July 28, 2014

Washington Budget Report: Jan. 11, 2011

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New House Rules Will Clear Path for New Deficits

Last week the House adopted budget enforcement rules that restrict spending but exempt tax cuts. Included are rules that weaken PAYGO by excluding revenues, allow reconciliation to be used for deficit-financed tax cuts, permit the chairman of the Budget Committee to unilaterally impose budget allocations, and establish spending reduction accounts in appropriations bills.

Spending restraint is certainly important. But the House approach of ignoring the budgetary effects of tax cuts is fiscally irresponsible and abandons the Pay-As-You-Go (PAYGO) principles that were successful in the 1990s. Several fiscal commissions have recommended a wide range of options for reducing budget deficits, saying that everything should be on the table. The House should heed this advice and pay for any proposal that would significantly add to deficits over the long term.

If You Think Debt is Expensive, Just Try Default

Secretary of the Treasury Timothy Geithner has warned Congress that the statutory debt limit could be reached by the end of March.  As of last week, total debt outstanding that is subject to the limit was $13.95 trillion, approximately $335 billion below the limit.

Increasing the debt limit is necessary to maintain the full faith and credit of the U.S. government. Delaying action and risking default would be irresponsible and could negatively impact financial markets.

However, the need to raise the limit provides an opportunity to assess past decisions; the debate over the last increase prompted President Obama to create a bipartisan fiscal commission. He and Congress should use the current situation to develop a realistic plan to put the country on a sustainable fiscal path.

Why Medicare Is So Popular -- and Needs Reform

Recent calculations by Gene Steuerle and Stephanie Rennane at the Urban Institute underscore Medicare’s financial challenges and the need to curb its growing costs. The new numbers show the relationships between what people of different ages and incomes pay into Medicare and Social Security and what they are scheduled to receive from them.

Current and future retirees who earn average or above-average wages are scheduled to receive slightly less in cash benefits from Social Security than they paid in taxes. But with Medicare, Steuerle and Rennane concluded that “past and current retirees, and most working age adults, will never pay for all of their benefits."

This is because Medicare payroll taxes and premiums cover only 51 to 58 percent of total Medicare expenditures over time. With the oldest baby boomers starting to sign up for Medicare in large numbers, elected officials must focus on reforms that can make this important program sustainable in the decades ahead.

Pentagon Can't Be AWOL in Deficit Battle

Citing the country’s “extreme fiscal duress,” Defense Secretary Robert Gates last week said the administration would cut $78 billion from its five-year defense plan. The Pentagon budget would still continue to grow above inflation for the next three years, however.

Gates said plans call for the Army to be reduced by 27,000 active-duty troops, starting in 2015. The Marine Corp would decline by 15,000 to 20,000 troops. Gates also reiterated his earlier calls for reforms and greater efficiencies in military spending, a wide-ranging effort that deserves more congressional support.

Given the enormous growth in defense spending since 2001, it is reasonable to expect the Pentagon – like the rest of the government -- to find significant savings in the years ahead.

Unfair Burdens on the Young

Although older Americans often talk about wanting a bright future for their children and grandchildren, irresponsible fiscal policies continue to dim that future year after year. High government debt and unsustainable benefit programs threaten to burden tomorrow’s citizens with extremely high tax rates – and far fewer government services.

Temporary deficits may be justified by difficult economic times. But we have a moral obligation to younger Americans and subsequent generations to develop credible plans to start paying our own way. Thanks to recent recommendations from bipartisan panels, elected officials have a wide range of possible solutions to consider.