October 1, 2014

Washington Budget Report: June 19, 2012

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Mixed Picture on Health Care Costs

Cost inflation in health care slowed significantly between 2009 and 2011, and updated projections from the Medicare actuaries point towards slower growth in 2012 and 2013 as well. But Joshua Gordon, policy director for The Concord Coalition, says the new numbers probably reflect temporary factors and “cannot serve as an excuse for politicians to rest on their laurels.”

Spending is expected to grow at an annual average of .9 percent above overall economic growth between 2011 and 2021 – relatively good news in light of the fact that health care costs have historically gone up 2 percentage points faster than the Gross Domestic Product (GDP).

“Most health care experts agree that the recession is the driving force behind the slowdown,” Gordon writes in a recent blog post, “although some also highlight changes that insurance companies, hospitals and physician groups have been making either because of the ACA (Affordable Care Act) or in anticipation of its full implementation.”

Eventually, however, the actuaries think the growth in health care spending will return to 2 percentage points over GDP. This, Gordon explains, is because “the actuaries assume the aging of the population, the increase in the newly insured under the ACA, and renewed economic growth will put upward pressure on spending that will outweigh the efforts in the ACA that are designed to restrain cost growth.”

Much could depend on how the Supreme Court rules on the ACA this month. If the court rejects some or all of the law, elected officials must resist the temptation to maintain or renew its popular coverage provisions without restraints on cost growth, which tend to be less popular. Even if the court upholds the law, Gordon says, further efforts will be needed to rein in costs.

Potential Harm in Delayed Decisions

Uncertainty over how elected officials will deal with key fiscal decisions this year is already “weighing on the economy” and probably reducing spending by individuals and businesses, according to Doug Elmendorf, director of the Congressional Budget Office (CBO).

“We think it’s an issue now and will be increasingly an issue in the second half of the year in terms of people’s decisions,” Elmendorf said at a recent program hosted by the Christian Science Monitor. Substantial tax cuts are set to expire and large automatic spending cuts are scheduled to kick in, all around the end of the year – a “fiscal cliff” that could jeopardize the economic recovery.

In addition, the government expects to near its debt limit late this year, threatening a default unless the limit is raised. The CBO director warned that taxpayers could pay a high price if financial markets became seriously concerned about the possibility of default.

“Even a small increase in the perceived risk of Treasury securities would be very expensive for the country,” Elmendorf said. If Treasury rates moved up by only a tenth of a percent over the next decade, he said, that would add $130 billion to the government’s interest payments over that same period.

Elmendorf also expressed concern about Europe: “If European economies slow more than they already have, or especially if there is some greater tumult in the European financial system, that will be bad news for the U.S. economy.”

The Concord Coalition urges Congress and the President to deal with the fiscal cliff issues and the debt limit increase in a responsible fashion as soon as possible. This would reassure financial markets, bolster the economy, boost public confidence and enable government agencies to better plan for next year.

Concord supports a comprehensive approach to fiscal reform such as the Simpson-Bowles plan proposed, with significant changes to all parts of the budget. At a minimum, however, elected officials should not abandon the automatic cuts without approving substitute measures that would deliver the same amount of long-term deficit reduction.

Even if elected officials delay action until after the November election for political reasons -- as is widely expected --  they should at least be working now on options that can be quickly implemented. With Europe’s continued difficulties, Washington should do everything possible to mitigate uncertainty in troubled world markets. Another round of default threats and political theatrics over the U.S. budget would be pouring gasoline on the fire.

Debt Limit Increase Tied to Spending Cuts

Several dozen House members told President Obama last week that they supported Speaker John Boehner’s position that the next increase in the federal debt limit should be coupled with spending “cuts and reforms” of a greater amount. 

“We agree with the Speaker that tying the debt limit increase to common-sense spending reforms is a necessary first step to solving the nation’s fiscal imbalance,” the 56 lawmakers said in a letter to Obama.  Boehner discussed his position in a speech last month.

The government expects to approach its statutory debt limit late this year. Democrats and Republicans, however, continue to disagree over what types of spending cuts should be made. In addition, Obama and others in his party have called for some additional government revenue to help close projected fiscal gaps.

The unpleasant reality is that Washington will again need to increase the debt limit to avoid default.  Ideally, such an increase would be accompanied by a broad package of fiscal reforms on which both parties can agree. It would be irresponsible, however, for any elected officials to try to hold a debt limit increase hostage to a one-sided agenda.