August 30, 2014

Washington Budget Report: February 25, 2014

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Obama Budget Offers Some Reform But Drops CPI Change

Information released so far on the President’s proposed budget for Fiscal 2015 provides a mixed picture on fiscal reform.

The administration has unfortunately dropped an earlier plan to save money by switching to a more accurate measure of inflation, but it is continuing a worthwhile effort to reduce overpayments to Medicare Advantage plans.

“It looks like this budget, as is usually the case, will contain a mixture of sensible reforms and politically expedient omissions,” Concord Coalition Policy Director Joshua Gordon said in a blog post this week.

More budget information was released on Monday, when Defense Secretary Chuck Hagel discussed plans to reduce military spending in line with the 2015 budget cap set in a bipartisan agreement in December. Pentagon plans, however, still exceed limits set for subsequent years.

The administration’s proposed changes would include shrinking the Army to its smallest size since before World War II and slowing the growth of military personnel costs, including those for its Tricare health insurance plans.

President Obama, who will officially unveil his complete proposed budget next Tuesday, is also suggesting 1 percent pay increases for federal workers, including those in the military.

Last year his budget included a proposal to switch to a more accurate consumer price index known as “Chained CPI.” This would save money in Social Security and other spending programs with cost-of-living increases. Because tax brackets are indexed to inflation, government revenue would increase as well.

Some Democrats oppose the Chained CPI, and Obama’s suggestion of a switch to it last year did not lead to a “grand bargain” with Republicans on the budget. Still, his decision not to include the reform in this year’s budget is disappointing.

“The problem is that by giving in to those who label the government-wide inflation measurement reform a simple ‘Social Security cut,’ the administration appears to be validating the label,” Gordon says.

The administration deserves credit, however, for continuing efforts to save tax dollars by reducing overpayments to Medicare Advantage plans. These plans -- which allow beneficiaries to enroll in private insurance -- have been paid more per beneficiary than traditional fee-for-service Medicare would allow.

As health care cost growth has slowed, the administration says, Medicare Advantage should see reductions in spending similar to those in traditional Medicare.

“Like the suggested CPI change,” Gordon says, “this is a sensible yet politically perilous reform.”

Despite Lower Deficits, CBO Warns of Rising Debt

In an analysis of its recent Budget and Economic Outlook, the Congressional Budget Office (CBO) underscores a key point: That growth in health care and retirement programs, together with rising interest payments, will drive projected federal deficits and debt higher in the coming decade and beyond.

“In the past few years,” the CBO warned in a blog post last week, “debt held by the public has been significantly greater relative to GDP than at any time since just after World War II, and under current law it will continue to be quite high by historical standards during the next decade.”

CBO says that figure will decline from 74 percent to 72 percent of GDP over the next three years. But under current law, it will then rise to 79 percent in 2024. This will be largely driven by interest payments and substantial spending growth in the government’s major benefit programs, outpacing government revenue.

An aging population and rising health care costs will push up spending for Social Security and major health care programs in this decade and beyond. In addition, mounting debt and the projected rise in interest rates from today’s unusually low levels will boost federal interest payments in the coming years.

This is why Washington must focus on fundamental fiscal reform even though the deficit are dropping in the short term. Unless fundamental changes are made -- through spending cuts as well as revenue increases -- debt as a share of GDP will rapidly increase after 2024 toward unsustainable levels.

Ways and Means Chair Pushes Tax Code Overhaul

House Ways and Means Chairman Dave Camp (R-Mich.) is urging Republicans on the committee to support comprehensive tax reform, telling them in an email last Wednesday that he would release a first draft of his tax reform plan later this week.

Camp’s message emphasized that Congress “cannot simply afford the business-as-usual mentality that keeps Washington comfortable, but complacent.” He said his plan would make the tax system “simpler and fairer” while also strengthening the economy.

Ideally, a comprehensive overhaul of the tax code would eliminate most tax expenditures, which are special provisions that favor certain individuals and businesses. Many of these tax breaks for narrow constituencies are wasteful and inefficient, and they cut federal revenue by more than $1 trillion a year.

Camp’s plan is expected to end many of the tax breaks and would reportedly reduce the number of tax brackets sharply while adding a surtax for many high-income earners.

Many of his colleagues are wary of serious reforms that would offend special interests. But eliminating wasteful subsidies while broadening the tax base would create a simpler and more efficient tax code -- a comprehensive overhaul that many economists and tax experts say is needed.

The Washington Post reported Monday that Camp’s plan would “raise nothing for deficit reduction.” It would be best, however, if the revenue saved from cutting tax expenditures were used for deficit reduction as well as some lowering of tax rates.