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Washington Budget Report: Sep. 20, 2011

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Obama Sends Deficit Plan to Super Committee

President Obama offered his deficit-reduction recommendations to the congressional super committee on Monday, urging the panel to find both spending cuts and additional tax revenue to far exceed its assigned goal.

Obama put Medicare and Medicaid on the negotiating table, giving Democrats in Congress political cover to consider entitlement reform while putting pressure on Republicans to show more flexibility on taxes. Obama also urged lawmakers to press forward with long-term fiscal reforms even as they considered short-term initiatives to support the struggling economy.

While giving Obama credit for these constructive elements in his plan, Robert L. Bixby, executive director of The Concord Coalition, says in a blog posting that the administration’s proposals “fall short of comprehensive structural reform in health care and tax policy.” 

The administration estimates their plan would produce a net deficit reduction of more than $3 trillion over the next decade. Obama threatened to veto any bill that changes Medicare benefits "but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share."

While it is reasonable to suggest that the wealthy pay more than they have in recent years, Bixby writes, true tax reform would involve a much more comprehensive effort that would broaden the tax base, lower rates and significantly narrow the gap between government spending and revenue.

Last week the super committee received encouragement and solid advice from other members of Congress.  The Blue Dog Coalition in the House sent the committee a letter on Wednesday urging “a balanced, bipartisan solution” that would cut the deficit by $4 trillion over 10 years. More than 30 senators from both parties sounded a similar theme in a press conference Thursday.

The budget projections that the super committee uses as its starting point will be critical, as Congressional Budget Office Director Douglas Elmendorf’‘s testimony before the panel last week made clear. If it is assumed that Congress will extend tax cuts and a number of other policies that are scheduled to expire under current law, for example, Elmendorf said the panel would need to find not $1.2 trillion but $6.2 trillion in deficit reduction over 10 years to reach the same level of debt relative to GDP (61 percent).

CBO Predicts Lopsided Impact From Automatic Cuts

In a new report, the Congressional Budget Office (CBO) has estimated the automatic spending cuts that would occur if the super committee is unsuccessful. The committee has the goal of reducing the deficit by at least $1.5 trillion over ten years. If legislation saving at least $1.2 trillion is not enacted by early 2012, the automatic spending cuts will be triggered and go into effect in 2013.

These cuts would apply to both discretionary and mandatory spending. However, partial exemptions for mandatory programs such as Social Security, Medicaid and Medicare would cause the cuts to fall largely on annual appropriations.

Mandatory spending will claim almost 60 percent of the budget over the next ten years, though CBO estimates that it would account for only 13 percent of the automatic spending cuts. Seventy-one percent of the cuts would come from discretionary appropriations and the remaining 16 percent would be the result of lower debt service costs.

Defense spending alone would be cut by $454 billion over ten years-- in addition to the $350 billion in defense cuts that OMB estimates were already included in the law raising the debt limit.

CBO’s estimates are a reminder that exempting mandatory spending and revenues from deficit reduction will require increasingly large cuts to discretionary spending that is less than half of the budget. To effectively address our nation’s fiscal challenges, revenue policies and mandatory spending that drive deficits must also be on the table.

Not All Tax Cuts are Created Equal

While tax cuts can encourage economic growth, it is important for Congress to remember that some work better than others – and to keep the big fiscal picture in mind. That’s the advice Diane Lim Rogers, chief economist for The Concord Coalition, offered last week in her testimony to the House Budget Committee.

“Tax cuts all have benefits,” she said, “but the first thing one learns in an economics class is in a world of scarce resources, we maximize well-being by weighing costs against benefits, and at the margin starting from where we are right now.” Although some tax cuts may help particular households and businesses, she said, they “don’t necessarily pass society’s cost-benefit test.”

Rogers also said it was important to distinguish between tax policies that can increase demand for goods and services, and those that can increase the supply of labor and capital. In an economy recovering from recession, Rogers said, policies to increase demand should take precedence.

The Bush tax cuts that were extended last year, she said, “are not the kind of tax cuts that provide high ‘bang per buck’ in a recessionary economy.” Nor were they particularly effective at growing the supply side of the economy, as even the Bush administration’s Treasury Department acknowledged.

Rogers also cautioned against using historical data to determine the appropriate level of future taxation. “Given the dramatic changes in the structure of our population and the continued growth and evolution of our economy,” Rogers said, “it is difficult to see how what was right over the past 40 years – and it wasn’t even quite adequate then – could be right over the next 40 years.”

Behind Schedule Again, Congress Turns to Continuing Resolution

On Capitol Hill this week, attention is turning to a continuing resolution (CR).  Because Congress will not complete the appropriations process before the fiscal year ends Sept. 30, a CR is necessary to prevent a government shutdown.

House Appropriations Committee Chairman Harold Rogers (R-Ky.) introduced a proposal last week to fund the government through Nov. 18 using the $1.043 trillion level included in the law increasing the debt limit.

The Rogers proposal would also provide $3.65 billion for disaster relief, including $1 billion for FY 2011 that is paid for with offsets.  Democrats have argued that offsets should not be required for emergency funding, and the Senate last week passed a bill to fund disaster relief without offsets.

Also last week, the Senate Appropriations Committee approved the bills for Defense; Commerce, Justice, Science; Financial Services and General Government; and the Legislative Branch.

Debits & Credits

Responsibility Reminder: Republican Gov. Mitch Daniels of Indiana recently took his party’s presidential hopefuls to task, saying they had a responsibility to conduct a “more candid and honest” conversation about the nation’s fiscal difficulties. “The candidate I could get instantly excited about,” Daniels said, “is someone who is willing to level with the American people and assume they are prepared to listen to the mathematical facts and agree that whatever other disagreements we have aren’t as important.”

Hobbling the Super Committee: President Obama and Speaker John Boehner, who earlier this year talked about a “grand bargain” on deficit reduction, are now taking things off the table just when their leadership is needed the most. Obama left Social Security out of his recommendations Monday to the super committee. Boehner last week urged the panel to tackle tax reform -- but not use any of the proceeds to actually reduce deficits.