July 23, 2014

Washington Budget Report: May 6, 2014

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GAO Urges Action to Improve Long-Term Outlook

While many in Washington have put fiscal sustainability on the back burner, the Government Accountability Office (GAO) offers an important reminder of the need for prompt fiscal reforms.

“Significant action to change the long-term fiscal path must be taken soon to minimize the disruption to individuals and the economy,” the GAO says in its annual update on that path. “The entire range of federal activities and spending—entitlement programs, other mandatory spending, discretionary spending, and revenue—will need to be re-examined.”

The report’s Baseline Extended Simulation builds on the Congressional Budget Office’s baseline; the GAO’s Alternative Simulation assumes baseline changes “to reflect historical trends.”

GAO points out that “a fundamental imbalance between revenue and spending over the long term leads to continuous growth in debt” as a share of GDP, which is unsustainable. The report also notes that spending increases are driven by the aging population and rising health care costs.

In the Alternative Simulation, which better reflects recent congressional action, the fiscal situation deteriorates more rapidly. By 2026, it shows interest on the federal debt exceeding Medicare costs. By 2027, debt held by the public would exceed the nation’s entire GDP; the following year Social Security, Medicare, Medicaid and net interest would consume all federal revenues.

Extending Tax Breaks -- and Deficits

With Congress back in session, some lawmakers have unfortunately focused their attention on once again renewing a group of temporary tax provisions that subsidize certain businesses and other special interests.

The provisions -- known as “tax extenders” -- expired at the end of last year and ideally should be replaced with comprehensive tax reform rather than renewed. Even worse, lawmakers in both parties have shown little interest in paying for the extensions under pay-as-you-go (PAYGO) rules.

The House Ways and Means Committee passed bills last week to extend six provisions for businesses, including allowing multinational corporations to defer taxes on certain foreign profits. And the House legislation extends the tax breaks permanently rather than for two years, as Congress has usually done in the past.

The Joint Committee on Taxation (JCT) estimates the legislation will reduce revenues by $310 billion over the next decade.

It is disappointing that lawmakers seem to have abandoned the pursuit of comprehensive tax reform this year in favor of extending tax breaks for certain interest groups -- especially after Ways and Means Chairman Dave Camp (R-Mich.) released a wide-ranging tax reform proposal earlier in the year.

It is still more troubling that lawmakers have not bothered to find PAYGO offsets for the cost of extending these provisions. If Congress will not address the country's long-term budget challenges this year, it should at least not make the fiscal situation worse.

‘Dead Men Ruling’ Offers Blunt Diagnosis But Also Hope

Despite its grim title of “Dead Men Ruling,” Eugene Steuerle’s new book offers an optimistic message about the nation’s future as he calls for greater fiscal responsibility and generational fairness.

In a blog post discussing the book, Concord Coalition Executive Director Robert L. Bixby welcomes Steuerle’s argument that the United States has sufficient resources to deal with its projected deficits and rising debt.

As Steuerle puts it, “Conditions are ripe to advance opportunity in ways never before possible, including doing for the young in this century what the twentieth did for senior citizens, yet without abandoning those earlier gains.”

But he says elected officials must break the “political logjam” that was largely created years ago by men who are either retired or dead. This logjam involves irresponsible tax cuts and large programs that “automatically grow so fast that they claim every dollar of additional tax revenue that the government generates each year.”

Bixby praises the book for its positive vision as well as its “bluntly accurate diagnosis” of our fiscal challenges: “Readers will come to appreciate that it is not a matter of policymakers choosing each year to spend too much or tax too little; it is that they have switched these decisions to autopilot, knowing full well that the course is unsustainable."