August 28, 2014

Washington Budget Report: October 8, 2013

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Debt Limit Worries Increase as Shutdown, Deadlock Continue

The federal shutdown over the 2014 budget continues amid growing concern among economists, investors, business executives, foreign leaders and others that Washington is also deadlocking over the federal debt limit -- raising the possibility that financial markets could fall sharply in anticipation of a U.S. default.

Elected officials are frittering away millions of tax dollars while harming federal workers and millions of other Americans with the shutdown. But a federal default would be much worse, for reasons that a Treasury report last week underscored:

“A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

By no later than a week from this Thursday, the administration warns, the government will exhaust the “extraordinary measures” it has relied on for months to avoid hitting the current debt ceiling. It will then have only a relatively small amount of money that won’t last long before the government will begin defaulting on at least some of its financial obligations.

Yet elected officials appear to have made little progress towards resolving their differences.

Republicans continue to demand Democratic concessions in return for raising the debt limit while Democrats argue that Congress has a fundamental responsibility to finance the commitments it has already approved.

On Saturday, however, the House did overwhelmingly pass a bill authorizing back pay for furloughed federal workers.

As the debt limit approaches, the debates over funding the government and raising the limit appear to be merging. This has led to speculation that a “grand bargain” of some sort may be back on the table.

On Sunday House Speaker John Boehner emphasized the importance of a budget deal and downplayed his previous insistence that “Obamacare” must be defunded or repealed.

White House economic advisor Gene Sperling said Monday that the President would be open to a short-term debt limit increase, which would provide time for a broader agreement to be worked out. Sperling reiterated, however, that Obama would not negotiate over the debt limit.

It is important for the public to understand that there is no realistic alternative to an increase in the current debt limit; even the supposedly austere House Republican budget calls for more borrowing through the next decade.

As responsible elected officials in both parties know, they must eventually find the common ground that will enable them to reassure nervous financial markets, increase the debt limit and end the government shutdown. They should avoid further delays in doing so.

Federal Interest Costs to Rise Rapidly in Coming Years

Lawmakers struggling with the Fiscal 2014 budget could face an even tougher challenge funding the government in the future as interest payments rise to record levels, squeezing other parts of the budget and making it more difficult to hold down deficits.

Slow economic growth and Federal Reserve monetary policies have helped keep interest rates at record lows in recent years, but the Congressional Budget Office (CBO) expects higher rates in coming years. That could make interest payments the fastest growing part of the federal budget.

For Fiscal 2013, CBO estimates interest payments will total $223 billion, or 1.3 percent of GDP. By 2038 the figure would increase to 4.9 percent of GDP or $1.46 trillion (in real 2013 dollars).

If Washington navigates its immediate budget and debt limit difficulties, interest rates are expected to rise in the next few years due to an improving economy. Yet if interest rates are even slightly higher than current projections over the next few years, it could add billions of dollars to federal interest payments.

The risks associated with rising interest payments are significant. That’s another reason why Washington should agree on a long-term deficit-reduction plan that will reduce government borrowing over the next decade and beyond.

High Volume Reported as Health Insurance Exchanges Open

Despite the partial government shutdown, the online health insurance exchanges included in the Affordable Care Act went live last Tuesday, with federal officials reporting heavy user traffic.

Sixteen states and the District of Columbia are running their own health exchanges. In other states, people can buy insurance through exchanges being operated by the federal government.

Over 1 million people visited the healthcare.gov website before 7 a.m. on the day it went live. But the website, which provides information on the exchanges, has suffered from a number of technical problems. Federal officials largely blamed high usage and said the system’s performance should improve this week.

The plans on the exchanges vary in price and coverage but all include preventive care and do not discriminate based on pre-existing conditions. Americans earning under 400 percent of the poverty level -- which works out to $45,960 for individuals and $94,200 for a family of four -- will be eligible for federal subsidies to purchase insurance on the exchanges.

Plans purchased before Dec. 14 will go into effect Jan. 1. Open enrollment through the exchanges will continue until March 31.

With millions of Americans gaining access to medical care, it becomes all the more important for policymakers to pursue additional cost-control measures in the health care system.

The Can Kicks Back in Denver: High Stakes for Young Americans

Concord Coalition Executive Director Robert L. Bixby and other speakers at the University of Denver on Friday put the spotlight on the high risks of irresponsible fiscal policies to young Americans.

Although the federal deficit dropped significantly in the fiscal year that just ended, Bixby emphasized that Washington still needs to deal with systemic budget problems that could jeopardize the nation’s prosperity and strength. How our elected officials deal with these larger challenges could have a dramatic impact on how much today’s students will pay in taxes and receive in government benefits throughout their lives.

The program was presented by the University of Denver, The Concord Coalition, Travelers Institute and The Can Kicks Back, an organization mobilizing young Americans to work towards greater sustainability and generational equity in the federal budget.

Isabel V. Sawhill, a senior fellow in Economic Studies at the Brookings Institution, and Joan Woodward, president of Travelers Institute, also spoke at the event, which included a screening of the Travelers documentary “Overdraft.” Sawhill lamented the lack of greater statesmanship in Washington, and Woodward emphasized the need for more public education about the federal budget.

The event was part of the “Generational Equity Tour,” a series of programs across the country that began in California and will end with an Oct. 31 rally at the Capitol.