September 30, 2014

Washington Budget Report: July 15, 2014

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Gimmicks Can't Get Around Demography

The Congressional Budget Office (CBO) today released new long-term projections that underscore the need for Washington to move beyond excessive partisanship and budget gimmickry to pursue the broad fiscal reforms necessary to meet the nation’s fiscal and demographic challenges.

“There are no gimmicks to get around the demographics,” says Robert L. Bixby, executive director of The Concord Coalition.

The annual CBO report looks out beyond the usual 10-year frame for fiscal analysis to the next 25 years and beyond. That perspective highlights the mounting pressure on the budget from an aging population, rising health care costs, an inefficient tax system and rising interest payments.

Bixby calls the CBO report “an invaluable reminder that elected officials in both parties must spend less time cooking up budget gimmicks and more time working together to figure out how to put the nation on a more responsible and sustainable path.”

Federal debt held by the public is already 74 percent of GDP, quite high by historical standards. Under current law, CBO says, that figure would decline slightly over the next few years but then start a relentless climb. In 25 years it would exceed 100 percent of GDP -- and perhaps even more as the result of economic damage from so much government debt.

Under current law, the budget office projects, federal spending for Social Security and major federal health care programs could rise to 14 percent of GDP by 2039, twice the past average. Interest costs would rise rapidly as well.

Everything else in the federal budget, however, would decline to only 7 percent of GDP in that period. That’s far below the 11 percent average of recent decades, raising questions about how realistic lawmakers are being with their current plans.

Mid-Session Review: Little Change in Broad Outlook

Despite a strengthening economy, the administration’s Mid-Session Review budget projections show little change in the overall fiscal outlook.

The report, released Friday, anticipates a deficit for the current fiscal year of $583 billion, down $66 billion from the administration’s March projection. But the administration says that under its proposed budget, deficits over the next decade would add $5.5 trillion to the debt -- up by $600 billion over the March estimate.

While the deficit is lower than the earlier projection for 2014-16, it is higher in all subsequent years. The biggest change: Revenues are now projected to be $760 billion lower over the coming decade.

Concord Coalition Executive Director Robert L. Bixby says it will take more than economic growth to put the nation on a sustainable long-term path. So Democrats and Republicans must move past their current stalemate.

“But there is little at this point that is moving the ball forward,” he notes in a new blog post. “The missing element is still meaningful negotiation over how best to meet the nation’s big fiscal challenges.”

‘Emergency’ Designation Is Not for Regular Spending

Lawmakers must carefully review President Obama’s request for “emergency” funding this year to fight wildfires, increase border security and deal with a surge of migrants from Central America.

The President has asked for $3.7 billion to improve border security while addressing the “urgent humanitarian situation” involving migrants -- particularly children -- along the Rio Grande Valley. He also requested an additional $615 million for wildfire suppression.

Elected officials should be cautious about emergency designations, which exempt spending from budget caps and should be reserved for projects that are sudden, urgent, necessary, unexpected and temporary.

That designation for fighting wildfires certainly seems questionable. Policymakers have long under-budgeted for such disaster-related work and then used the resulting shortfall to get around budget caps.

On the southern border, Washington should respond quickly to legitimate humanitarian concerns. Much of what the President is asking for, however, seems to go beyond temporary needs and should be handled through regular appropriations.

 

A Short-Term Gimmick for Highway Funding

The House Ways and Means Committee and Senate Finance Committee approved similar plans last Thursday to transfer $10 billion in general revenues to the Highway Trust Fund.

Unfortunately, both plans rely on “pension smoothing,” a gimmick that was used in the 2012 transportation bill that could later worsen federal deficits.

The Transportation Department plans to begin cutting payments for state transportation projects next month unless Congress fixes the trust fund.

The White House has come out in support of the House plan, but also criticized lawmakers for failing to find a long-term solution to highway funding.

Rather than pay for a solution with legitimate offsets, some lawmakers want to let corporations reduce their tax-deductible contributions to pension funds. In the short run, this would increase federal revenue. Later, however, the corporations might well need to increase pension contributions, reducing federal revenue. 

In another short-sighted decision last week, the House voted to permanently extend “bonus depreciation,” an expired tax provision that gives companies larger upfront deductions on certain capital investments. According to congressional staff estimates, this would cost the government $287 billion in lost revenue over 10 years. 

Improper Payments Are Down But Still Troubling

The government made an estimated $105.7 billion in improper payments last year, including $62.2 billion for health care, the Government Accountability Office (GAO) says.

Beryl Davis, a GAO official, discussed the problem before a House sub-committee last week. Officials from the Office of Management and Budget, IRS, Defense, and Health and Human Services also testified.

Administration efforts to correct the problems have reduced improper payments from their $121 billion peak in 2010. Further improvements, however, are clearly needed.

The government, excluding Defense, has an overall error rate of 4 percent. In health care, the GAO says, error rates were 5.8 percent for Medicaid, 9.5 percent for Medicare Advantage, and 10.1 percent for Medicare fee-for-service.

“It is important to note that reported improper payment estimates may or may not represent a loss to the government," Davis said. "For example, errors consisting of insufficient or lack of documentation for a payment are included in the improper payment estimates."

The Pentagon’s Inspector General found that defense agencies are still allowing themselves to be significantly overcharged. For instance, the Pentagon paid $8,123 each for helicopter gears that should have cost $445.

Donovan Takes the Reins at OMB

Former Housing and Urban Development Secretary Shaun Donovan takes over as President Obama's fourth budget director after the Senate's 75-22 confirmation vote last week.

Donovan replaces Sylvia Matthews Burwell, who was recently confirmed as Secretary of Health and Human Services.

As head of the Office of Management and Budget, Donovan must work with Congress to quickly nail down Fiscal 2015 spending plans. And despite the dropping deficit, he must focus Washington’s attention on the nation’s long-term fiscal challenges.