June 23, 2017

Washington Budget Report: February 11, 2014

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House Finally Acts on Debt Limit But Recent Difficulties Show Need for Reform

As the Treasury resorts to “extraordinary measures” to avoid defaulting on some financial obligations, Congress has continued to struggle with the necessary but embarrassing task of raising the federal debt limit.

Today the House finally took action, narrowly passing a year-long suspension of the debt limit without extraneous measures. Although Republicans control the House, only 28 of them joined with 193 Democrats to narrowly pass the measure, 221-201. A Senate vote could come later this week.

Today's vote came after House Republican leaders gave up on a misguided plan to tie a debt limit increase to reversing a fiscal reform that Congress approved only weeks ago on pensions for working-age military retirees. (Senate Democrats have also prepared legislation to reverse that reform but not in connection with a debt limit increase.)

The current debt limit system only provides what Concord Coalition Executive Director Robert L. Bixby calls “a false impression of fiscal rectitude.” That’s why Concord, in an updated issue brief, is again urging elected officials to reform the debt limit so that it is better aligned with spending decisions and tied to some relevant standard such as the growth of the U.S. economy.

Congress had previously suspended the debt limit through last Friday. Treasury Secretary Jack Lew warned lawmakers on that day that administration officials were not confident that the “extraordinary measures” to avoid a default would last beyond Feb. 27.

Republicans have spent weeks discussing what concessions, if any, they should demand for an increase in the debt limit. Democrats, however, insisted that Congress should approve a "clean" increase in the limit.

Senate Bill Sounds Retreat on Military Pension Reform

The Senate is moving forward on a troubling bill that would add roughly $6.8 billion to the deficit over the next decade by repealing a modest reform in cost-of-living adjustments (COLA) for working-age military retirees.

The legislation, which passed a procedural hurdle on a 94-0 vote Monday, would reverse a key part of the budget agreement that the House and Senate passed with large majorities only weeks ago.

This does not bode well for future reforms involving military benefits, an area that many experts agree is ripe for reasonable cost reductions. The Senate legislation could also set a costly precedent for ignoring the “pay-as-you-go” standard (PAYGO) that calls for lawmakers to offset spending increases and tax cuts.

“Falling annual deficits, welcome as they are, have unfortunately distracted some in Washington from projections that trillion-dollar deficits will return in a few short years and that the debt will continue to grow faster than the economy,” says Concord Coalition Executive Director Robert L. Bixby. “This is no time to abandon pay-as-you-go budgeting, especially with the COLA for younger military retirees.”

Even a strict pay-as-you-go policy would not be enough to stabilize the federal debt, but Bixby calls PAYGO “the first line of defense against further fiscal erosion.”

New Fed Chair Discusses Challenges Ahead

In her first congressional appearance as chair of the Federal Reserve, Janet Yellen this morning discussed challenges facing the central bank and noted that tightening fiscal policy had slowed economic growth last year.

President Obama nominated Yellen last October to succeed Ben Bernanke and she took over at the Fed last week. She served as the Fed’s vice chair for the past several years and is the first woman to lead the Fed.

Like Bernanke, she has encouraged elected officials to pursue more responsible fiscal policies that would support the economic recovery in the short term while laying the foundation for longer-term fiscal reforms.

Yellen, who testified today before the House Financial Services Committee on the Fed’s semi-annual monetary policy report for Congress, promised “a great deal of continuity” in Fed policy. She is scheduled to testify Thursday before the Senate Banking Committee.

State Surpluses Offer Chance for Long-Term Improvements

The economic recovery has produced larger-than-expected surpluses for many states, and their elected officials are considering what to do with the windfalls.

Unfortunately, many state lawmakers have put forward plans that address short-term issues while ignoring more important long-term fiscal concerns such as the need to replenish rainy day funds and curb rising pension and health care costs.

A recent report by the State Budget Crisis Task Force warns that many state governments have done little to deal with the structural budget problems that have begun to crowd out funding for other priorities. The task force is chaired by former New York Lt. Gov. Richard Ravitch and Paul Volcker, who also serves on The Concord Coalition’s Board of Directors.

A recent study by the Center on Budget and Policy Priorities found that most states under-utilize tools that can help build sustainable fiscal policies. These tools include multi-year budgets and independent offices to prepare credible estimates on spending and tax proposals, as the Congressional Budget Office does at the federal level.

As state officials decide what to do with their new-found surpluses, they have opportunities to positively impact on the long-term fiscal health of their states. They should not let those opportunities go to waste.