Five Key Problems with the President’s 2019 Budget Plan

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Although Congress has yet to complete its long overdue work on spending plans for the current fiscal year, lawmakers must soon turn their attention to the budget for Fiscal 2019, which begins Oct. 1. Unfortunately, President Trump’s proposed budget fails to provide credible guidance and falls far short of what is required to put the federal government on a sustainable fiscal path — particularly after Washington’s recent approval of deficit-financed spending and tax breaks.

Here are five areas of critical concern:

1. The balanced budget goal is gone.

The president’s proposed budget for the coming fiscal year was presented against a backdrop of large and rising deficits and a national debt headed steadily higher as a share of the economy. While this situation was already embedded in current law before President Trump took office, it has been made worse because of deficit-financed tax cuts and spending increases enacted over the past year. Other driving forces behind the longer-term outlook: An aging population and rising health care costs that are causing major benefit programs such as Medicare, Medicaid and Social Security to grow faster than the economy and federal revenues.

The new budget plan should have begun with a clear fiscal-policy target to guide decision-making. Without such a target, a presidential budget is nothing more than a random compilation of proposals that may or may not address our nation’s fiscal challenges. Having such a goal requires policymakers to set priorities and make necessary trade-offs.

Last year President Trump’s budget had the goal of getting back to balance within 10 years. It was a reasonable goal but it came with irresponsible gimmicks, unspecified policies, and double-counting that limited its credibility and impact on congressional decision-making.

This year’s budget proposal is even worse because it abandons the balanced budget goal but continues to include policy and economic assumptions that lack credibility. Federal debt held by the public, measured as a share of the economy, would increase from 76.5 percent at the end of 2017 to 81.9 percent by the end of 2022. It then is projected to decline to 72.6 percent by 2028. Even these meandering targets seem unrealistic given that the administration does not have a set of proposals that would credibly achieve them, nor does it offer proposals to address the long-term sustainability challenges beyond the next 10 years.

2. The proposed budget begins with rosy economic assumptions, then adds even more.

The budget projects steady annual economic growth of about 3 percent. On top of the added growth presumed from last year’s large deficit-financed tax cuts, the budget assumes another boost from the policies in this year’s budget that would supposedly reduce deficits by $813 billion over 10 years. There is, however, little evidence to suggest that last year’s tax cuts or the policies assumed in the budget would produce sustained 3 percent growth.

The budget’s growth assumptions are significantly higher than those of the Congressional Budget Office (CBO) and private-sector forecasts. The administration’s assumptions are not supported by demographic factors and labor force productivity trends — the two key factors on which economic growth ultimately depends. While it is certainly possible to attain above-trend growth in any given year, it is not fiscally responsible to base a budget on the assumption that such growth can be maintained permanently.

The CBO projects that the economy will grow at an average annual rate of just 1.9 percent over the next 30 years (adjusted for inflation). That would be a significant drop from the 2.6 average rate over the past 30 years. The congressional Joint Committee on Taxation, which is charged with scoring tax legislation, estimated that the tax cuts would provide a short-term boost to growth but little long-term change, leaving annual growth well short of 3 percent.

Some politicians claim that CBO is being too pessimistic but demographic changes justify these lower projections. Since 1950, the growth in potential GDP (the maximum possible production of the economy if all resources were fully utilized) has been due in roughly equal parts to a growing labor force and rising productivity.

However, over the next decade, CBO projects labor force growth will be just one-third of the recent historical average while productivity growth will be slightly below its average since 1950. This means that achieving economic growth anywhere near past levels will require new policies that increase the size of the labor force and improve productivity.

In that regard, however, some proposals in the budget have the potential to slow GDP growth. For example, proposals to restrict legal immigration might slow growth by shrinking the labor force at a time when the country’s ratio of workers to retirees is already falling rapidly. Similarly, major cuts targeted at domestic discretionary spending could impede economic growth if they result (as seems likely) in diminished federal investment in workforce productivity.

3. Health care savings are not directed at controlling underlying costs.

Health care programs comprise almost 30 percent of federal spending. These programs include Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for individuals to purchase private health insurance under the Affordable Care Act (ACA).

Spending on these programs is driven by increases in the number of people covered plus the underlying cost of providing services. As the population ages and the cost of providing services rises, there will be increased pressure on the federal budget.

Proposals that achieve savings only by reducing the number of people with insurance or increasing cost-sharing have limited potential for sustainable savings. They reduce some budgetary pressure but at the risk of reducing access to quality care. They do nothing to control health care inflation over the long term or to improve the value of services received. Innovative strategies for slowing health care costs take a back seat in the budget to such measures.

There would be large cuts to health care spending, primarily for Medicaid. The administration seeks savings of nearly $700 billion in part through the theoretical passage of legislation patterned after an ACA “repeal and replace” proposal by Sens. Lindsey Graham (R-S.C.) and Bill Cassidy (R-La.). This proposal would turn most ACA and Medicaid spending into block grants to states.

However, that proposal failed to get a majority vote in the Senate in the fall and is almost certainly not going to be taken up again by the Senate over the next year. This makes the assumed large savings in the budget unlikely.

The budget fails to clarify the administration’s stance on the individual insurance marketplaces set up by the ACA. With full repeal of ACA unlikely, and the markets facing continued instability, further premium increases are on the horizon due to the elimination of the law’s individual mandate. So the administration should decide whether it will support bipartisan attempts among some members of Congress to pass a market-stabilization bill.

This type of legislation could be an opportunity to attach some bipartisan cost-control measures — of which there are some in the budget. There are changes to Medicare provider payments and Medicare prescription drug plans that aim to bend the cost curve and achieve savings of around $120 billion. These proposals should be taken seriously by Congress and have the potential for bipartisan support, having also appeared in President Obama’s budgets.

On top of that, the Trump administration continues to unveil some new provider-payment reform models, and the new Health and Human Services (HHS) secretary has indicated an openness to some key types of cost-control experimentation.

Yet the overall push for cost control is weaker than it needs to be, given that health spending is the largest programmatic driver of the nation’s long-term fiscal challenges.

Moreover, the president recently signed legislation delaying the ACA’s “Cadillac tax” on high-cost insurance plans. This tax could slow health care cost growth by reducing the tax subsidy for expensive employer-provided insurance plans. It was a major cost-saving feature in the original ACA. Continual delays of the tax amount to a lost opportunity to hold down health costs.

The president also signed a repeal of the Independent Payment Advisory Board (IPAB), which was designed to act as a guardrail against excessive Medicare cost growth.

Such actions, and their lost opportunities for cost control, overshadow the few positive proposals in the budget.

4. The budget’s discretionary spending targets are neither plausible nor desirable.

Discretionary spending consists of the roughly 30 percent of the budget that is determined through the annual appropriations process. It includes defense spending and non-defense funding for all the Cabinet departments such as State, Education, Justice and Homeland Security along with federal agencies such as the Environmental Protection Agency.

Since 2011 both defense and non-defense discretionary spending have been governed by caps set in place by the Budget Control Act of 2011. Living within these caps has proven to be problematic, making appropriation bills hard to pass. As a result, Congress has revised the caps upward three times: in 2013, 2015 and in the spending agreement just reached in February.

The discretionary spending assumptions in the president’s budget lack credibility. In total discretionary spending would fall from 6.3 percent of GDP  to 3.7 percent of GDP in 2028. Over the past 40 years it averaged 8.2 percent of GDP.

Perhaps the most jarring proposal in the budget is to cut non-defense discretionary spending by 2 percent a year (the “two-penny plan” instead of last year’s proposed “one-penny plan”). This would begin with cuts in Fiscal 2018. This proposal results in “paper” savings of nearly $1.5 trillion, and for 2028 a cut in spending of 42 percent. This would bring non-defense discretionary spending down to 1.3 percent of GDP by 2028, so far below its historical average of 3.8 percent as to be totally implausible.

The possibility that either Congress or the administration itself would enact such severe spending restraints is belied by the increases just signed into law. Moreover, cuts of this magnitude would hinder the government’s capacity to invest in domestic priorities such as education, basic research, environmental protection and law enforcement.

Such cuts would also likely negate the administration’s infrastructure investment effort. While the infrastructure plan calls for most of the money to come from state and local governments as well as the private sector, the administration wants the federal government to provide $200 billion of the $1.5 trillion investment goal. Yet the budget proposes transportation and other infrastructure cuts of around $200 billion and there is no clear, credible explanation of this juxtaposition or how any new infrastructure spending would be financed.

Missing from the plan is any attempt to close the projected funding gap in the government’s Highway Trust Fund. Trump says he is open to the possibility of raising the federal gas tax, which has not been done since 1993 despite rising highway construction and maintenance costs. A gas tax increase of 25 cents per gallon would raise nearly $400 billion. This would be a responsible step to pay for increased highway spending. But just hinting at such an increase is not enough; the president could have shown real leadership by explicitly calling for it.

Meanwhile, despite a short-term increase in defense spending and continued funding above baseline assumptions through 2028, this category would also decline as a share of GDP from 3.2 percent in 2017 to 2.4 percent in 2028.

5. The budget does not reflect shared sacrifice.

An important principle of major deficit-reduction efforts is that they should be designed in a way that shares whatever sacrifices are made. This is a wise approach both for reasons of fairness and political viability. Disproportionate cuts merely harden opposition from those who perceive that they are being targeted, making it less like that any cuts will be enacted or that the savings will hold up over the long term.

President Trump’s budget flies in the face of this principle. It isolates the largest, most politically protected programs from big changes and targets its cuts on more vulnerable programs such as means-tested entitlements and non-defense discretionary programs, particularly for education, housing and community development.

In 2017 the three largest programs in the budget were Social Security ($939 billion), Medicare ($591 billion) and defense ($590 billion). They represented 57 percent of non-interest spending. Under the president’s budget, however, they would swell to nearly 70 percent of non-interest spending within 10 years. That results from the growing cost of Social Security and Medicare as the population ages and the added cost of the president’s defense buildup.

While the budget shows a net 10-year reduction of $300 billion from Social Security, Medicare and defense (mostly from Medicare cuts), “welfare” programs, including Medicaid, and non-defense discretionary spending is reduced by roughly $2.4 trillion, eight times as much.

Aside from the lopsided nature of the cuts, they target portions of the budget that with the exception of Medicaid are not growing faster than the economy and thus comprise less of a threat to our fiscal future.

The choices made in the budget may reflect in part the president’s overemphasis on cutting “waste” as a long-term solution. His budget message begins by promising to end wasteful spending. After correctly noting that the U.S is “laboring under the highest level of debt held by the public since shortly after the Second World War,” he says that his budget “makes the hard choices needed to stop wasteful spending, lower the national debt, and focus Government on what matters most — protecting the Nation.”

This framing implies that the only hard choices we need to make involve cutting waste. It’s a misleading and mathematically flawed proposition. To be sure, there is waste to be found in the federal budget, but it is not why our nation’s fiscal policies are on an unsustainable track.

The Trump budget highlights efforts towards increasing government efficiency, suggesting a new “management agenda” to be unveiled in the spring. Improving efficiency and combating fraud could save some money, but that would not be a sufficient strategy for fixing the long-term fiscal challenges facing the nation. Even substantial savings from cutting waste, fraud and abuse would mostly provide one-time gains that would not alter the basic structural nature of the government’s projected deficits.

The bottom line is that if we want to increase defense spending, leave Social Security and Medicare largely untouched and have adequate resources to fund the rest of government and not run up the debt to unsustainable levels, we will eventually have to raise more revenue. This is the basic trade-off that the president’s budget obscures in its fog of phantom cuts.

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