth of 3.2% next year, far higher than the Blue Chip estimates; (2) the budget assumes that FY 2008 war funding levels continue indefinitely and then claims major "budget savings" by proposing war funding of only $50 billion for 2011 and thereafter; (3) the budget claims savings from letting the Bush tax cuts for high income earners expire, even though that is current law; and (4) the budget avoids paying for extension of the remaining Bush tax cuts and the AMT fix by "assuming" them as part of the budget baseline. 

Link to President's Budget

Link to House Democratic Analysis

Link to House Republican Analysis

Link to Senate Democratic Analysis

Link to Senate Republican Analysis

Concord Coalition Statement on President Obama's Budget