Welcome to the Concord Coalition's weekly Washington Budget Report: a nonpartisan plain English summary of key budget, appropriations, and tax developments.
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Budget Process: Step-by-Step
Track 1- Economic Stimulus:
Track 2 - Completion of '09 Appropriations:
- March 11: President signed omnibus appropriations bill funding agencies through the rest of FY09
- April 9: President transmitted an $83 billion FY 2009 supplemental request to Congress
Track 3 - FY 2010 Budget:
- February 26: President Obama transmitted a budget outline.
- March 13: Congressional committees transmitted "views and estimates" on the FY 2010 budget to their respective Budget Committees.
- March 20: CBO released its Preliminary Analysis of the President's FY 2010 budget (using CBO economic projections)
- March 25-26: House Budget Comm and Senate Budget Comm marked-up their respective versions of the FY 2010 Congressional Budget Resolution.
- April 2: House (H.Con.Res.85) and Senate (S.Con.Res. 13) passed their respective versions of the FY 2010 Budget Resolution.
- Week of April 20: House-Senate conference on Budget Resolution.
- Early May: President to transmit FY 2010 budget details
- Note on Appropriations timing: Action on appropriations bills will not begin until after Congress receives the President's budget details
- May-Sept: Action on FY 2010 appropriations bills and budget reconciliation bill(s) (if called for by the Budget Resolution).
Track 4 - Stabilizing the Financial, Housing, and Auto Sectors (Ongoing)
- Concord's Financial Crisis Timeline
- Feb. 10: Treasury released Financial Stability Plan.
- Feb. 18: President announced Homeowner Affordability and Stability Plan
- Feb. 26: President released 2010 budget including a $250 billion contingent reserve for additional financial stabilization
- March 3: Treasury and Fed announced launch of TALF to boost consumer, small business credit
- March 18: Fed announced plan to pump $1.15 trillion into financial markets
- March 23: Treasury announced plan to purchase "toxic assets"
- March 26: Treasury Secretary announced regulatory overhaul for financial industry
- March 5: White House Summit on Health Reform
- Sept 29: Tentative deadline for congressional committees to report health care reconciliation legislation (assuming the reconciliation instructions proposed by the House are in the conference report on the budget resolution)
- March 31: House Energy & Commerce Chairman Waxman (D-CA) released a discussion draft of a climate-energy bill, although it remains unclear if Ways & Means Democrats will back Waxman's cap & trade approach or prefer an emissions tax.
- April 27: Target date for markup of legislation in House Energy & Environment Subcommittee
- Senate Democrats are currently stalled in their efforts to find 60 votes for a climate-energy bill, although Majority Leader Reid is hoping to bring a bill to the Floor by summer.
Health Care Reform: Will Conferees Opt for Filibuster-proof "Reconciliation"?
The President's Budget calls for comprehensive health care reform to rein in skyrocketing health care costs and cover the uninsured. Specifically: a $634 billion downpayment on health care reform, funded by $316 billion in Medicare and Medicaid reforms, and $318 billion in new revenues from limiting tax deductions for upper income earners.
The House- and Senate-passed budget resolutions call for health care reform as a general proposition, and commit to offsetting the full costs of health care reform, but don't address details.
The Senate-passed resolution requires that health care reform be "deficit neutral" over the next 11 years, that is, total new spending on health care over the 11-year period must be offset by spending cuts and/or tax increases over that period. This type of mechanism is known as a "reserve fund." It does not require action, but provides a budgetary placeholder that allows spending and revenue levels to be adjusted at a later time to accommodate a new deficit-neutral program. (Important note: Typically, reserve funds would require legislation to be deficit neutral over 6 years and over 11 years. The Senate's health care reserve fund requires offsets, but only over the entire 11-year period, recognizing that health care reform is likely to have a net cost up front, with savings not accumulating until later years.)
A key difference between the House and Senate budget plans is that the House-passed plan would allow for use of the filibuster-proof "budget reconciliation" process to facilitate passage of health care reform. The Senate resolution would not use reconciliation, and health care reform would therefore be susceptible to a filibuster -- with 60 votes being required to overcome a filibuster.
The key strategic question of whether reconciliation will be used to expedite health care reform will be decided during a House-Senate conference committee on the budget resolution the week of April 20. As reported by Congressional Quarterly, House Speaker Nancy Pelosi (D-CA) said, "I believe it is absolutely essential that we come out of this year with substantial health care reform legislation. That is best secured by having reconciliation in the package."
Senate Majority Leader Harry Reid signaled openness to including reconciliation in the final budget resolution, saying "we're taking nothing off the table."
However, in a letter released prior to the Easter recess, the Senate's President Pro Tempore Robert C. Byrd (D-WVa) argued that the purpose of reconciliation is to "adjust revenue and spending levels in order to reduce deficits. It was not designed to create a new climate and energy regime, and certainly not to restructure the entire health care system."
However, as a point of history, the budget reconciliation process was used in 1997, 1999, 2000, 2001, 2003, and 2005 to reduce taxes (as opposed to deficit reduction). Some observers also argue that health care reform--if it includes spending restraints and squeezes inefficiencies out of the system--is integral to reigning in the rapid growth of health care costs which is a major driver of deficits.
The $2 Trillion Tax Cut and PAYGO
A major issue in the budget resolution conference has unfortunately escaped media attention.
The 2001 tax cuts are currently scheduled to expire at the end of 2010. Both the House- and Senate-passed budget resolutions assume enactment of legislation extending the 2001 tax cuts (excluding taxpayers earning over $250,000 per year).
The cost of extending the tax cuts (without offsets) is more than $2 trillion over 10 years -- revenue losses that would erode the revenue base and seriously exacerbate the already precarious fiscal position of the U.S.
A major issue before the House and Senate budget conferees is how the PAYGO rule will apply to the tax cut extension.
In the Senate, legislation to extend the tax cuts (without offsets) would violate the PAYGO requirement that new tax cuts be offset with tax increases or spending cuts. The Senate would therefore have to muster 60 votes to waive the PAYGO rule before passing a permanent tax cut extension. However, given widespread bipartisan support for extending the tax cuts, there is little doubt that the Senate could easily waive the PAYGO rule for that purpose.
However, a more fiscally responsible approach would sunset a tax cut extension after the recession has run its course.
Unlike the Senate, where the members will have to vote to waive PAYGO, the House-passed budget resolution would establish a mechanism to avoid such a vote. The House budget resolution, in section 401, would assume extension of the tax cuts in the baseline (or budgetary starting point). Consequently, enactment of the tax cut extension would not be considered a new reduction in taxes. However, this baseline mechanism is made contingent on legislation that re-enacts "statutory PAYGO." (Statutory PAYGO is the stronger, self-enforcing PAYGO mechanism in place in the 1990s).
The irony is that in securing re-enactment of statutory PAYGO the House would be accepting a major violation of the PAYGO principle requiring that new tax cuts be offset.
(Update: Prior to the Easter recess, Senate Finance Committee Chairman Max Baucus (D-MT) introduced legislation that would permanently extend most of the 2001 tax cuts. Baucus press release)
Defense: $83 billion Defense Supp; Sec. Gates Proposes Major Shifts
FY 2009 Defense Supplemental Request: On April 9, 2008, the Administration submitted to Congress an $83 billion FY 2009 Supplemental Appropriations request, including $75 billion for operations in Iraq and Afghanistan. The large request was necessary because the outgoing Bush Administration had requested only partial war funding for FY 2009 in their final defense budget. The supplemental would bring total war spending for FY 2009 to $141 billion.
In addition to war funding, the supplemental also requests funds for international affairs, nuclear non-proliferation, Dept of Justice anti-terrorism efforts, wildfire suppression, and Capitol Police.
Gates Proposes Major Changes in Defense: During Congress' Easter recess, Secretary of Defense Robert Gates released proposals for a major shift in defense spending. In general, Secretary Gates proposed scaling back some major weapons systems originally conceived during the Cold War, while putting a new emphasis on counterinsurgency training and troop support.
- Figher planes: cease production of F-22 and continue development of F-35 Joint Strike Fighter
- C-17 cargo plane: cease production with completion of the 205 either built or on order
- VH-71 Presidential Helicopters: end the program for 28 redesigned Marine Ones
- Army's Future Combat Systems: cancel the vehicle segment
- Missile Defense:cancel 2d Airborne Laser plane and increase funding for short-range defenses
- Next generation bomber: place development on hold
- Special ops forces: add 2,800 to the force and buy new specialized aircraft
- Helicopters: recruit and train new Army crews to meet high demand in Afghanistan
- Buy more surveillance and reconnaissance equipment including Predator and Reaper drones to support operations in Iraq and Afghanistan
Impending Fight over Plan to Change Student Lending
The President's FY 2010 Budget proposes to eliminate the federal guaranteed student loan program, and instead expand the Direct Loan program, thus saving $94 billion. (According to CBO, "under the Federal Credit Reform Act, the budgetary cost of direct loans and guaranteed loans reflects the total cash flows over the life of each loan....(T)he direct loan program is estimated to have a lower cost for each dollar loaned than does the guaranteed loan program.")
The $94 billion in 10-year budgetary savings that would result from originating all student loans in the Direct Loan program would pay for an expansion of the Pell Grant program for low-income students. Each Pell grant would increase by $200 to $5,550 for 2010 and thereafter the amounts would be automatically adjusted for inflation (by making the program an entitlement -- that is, not subject to annual appropriations decisions).
The Obama Administration proposal has ignited opposition on two fronts. Congressional appropriators resist the move to make student loans a "mandatory program" with automatic cost-of-living adjustments that circumvent annual discretionary spending decisions by the Appropriations Committees.
And the private loan industry is gearing up strong opposition to shifting student loan origination away from private banks, over to the Department of Education.
Social Security Deficit
As previously reported by WBR, there is broad agreement among our nation's top economic officials that the U.S. is currently on a perilous long-term fiscal path -- a path leading to unsustainable levels of Federal debt that the threaten the long-term stability of the U.S. economy.
In addition to rapidly rising health care costs, another major contributing factor is the retirement of the Baby Boomer generation, which began in 2008. With the retirement of the boomers, outlays for Medicare, Medicaid, and Social Security will rapidly increase.
Prior to the current recession, the Congressional Budget Office (CBO) had projected that, in the next decade, the retirement of the boomers would cause Social security to begin paying out in benefits more than it takes in through payroll taxes.
Due to the current economic downturn, CBO now projects that Social Security will run a cash deficit this year -- fiscal year 2009. CBO estimated in March that Social Security benefits in 2009 will amount to $659 billion -- more than the estimated payroll tax receipts of $653 billion. The last time the program ran a cash deficit was 1984. CBO Fact Sheet
The cash deficit does not have any specific ramifications. Benefit levels are set by a statutory formula that is not tied to the program's bottom line. Nevertheless, the estimated cash deficit this year means that Social Security will begin increasing the nation's total deficit, and the situation will seriously worsen in the next and subsequent decades -- unless actions are taken to address the program's unfunded liability.