August 20, 2014

Washington Budget Report: Jan. 22, 2013

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Obama Leaves Questions Open on ‘Hard Choices’

President Obama’s inaugural address Monday touched lightly on the subject of deficit reduction, but it failed to convey the magnitude of the fiscal problems facing the country and the urgency with which they should be corrected.

On the positive side, Obama acknowledged that the country needs to “make the hard choices to reduce the cost of health care and the size of our deficit.”  As he indicated, this can be done without taking apart the social safety net.

Unfortunately, however, the President did not offer any real sense of what these “hard choices” should be. This was particularly noticeable on the large federal entitlement programs; he praised Social Security, Medicare and Medicaid as strengthening the country, but he missed the opportunity to emphasize the need to put these important programs on sustainable paths.

The President called for revamping the tax code, an idea in which elected officials in both parties have expressed interest. But there are significant differences in Congress over what would constitute genuine tax reform, and Obama did not explain how he thought these differences might be bridged.

Comprehensive fiscal reform will require bipartisan compromise. On Monday Obama called for civil political discourse and cooperation, but some themes also emerged that indicated likely points of contention in the months ahead.

“Progress does not compel us to settle centuries-long debates about the role of government for all time, but it does require us to act in our time,” Obama said. Democrats and Republicans alike would do well to keep that thought in mind during the coming budget negotiations.

House to Vote on Short-Term Debt Limit Fix

House Republicans have proposed a plan to remove the threat of a government default in February and eventually increase the debt limit by enough to cover federal borrowing through May 19. The plan, which the House is expected to vote on this week, would also halt pay for members of Congress if their chamber fails to approve a budget resolution by April 15.

“Before there is any long-term debt limit increase, a budget should be passed that cuts spending,” Speaker John Boehner said in discussing the plan, which emerged from a House Republican retreat in Williamsburg, Va.

Boehner and other Republicans reiterated their past criticism of Senate Democrats for failing to approve a budget resolution in the past four years. On Sunday, however, Sen. Charles E. Schumer, the No. 3 Democrat in the Senate, said Senate Democrats plan to draft a budget measure this year.

Democratic reaction to the Republican plan has been mixed. While the administration said it was “encouraged” by the plan, House Minority Leader Nancy Pelosi called it “a gimmick.” Senate Majority Leader Harry Reid’s office said the Senate would consider legislation “if the House can pass a clean debt ceiling increase to avoid default and allow the United States to meet its existing obligations.”

“The House Republicans’ plan,” says Concord Coalition Executive Director Robert L. Bixby, “shows a constructive shift of focus away from threats of default and towards the need for a budget. That should improve the chances for negotiations over a serious fiscal plan.”

Earlier last week, Concord urged elected officials to promptly raise the debt limit and then reform the debt limit process. As Concord explained in an issue brief, the debt limit has never proven to be an effective means of controlling debt.

Failure to increase the limit to pay for earlier policy decisions, however, could risk serious long-term harm to the nation. With an unnecessary crisis over the debt limit averted, Concord said, elected officials “should promptly develop a comprehensive, specific and credible plan to place our nation on a sustainable fiscal path.”

For Long-Term Deficit Reduction, Focus Should Be on Policy Reforms

As policymakers look towards the upcoming budget debates over the debt ceiling and “automatic” spending cuts (the sequester), those concerned with fiscal responsibility should be more focused on policy reforms than achievement of a specific deficit-reduction target.

The idea that we can pinpoint a specific amount of deficit reduction necessary within a 10-year time frame can be a distraction from the fiscal sustainability conversation we need to have, according to Concord Coalition Policy Director Joshua Gordon.

First, getting caught up in exactly when the debt-GDP-ratio would stabilize, or whether we might miss that goal by a few percentage points at the end of the 10-year budget window, assumes a precision in economic and technical estimating that no entity actually possesses.

Second, our main emphasis should be on ensuring long-term stabilization of the growth rate of the debt rather than the specific level at which it stabilizes.

Finally, Gordon argues in a recent blog post, policymakers will need to focus on tax reform and changes in mandatory spending programs because the discretionary budget has already been cut substantially. In addition, the projected growth in debt is tied to the growth in mandatory spending programs and the lack of sufficient revenue to pay for them.

However, changes to these programs will likely have to be phased in over a longer period of time than just the 10-year budget window. Ensuring that the right choices are made is more important than how the proposals “score” within an arbitrary time period.

That is why it is more important for policymakers to concentrate on changes they can make for the long term than on achieving a precise amount of deficit reduction in the short term.

Annual Financial Report Highlights Need for Fiscal Reform

The Treasury Department has released its annual assessment of the nation’s finances, projecting that deficits under current policy will cause the government’s debt-to-GDP ratio to double over the next 30 years and quadruple over the next 75.

The 2012 Financial Report of the United States Government projects that non-interest spending will reach balance with annual revenues in 2018, partly thanks to a recovering economy. But it concludes that “increased spending for Social Security and health programs due to continued aging of the population and anticipated rising health costs” will cause the deficit to rise dramatically between 2022 and 2039.

The report emphasizes that addressing the country’s long-term challenges will be significantly easier if done sooner rather than later. The Treasury estimates that reforms will need to be 20 percent larger if they are delayed for a decade, and 50 percent  larger if delayed for two decades.

The report, released last week, was finalized before passage of the “fiscal cliff” legislation -- the American Taxpayer Relief Act of 2012 – and so does not take into account that law’s impact on federal revenue.

“While Congress and the administration have taken steps recently to improve the near-term outlook,” U.S. Comptroller General Gene L. Dodaro said following the release of the report, “our federal government’s long-term fiscal path remains unsustainable without further policy changes.”

As in past years, his agency -- the Government Accountability Office -- expressed concerns about the reliability of some numbers in the annual financial report. The GAO warns that it could not render a complete opinion on the report for a variety of reasons, including weaknesses in financial management at the Department of Defense and elsewhere.

House Approves Additional Sandy Funding

With a 241-180 vote, the House last week approved legislation to provide $50.5 billion in appropriations to aid recovery from damage by Hurricane Sandy and to help prevent damage from future disasters. Including $9.7 billion that the House passed in December, the House has now approved approximately $60 billion in Sandy-related aid.

During consideration of the latest bill, the House initially passed a $17 billion proposal by House Appropriations Committee Chairman Harold Rogers. Then Democrats joined with several Republicans (mostly from the affected states) to add $33.7 billion to the bill.

Last year the White House requested $60.4 billion in funding for priorities such as the Community Development Block Grant program, the Federal Emergency Management Agency’s response and recovery efforts, the National Flood Insurance Program, repairs to transportation infrastructure in areas such as New York city, and Federal Transit Administration and Army Corps of Engineers programs to reduce the risk of future flooding and damage to transportation systems.

Prior to the end of the last Congress, the Senate approved the full amount requested by the President. The Senate is expected to act on the House bill soon after it returns this week from the recess.