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Washington Budget Report: May 15, 2013

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As Deficit Drops, Long-Term Challenges Remain

The Congressional Budget Office (CBO) released updated numbers yesterday showing a short-term decline in projected deficits, but elected officials and the public should not be lulled into a false sense of security.

“A lower deficit is good news but hardly the end of the story,” said Robert L. Bixby, Concord’s executive director. “For the most part, it reflects a recovering economy and other factors that do not affect the long-term structural mismatch between spending and revenues.”

The budget office projects the deficit will fall to $642 billion this year, about $200 billion below the CBO’s February estimate. Annual deficits would continue to decline through 2015, but would then rise to $895 billion by 2023. Over the next decade, CBO projects, the deficits will total $6.3 trillion.

While much work remains to be done on fiscal reform, Bixby points out that there is no mystery about why the long-term challenges remain: “Our population is aging and that means relentlessly higher spending on Social Security, Medicare and Medicaid, which already comprise 45 percent of the budget. Steps that have been taken so far to control the deficit have failed to address this core problem and will soon be overwhelmed by it.”

The recent slowdown in health care inflation has led the CBO over the last year to re-estimate 10-year health care spending by $740 billion. Given the uncertainty about this trend, however, policymakers should heed recent calls from bipartisan groups to encourage further cost control and transformation in the health care system.

Despite the clear warning signs, budget negotiations have come to a halt.

“Conventional wisdom seems to be that nothing will happen until the debt limit brings on another crisis later this year,” Bixby said. “That reckless strategy is likely to end in another short-term ‘fix’ that accomplishes little other than political face-saving.”

Putting More 'Skin in the Game' on Health Care

One of the central problems with the country’s health care system is that it often shields consumers from costs in ways that provide little incentive to hold them down. In many cases, the consumers do not even know the full costs of their treatment or insurance coverage.

In other words, they have relatively little “skin in the game.” This, combined with other problems in the health care system, leads to excessive levels of utilization and spending.

Joshua Gordon, policy director for The Concord Coalition, points out that several recent bipartisan health care reform plans address the skin-in-the-game issue through proposals that would make consumers more sensitive to health care costs and the need to economize where possible. Eliminating or scaling back the tax exclusion for employer-provided health insurance is the primary mechanism in this effort.

He discusses these proposals in the second of three blog posts on the developing consensus among fiscal and health care policy experts on ways to move the country towards a less expensive, more effective and more patient-centered system.

The first blog post in this series focused on the proposed supply-side reforms. The third blog post will include a look at how all these reforms could help put the country on a more sustainable fiscal path over the next decade and beyond.

Regular Budget Process Can Help Resolve Conflicting Priorities

While the House and Senate have each passed their own budget resolutions for the coming fiscal year, Congress now needs to move the regular budget process forward through conference committee negotiations aimed at producing a compromise plan.

Concord Coalition Co-Chair Sam Nunn and Pete Domenici, a senior fellow at the Bipartisan Policy Center, make the case for relying on “regular order” in a recent guest column in The Hill. The former senators urge House and Senate leaders to appoint the conferees as soon as possible.

“Ultimately, we must enact changes to preserve, adjust and strengthen the major entitlement programs: Medicare, Medicaid and Social Security,” Nunn and Domenici write. “We must also enact fundamental tax reform that raises revenues by cutting back on the trillion dollars of annual tax breaks that are essentially government subsides run through the tax code.

“The regular budget process is designed to resolve such conflicting priorities. It is broken because it is ignored.”

Failure to use the regular budget process in recent years has had a high price: “debt-ceiling crises, ‘fiscal cliffs,’ threats of government shutdowns, complex appropriations negotiations and other sorts of chaotic melodrama — all of which has confused and angered the general public and left Congress widely demeaned.”

The use of regular order and the need for comprehensive, bipartisan fiscal reform were also discussed last week when the Peter G. Peterson Foundation convened its fourth annual fiscal summit in Washington.

The summit brought together elected officials, business leaders and policy experts, with a keynote conversation featuring former President Bill Clinton and Bill Gates, co-chair of the Bill & Melinda Gates Foundation.

Lawmakers Should Avoid Debt-Limit Dramatics

After being suspended earlier this year, the federal debt limit is scheduled to come back into force within the next few days, underscoring the need for bipartisan cooperation to avoid another round of market-rattling political brinksmanship later this year.

Treasury Secretary Jacob Lew said Friday that the government could rely on its predicted cash flow and “extraordinary measures” to push the “effective deadline” for raising the limit back until at least Labor Day.

The additional time is also partly because of spending cuts, higher tax receipts and large anticipated payments from housing agencies Fannie Mae and Freddie Mac to the Treasury in June.

The Bipartisan Policy Center (BPC) recently projected that the government would still be able to pay its bills through sometime in October without congressional action. The BPC cautioned, however, that any projection this far in advance is “highly uncertain.”

House Republicans passed legislation last week that would supposedly enable Washington to continue paying bondholders and sending out Social Security payments even if the Treasury could no longer finance the rest of the government. The legislation, expected to die in the Senate, reflects a chaotic approach to federal budgeting as well as unconventional notions about default that global investors are under no obligation to accept.