|CONCORD COALITION URGES LAWMAKERS TO COUPLE ECONOMIC STIMULUS WITH LONG-TERM FISCAL RESTRAINT||CBO's BUDGET & ECONOMIC OUTLOOK: FY 2009 - 2019||EARMARK REFORMS||Budget Timetable|
This is a special edition of the Washington Budget Report including a Concord Coalition press release and analysis of the Congressional Budget Office Budget and Economic Outlook released earlier today.
Budget Process: Step-by-Step
CONCORD COALITION URGES LAWMAKERS TO COUPLE ECONOMIC STIMULUS WITH LONG-TERM FISCAL RESTRAINT
PRINT PRESS RELEASE
FOR IMMEDIATE RELEASE: Wednesday, January 7, 2009
CONTACT: Jonathan DeWald (703) 894-6222
WASHINGTON -- The Concord Coalition today urged lawmakers to take note of the first ever annual deficit projected to exceed $1 trillion and a post World War II high of 8.3 percent of GDP, and take steps to prevent deficits of this magnitude from becoming the norm. Concord warned that any attempt at economic stimulus must be coupled with steps to improve the nation’s longer term fiscal outlook. Concord also updated its “plausible baseline” reflecting reasonable adjustments to the new Congressional Budget Office outlook which now shows a 10-year deficit of $10.3 trillion.
"While much attention will be paid in the coming weeks to the size and contents of a fiscal stimulus plan, it will be important for policymakers to keep in mind the bigger picture presented by the Congressional Budget Office. The budget outlook over the coming years demonstrates the extent of fiscal weakness this country faces as it heads into the baby boomers’ retirement years. This weakness will make it even more difficult, yet more important to address our projected long-term fiscal imbalance,” said Robert L. Bixby, executive director of The Concord Coalition.
“The biggest factor missing from CBO’s recent baseline is the implication of an economic stimulus. While many economists acknowledge the merits of a stimulus for the next two fiscal years, what must be avoided is a costly bargaining process in which support for proposals with dubious bang for the buck and potential long-term costs is exchanged between Democrats and Republicans in the name of ‘getting something done.’ As the size of the expected package rises this risk will increase. In an atmosphere of crisis, attention can easily be diverted from the need for long-term fiscal discipline,” said Bixby.
The CBO report shows that the economic slowdown has led to a 19 percent increase in outlays for fiscal year 2009 from last fiscal year, and an almost 7 percent decrease in tax receipts. Relative to CBO’s previous forecast (September 2008), the revisions to the economic outlook account for a more than $2 trillion decrease in revenues over the 10-year budget window. That is a figure larger than the original ten-year legislative cost of the 2001 and 2003 tax cuts, and does not account for extending any of them, does not account for continued relief from the Alternative Minimum Tax (AMT), and does not include any new tax cuts that might be enacted in the next stimulus package.
“The CBO report is startling in highlighting how much conditions have deteriorated and how dependent our fiscal outlook is on the strength or weakness of our economy. It demonstrates that our current tax system is already inadequate as a revenue source even before considering extended and new tax cuts, especially in the face of short-term spending needs and long-term entitlement pressures,” said Diane Lim Rogers, chief economist of The Concord Coalition.
The current economic weakness has led to a decline in interest rates, providing the federal government with an opportunity to finance new borrowing at lower initial cost. Over time, however, the huge buildup in debt combined with rising interest rates will bring interest payments on the national debt up to around three-quarters of a trillion dollars ($772 billion in 2019), or 3.5 percent of GDP, under Concord’s plausible baseline.
The Concord Coalition's baseline scenario uses alternative assumptions contained in the CBO report. It reflects more plausible policies based on recent trends. Our baseline assumes:
- Appropriations rise at the same rate as economic growth (GDP), not inflation
- Funding for operations in Iraq and Afghanistan will slow gradually
- All expiring tax provisions are made permanent
- Relief from the Alternative Minimum Tax (AMT) is extended
For more on the Concord Coalition plausible baseline, visit: http://www.concordcoalition.org/learn/budget/concord-coalition-plausible-baseline
The Concord Coalition is a nonpartisan, grassroots organization dedicated to balanced federal budgets and generationally responsible fiscal policy. Former U.S. Senators Warren Rudman (R-NH) and Bob Kerrey (D-NE) serve as Concord's co-chairs and former Secretary of Commerce Peter Peterson serves as president.
CBO's BUDGET & ECONOMIC OUTLOOK: FY 2009 - 2019
Today, the Congressional Budget Office released its annual report, The Budget and Economic Outlook: Fiscal Years 2009 to 2019. Following are highlights:
- The deficit for the current fiscal year, FY 2009, is projected to be nearly $1.2 trillion (for this year alone) due to the drop in revenues and increase in spending (on unemployment insurance and food stamps) that typically accompany a recession, as well as Treasury borrowing to pay for actions to battle the credit crunch.
- The $1.2 trillion projection does not include the FY '09 costs of a stimulus package. Therefore the actual FY '09 deficit will be much higher than $1.2 trillion.
- By comparison, the FY '08 deficit was $455 billion.
- The projected '09 deficit, at 8.3 percent of GDP--and higher when the stimulus package is included--will be the largest since WWII.
- The deficit projection includes about $200 billion resulting from the operations of Fannie Mae and Freddie Mac, which were seized by the federal government last September.
- Federal revenues for FY 2009 are projected to decline by $166 billion due to the recession.
- On the economic outlook, CBO said "the sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the U.S. into a recession that will probably be the longest and the deepest since World War II." (emphasis added)
- Based on policies currently in place (i.e. without enactment of a stimulus package) CBO predicted the recession will last into the second half of 2009, with GDP (gross domestic product) falling by 2.2%and an unemployment rate that will exceed 9% early in 2010.
- More bad news on the housing front: CBO projects an additional 14% drop in the national average price of a home between the 3rd quarter of 2008 and the second quarter of 2010.
- On the credit crunch, CBO said it is "too early to determine whether the government's actions to date have been sufficient to put the system on a path to recover." CBO also cautioned that "it will take time for financial institutions to recover from losses due to loan defaults. As a result, borrowers will continue to find the terms and availabiltiy of credit tight...dampening economic activity for several years."
- Slow Recovery: CBO projects a slow recovery due to continuing tight credit; the excess supply of vacant houses which will suppress a rebound in housing constructions; less consumer spending due to sharp reductions in households' net worth; and weak demand abroad for U.S. exports.
- Entitlement Growth: Over the longer term, rapid growth in entitlement programs (Medicare, Medicaid, and Social Security) will continue to drive deficits higher with mandatory spending increasing from 11.2% of GDP in FY 2008 to 13% of GDP by FY 2019.
- Long-Term Deficits: CBO's long-term projections show a declining deficit over the next decade because CBO assumes, consistent with traditional scoring methodologies, that the 2001 and 2003 Bush tax cuts will expire, as scheduled, at the end of 2010. In reality, the Obama Administration has said it will call for permanent middle class tax cuts as well as business tax cuts to stimulate economic recovery -- all without budgetary offsets. Therefore, CBO's 10-year revenue projections are unrealistically high and its deficit projections are unrealistically low.
On January 6th, House Appropriations Chairman Dave Obey (D-WI) and incoming Senate Appropriations Chairman Daniel Inouye (D-HI) announced new earmark reforms:
- Posting requests online: Members will be required to post their earmark requests on their websites at the time the request is made (typically March and April);
- Committee disclosure: Earmark lists will be made publicly available the same day as the Appropriations Subcommittees report their bills; and
- Reducing earmarks: Earmarks will be held below 1% of discretionary spending ($10 billion) beginning in 2011.
Cautionary note: While we, of course, support more transparency with respect to earmarks, it is important to understand that earmarks are not the key factor in controlling the exploding public debt. Earmarks are less than 1% of the Federal budget. Moreover, earmarks generally relate to who makes spending decisions--Executive Branch or Congress--not how much is spent.
The key factors in the growth of the public debt are the rapid and unsustainable growth of Medicare, Medicaid, and Social Security (due to rising health care costs, retirement of the boomers, and increasing longevity), as well as erosion of the revenue base.
Jan. 7: CBO releases annual budget and economic outlook (for fiscal years FY 2009 - 2019)
Jan 20: Presidential Inauguration.
Late Jan / Feb: Enactment of economic stimulus bill
Late Jan / Feb: Enactment of remaining FY 2009 appropriations
March 6: Funding for much of the Federal Government expires under the terms of the current continuing resolution (see article below)
March 31: SCHIP runs out of federal funds (State Children's Health Insurance Program)
March/April: President Obama to transmit FY 2010 budget proposal to Congress
April/May: Congressional action on a 5-year or 10-year Budget Resolution
May-September: Congressional action on a Budget Reconciliation bill (if called for by the Budget Resolution)
Ongoing: Measures to stabilize financial, housing, and auto sectors