November 24, 2014

Washington Budget Report: May 3, 2011

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Evaluating Plans to Enforce Budget Discipline

Tomorrow the Senate Finance Committee is scheduled to hold a hearing on budget enforcement mechanisms, a topic that has become popular as members of both parties have recently offered proposals to reduce the deficit by changing the budget process.

The proposals have key differences, though each attempts to reduce the deficit by setting specific spending, revenue or deficit targets. The targets are enforced using some variation of a trigger or sequestration procedure requiring automatic spending cuts or revenue increases if the targets are missed.

Process proposals often appeal to politicians because they usually leave out the specifics of the politically difficult decisions necessary to meet the targets. As a means of actually reducing the deficit, such proposals have had a mixed track record because they have frequently been poorly designed and weakened with exemptions.

For a process proposal to have a meaningful effect on the deficit, it should limit exemptions, consider the entire federal budget to be on the table for deficit reduction, include realistic targets, and be accompanied by a bipartisan commitment both to enforce the targets and support the specific spending and revenue policies necessary to meet them.

Budget process reform is a useful starting point, but it is no substitute for these difficult policy choices.

Magical Thinking on Taxes

Broad tax reform could simplify the tax code, boost the country’s economy and help reduce deficits all at the same time. Yet many elected officials in both parties cling to positions that could get in the way of such reform.

Some Republicans insist that tax revenue should not climb above 18 percent or 19 percent of the economy, the average over the last 40 years. But this ignores the fact that the aging population and spiraling health care costs are dramatically increasing public demands on the federal budget.

President Obama, meanwhile, has led Democrats in resisting the idea of tax increases on middle class households -- despite the fact that even large tax increases on just the wealthy cannot close the huge projected deficits.

In holding to these positions, Democrats and Republicans are both working against some of their own policy goals.

Next Defense Secretary Calls For 'Hard Choices'

President Obama has turned to a well-known expert on the federal budget to run a Defense Department where the administration hopes to dramatically improve efficiency and reduce spending.

The President named Leon Panetta, who has been CIA director, to replace Robert Gates as secretary of defense. Noting Panetta’s previous service as director of the Office of Management and Budget in the Clinton administration, Obama said Panetta would “ensure that even as we make tough budget decisions, we’ll maintain our military superiority and keep our military the very best in the world.”

This should certainly be the goal for military leaders as well as elected officials. The President has called for $400 billion in national security spending reductions over the next 12 years. Panetta said Thursday that “hard choices” need to be made and that the Pentagon must be “strong and disciplined” in its spending.

That same day, the chairman of the Joint Chiefs of Staff, Adm. Mike Mullen, told a forum in Washington that the federal debt is “the biggest single threat to national security” because it could mean less money for defense in the future.

He acknowledged that the rapid growth of the military budget over the past decade, however, “hasn’t forced us to make the hard choices.”

Another Warning on Debt Limit

The administration has notified members of Congress that because they apparently will not raise the federal debt limit by May 16 – when the limit is expected to be reached -- the Treasury Department will begin implementing “extraordinary measures” to buy more time.

About a month ago, Treasury Secretary Tim Geithner estimated that such measures would enable his department to extend borrowing authority until about July 8. In a letter to congressional leaders on Monday, Geithner said stronger tax receipts had pushed the estimated date back to Aug. 2. But he still urged Congress to raise the debt limit soon.

The limit must be raised to avoid a government default, although Congress should use this "must pass" legislation as an opportunity to agree on procedural or substantive fiscal reforms. The longer lawmakers delay action, the greater the risk of turmoil in the financial markets triggered by investors' doubts about whether Washington will meet its financial obligations.

Geithner’s letter this week pointed out that under either the President’s proposed budget or the budget approved by House Republicans, the debt limit would need to be raised by roughly the same amount to fund the government through the next fiscal year.

Debits & Credits

An Encouraging Word: Ben Bernanke used part of his first press conference as chairman of the Federal Reserve to cheer bipartisan deficit-reduction efforts: "It is encouraging that we are seeing efforts on both sides of the aisle to think about this issue from a long-run perspective. It's not a problem that can be solved by making changes only for the next six months."

Should Have Tried Harder: Sen. Pat Roberts (R-Kan.) recently explained his uncertainty about supporting an increase in the debt limit now after voting to do so five times during the George W. Bush administration: “We really made an effort to get the debt down” in the Bush years. According to a new Washington Post analysis, policies from President Bush's two terms in office have actually added more than $7 trillion to the debt.