October 20, 2014

Mid-Session Review Amid Little Progress on the Budget

The Obama Administration released its Mid-Session Review (MSR) of the budget on Monday. It would be nice to say that this update arrived just in time to clinch the deal on a fiscal sustainability plan, or even a plan to get through the rest of the year, but sadly that is not the case.

There are no apparent negotiations going on between the House and Senate to work out their differences over next year's spending levels, let alone any broader deal involving the President. Certain mechanical functions are grinding forward, such as the release of the MSR and approval of a few appropriations bills, but these are disjointed efforts with no attempt at coordination.

We no longer have "regular order" so much as we have regular chaos. A tacit decision seems to have been made to take no action on the budget until a crisis is at hand, which is not likely to occur until the end of the fiscal year on Sept. 30.  And even then, the "fix" might be to simply push things forward just enough to reach the next crisis point – raising the debt ceiling - later in the fall.

Within that context, the MSR means little. Still, it is useful to have the administration reiterate its most recent proposals with updated numbers.

The marquee number shows the deficit shrinking this year to $759 billion (4.7 percent of GDP), a substantial improvement from the $973 (6 percent of GDP) deficit projected in the budget submitted to Congress in April.

Lower spending ($149 billion) and higher revenues ($65 billion) each contributed to the $214 billion improvement, but not because of any recent legislative activity. Nearly half of the "lower spending" is the result of Fannie Mae and Freddie Mac dividend payments ($71 billion), which are treated as "negative outlays" in the budget. Another $43 billion is the result of sequestration, which the April budget assumed would be delayed or replaced.

Over the next 10 years, however, the MSR shows a worsening of the deficit and provides little cause to believe that our fiscal challenges are behind us. In fact, the 10-year deficit projection has grown to $5.8 trillion -- up from $5.3 trillion -- with higher deficits each year compared to the April budget.

While the overall changes are modest, they trend in the wrong direction, particularly towards the end of the 10-year window. Much of the negative change comes from lower revenue projections due to dampened expectations for economic growth. On the outlay side, higher projected Medicaid spending was the biggest revision.

According to the MSR, the President's policies, if enacted, would stabilize the debt-to-GDP ratio at around 75 percent through a mix of tax increases and spending cuts. However, more would certainly need to be done to keep the debt from rising again beyond the 10-year budget window.

There is no need, however, to over-analyze the President's budget or the budgets adopted by the House and Senate. If no negotiations are to occur -- as through "regular order" on a budget resolution -- and if the consensus is to wait for the inevitable crisis in the fall, then the MSR and the congressional budgets documents are good as talking points, nothing more.