April 21, 2014

Washington Budget Report: March 5, 2013

« Back to WBR Issue List

Sign Up to receive the Washington Budget Report »


Time to Rely on Regular Budget Process

Unable to reach agreement on a better alternative, elected officials allowed the sequester’s arbitrary spending cuts to begin taking effect late last week. But even if these cuts remain in effect, the federal budget will still be on an unsustainable long-term path.

In a blog post, Concord Coalition Executive Director Robert L. Bixby urged elected officials to use the regular budget process to move forward toward the more comprehensive fiscal reforms that are needed.

Sequestration was not good policy, Bixby wrote, but had become a matter of political accountability: “A threat, such as sequestration, can only be effective if everyone understands that the consequences are real. The cuts may be ill-timed and arbitrary but they are what the President, the House and the Senate agreed would happen if they and their super committee kicked the can down the road.”

Obama met with congressional leaders Friday but officials in both parties continued to reiterate their basic differences over the budget.  While most Democrats support replacing the cuts with a combination of revenue increases and spending cuts, most Republicans remain opposed to any additional revenue increases.

Bixby says sequestration “is simply one small part of a larger, ongoing story. It can be and should be replaced, but not until Republicans and Democrats can agree on something better. The best opportunity to do that comes not with the threat of a government shutdown when funding runs out on March 27, or when the debt limit is again reached this summer, but through the regular budget process which will kick off later this month with the President’s budget proposal, and House and Senate action on budget resolutions."

This week the House is expected to consider legislation to fund the government for the remainder of the fiscal year and prevent a government shutdown. Included in the legislation are regular Defense and Military Construction/ Veterans Affairs appropriations bills and a continuing resolution to fund most other federal agencies at current levels.

Funding provided in the bill would remain subject to sequestration, though it provides some flexibility for agencies to allocate cuts to defense and veterans programs. Including the effects of sequestration, CBO estimates that the bill will limit FY 2013 discretionary spending to  $984 billion. The current continuing resolution is scheduled to expire on March 27.

Key Medicare Factors: Aging Population, More Beneficiaries

Aging contributes more to rising Medicare spending than health care cost growth

Among budget wonks, there is something of a consensus that the projected upward trajectory of our debt is caused primarily by projected growth in federal health care programs. The short-hand version: The nation’s fiscal challenge is really “just a health care problem.”

Yet Concord Coalition Policy Director Joshua Gordon says in a recent blog post that this shorthand is misleading because over the next 20 years, inflation from an inefficient and poorly incentivised health care system is not a big problem for Medicare. Instead, recent reports from the CBO, HHS and the GAO show that nearly three-quarters of Medicare’s spending increases can be attributed to the aging of the population and the growing number of beneficiaries.

In some ways this is good news for those who want to put the nation on a more sustainable fiscal course; it means the solutions are technically easier to figure out. We need to simply lower promised benefits, increase cost-sharing, or increase government revenues to account for the new ratio of workers to retirees.

In a political sense, however, Gordon says this makes solutions harder because we are no longer aiming to cut the amorphous “waste” in health care spending, but talking about benefit cuts or tax increases. It also cuts off “delay” as a political tactic because the sooner we act, the less dramatic steps need to be undertaken.

It is possible, even likely, that current projections for slower-than-normal growth in health care inflation are far too optimistic. Yet this doesn’t change the basic budgetary case for tackling the aging problem as soon as possible.

Simpson-Bowles Framework Deserves Public Support

Americans around the country can support long-term fiscal reform by encouraging their elected representatives to consider the updated framework that Erskine Bowles and Alan Simpson released last month.

Bowles and Simpson co-chaired the National Commission on Fiscal Responsibility and Reform, which produced a bipartisan plan in late 2010. They say their new framework is not meant as a revision of that plan but "builds upon where elected leaders were in their negotiations last year."

In a new op-ed, Concord Coalition Robert L. Bixby says the Simpson-Bowles framework could serve as a starting point for negotiations over comprehensive, long-term changes to put the federal budget on a more responsible course.

The framework calls for an additional $2.4 trillion in deficit reduction to be phased in over the next decade, with roughly a fourth coming from health care reforms and another fourth from tax simplification and reform. Simpson and Bowles also recommend making Social Security “sustainably solvent” through structural reforms.

“Fortunately, at least some in Washington are willing to put the country’s future before political calculations and partisan considerations,” Bixby writes in the op-ed, which has appeared in several papers around the country. “Ordinary citizens should get behind these courageous leaders, voice support for the Simpson-Bowles framework, and encourage all of their elected officials to put it to good use immediately.”

Thoughtful Advice From Fed Chairman

In his semiannual report to Congress on monetary policy last week, Federal Reserve Chairman Ben Bernanke threw in some solid advice on fiscal policy as well. Let’s hope lawmakers were listening.

While some progress has been made toward reducing federal deficits over the next few years, he said, a “substantial portion” of that progress “has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.” That includes the sequester that began to take effect last week.

At the same time, Bernanke warned, “the difficult process of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast-rising health-care costs.”

To address both near-term and longer-term issues, he urged Congress and the administration to “consider replacing the sharp, front-loaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.”

With Congress about to consider budget plans for both the rest of this fiscal year as well as Fiscal 2014, Bernanke also offered a timely reminder that “not all tax and spending programs are created equal with respect to their effects on the economy.”

That’s why, as the Fed chairman noted, policymakers “should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure.”