October 24, 2014

Washington Budget Report: Dec. 14, 2010

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Deficit Reduction Plan Should Follow Costly Tax Legislation

With Congress considering legislation to extend Bush-era tax cuts and continue unemployment benefits, The Concord Coalition warns that its high cost can only be justified if it is promptly followed by a substantial deficit-reduction plan. Such a plan could take effect as the economy recovers.

“With the impending expiration of tax cuts and emergency unemployment benefits having already run out,” Concord says in a new issue brief, “action must be taken on those items more swiftly than would be ideal, to prevent damage to the fragile economic recovery. However, there can still be conditions or commitments set along with this agreement that would pave the way for a fiscally prudent set of reforms.”

Concord praises the temporary nature of the proposed extension of the 2001 and 2003 tax cuts. But without tax reform, there will be strong political pressure in 2012 to simply enact another deficit-financed extension.

Shortly after President Obama announced a tentative deal on the tax cuts and unemployment benefits with Republicans last week, Concord called for elected officials to put a high priority on approving a comprehensive reform plan to make the tax code simpler, more fair and more efficient.

Concord also believes that fiscal responsibility will require substantial cuts in discretionary domestic spending, the defense budget and the big entitlement programs.

Compared to extending the Bush-era tax cuts, the bill's proposed “payroll tax holiday” next year, while it would also increase the deficit, offers more "bang for the buck" in stimulating the economy.

The High Price of Procrastination

Deficit hawks have long warned that unnecessary delays in deficit reduction carry risks and high costs that will only make the job harder down the road. A new study by the Congressional Budget Office (CBO) underscores that point. It analyzes the effects of waiting a decade – from 2015 to 2025 – to implement policies that would stabilize the federal debt relative to the economy.

CBO says the higher debt resulting from such a delay would:

  • Lower incomes by reducing the amount of savings devoted to productive capital. 
  • Increase interest payments by the government, which would mean that larger tax increases or spending cuts would eventually be necessary. 
  • Make it more difficult for policymakers to respond to financial crises, recessions, wars or other unexpected problems. 
  • Increase the likelihood of another fiscal crisis.

The Treasury Department and the CBO also recently released deficit numbers for the first two months of the 2011 fiscal year. Treasury put the deficit at $291 billion, only about $5.8 billion below last year’s level at this time. The CBO estimated the deficit so far this year at $283 billion.

With No Appropriations Bills Done, House Passes Full-Year Continuing Resolution

Last week the House voted 212-206 to pass a continuing resolution to fund federal agencies for the rest of the fiscal year.  According to the Appropriations Committee, the $1.1 trillion bill freezes discretionary spending at the FY 2010 level and provides $46 billion less than the President had requested.

Compared to 2010, the bill cuts funding for programs such as the census, defense base closures  and high-speed rail. It puts more money into areas such as nuclear weapons programs, Veterans Administration medical operations, Pell grants and Defense Department pay and health care.

This week the bill moves to the Senate, where Democrats have released a more comprehensive omnibus bill including all of the unfinished bills and some Republicans are considering amendments to shorten the House-passed continuing resolution. The current continuing resolution expires Saturday.

Also last week, House Republicans selected Rep. Harold Rogers of Kentucky to chair the Appropriations Committee during the 112th Congress.  Democrats chose Rep. Norm Dicks of Washington as their Ranking Member on the committee.

Medicare ‘Doc Fix’ Done -- Again

Congress has approved a one-year extension of Medicare payment rates for physicians, avoiding steep cuts that would otherwise have taken effect. Rather than finding a better long-term alternative to the current payment formula, lawmakers have repeatedly used stop-gap measures to prevent payment cuts. Last week’s extension — the fifth this year —will continue current rates through 2011 at an estimated cost of $14.9 billion.

Lawmakers offset the bill's total cost over ten years primarily by adjusting a provision in the health care reform law that requires consumers who receive health insurance subsidies to repay part of those subsidies if their reported income is found to be inaccurate. When the offsets and additional health provisions included in the bill are taken into account, the bill will increase deficits by $17 billion over five years.