July 28, 2014

Washington Budget Report: Sep. 8, 2010

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CBO’s Projections on Federal Budget and Economic Growth Are A Helpful Antidote to Misleading Campaign Rhetoric

With the federal deficit and related fiscal problems on center stage in this year’s congressional campaigns, the latest update on the Budget and Economic Outlook from the Congressional Budget Office deserves particular scrutiny. That report has thrown sand into the political gears of both parties as they develop their fiscal policy arguments for voters.

Based on the non-partisan CBO’s analysis, permanent deficit-financed tax cuts are not as painless for the long-term health of the economy as many in both parties seem to assume. And there is no basis for campaign rhetoric saying that this year’s health care reform “saved” Medicare for many years, or that Social Security poses no budgetary challenge.

The report also cuts against the political winds by indicating that spending increases for economic stimulus, unemployment compensation and the Troubled Asset Relief Program (TARP) have supported the economy while not adding significantly to the long-term structural deficit.

The problem is that spending – primarily for automatic increases in health care and retirement benefits -- is projected to grow faster than revenues and the economy in the coming decades. This leads to a growing gap that must be filled by borrowing.

Candidates thus face some difficult choices that are not often acknowledged on the campaign trail but that will have to be confronted by whoever wins.

On balance, CBO’s August Update confirms that all policy options – spending cuts and tax increases – should remain on the table in discussing potential solutions to our nation’s structural deficit. Economic growth alone will not be enough to achieve a sustainable fiscal policy, nor will trimming everyone’s favorite target – waste, fraud and abuse. Campaign rhetoric that suggests otherwise is not supported by the facts.

Effective Tax Reform Will Take Better Thinking and More Open Discussion of the Options

The administration, worried about Democratic election prospects, is considering a new set of tax cuts to stimulate the economy. But Diane Lim Rogers, Concord’s chief economist, argues that the administration’s ideas are neither new nor particularly well thought-out. While the economy may need some additional temporary help, she says there is no justification for deficit-financing permanent tax cuts.

In a new blog, Rogers also argues that any extension of the Bush tax cuts should be weighed against other options to help the economy – not simply given a free pass, as many policymakers in both parties seem to favor. And Rogers objects to the restrictions placed on the President’s Economic Recovery Advisory Board – restrictions that doomed its new report on tax reform options to be a “boring disappointment.”

Her recommendations for effective tax reform: Raise more revenue to help deal with the expanding requirements of an aging population, broaden the income tax base by ending many loopholes, and consider placing more of the tax burden on things other than income.

Congress Warned to Heed Fiscal Commission's Recommendations

How Congress reacts to the recommendations later this year from President Obama’s bipartisan fiscal commission will be important for the credit standing of the United States, according to John Chambers, an official with Standard & Poor’s.

“It is very important for Congress to take the required steps,” Chambers said in a Dow Jones Newswires interview late last month.

The National Commission on Fiscal Responsibility and Reform faces a deadline of Dec. 1 for making its recommendations. Support from at least 14 of the 18 commission members is required for any recommendation, a high hurdle. And many in Washington question whether Congress would approve recommendations that would involve tax increases or significant cuts in popular programs like Medicare.

But Chambers’ warning is a reminder that investors in the United States and around the world may have higher expectations for immediate results from the commission process than do many lawmakers. That is something that commission members and lawmakers alike should keep in mind.

New National Tour Will Encourage Public Discussion of Possible Solutions to U.S. Fiscal and Economic Challenges

The Concord Coalition and The Peter G. Peterson Foundation are launching a "Fiscal Solutions Tour" this week to foster informed public dialogue about possible answers to the nation's fiscal and economic challenges.

The tour will visit six cities around the country this fall. At public forums in each city, public policy experts will offer diverse perspectives on options for defense and domestic spending cuts, Social Security and Medicare reforms, improvements in the health care system, better tax policies and tougher budget controls in Congress.

The experts will include Robert L. Bixby, Concord's executive director; David M. Walker, president and CEO of the Peterson Foundation; Douglas Holtz-Eakin, president of The American Action Forum; Bill Novelli, a professor at Georgetown University, and Isabel Sawhill, senior fellow, Economic Studies, at the Brookings Institution.

Additional information about the tour is being released today at a press briefing in Washington and at concordcoalition.org.

Debits & Credits

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