GOP Turns the Tables on a Long-Term Budget Deal

Published Jun 21, 2013. By Eric Pianin and Josh Boak. In The Fiscal Times.

By ERIC PIANIN, JOSH BOAK, The Fiscal Times June 21, 2013


Congressional Republicans are eager to move the goal posts on the budget deficit, now that projections of the government’s balance sheet has improved for the next few years while the real problems won’t surface for decades to come.

 

Just months ago, top GOP leaders accused President Obama of shifting the goal post when negotiating a possible budget deal by seeking new tax revenues. Now the key to the GOP offense in negotiating with the administration over spending and the national debt involves greatly lengthening the end zone.

 

Budget plans usually feature a ten year time frame for determining how policies might play out.  Any anxiety about the current trajectory was relieved last month when the Congressional Budget Office estimated that more than $400 billion would be trimmed from the more than $1 trillion deficit last year, and that shortfall would continue to decline as a share of the economy.

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The good deficit news was partly fostered by tax increases agreed to during the fiscal cliff negotiations, assessments of the impact the Affordable Care Act, and the $1 trillion of automatic spending cuts over ten years in the sequester.

 

THE 30 YEAR WAR Within the last several weeks, Republicans such as Wisconsin Senator Ron Johnson demanded that policy be set for controlling spending and entitlement programs based on projections telescoping out for the next 30 years or more – when Social Security and Medicare costs are certain to skyrocket.

Johnson argues that using a 30-year window would portray a more accurate picture of the growth of entitlement programs. From that perspective, he says, the budget gap would grow to between $72 trillion and $107 trillion, depending on the economic assumptions used.

“Right now we're trapped in this 10-year budget window which really minimizes the problem,” Johnson told the Fiscal Times this week. “If you open up a 30-year budget window -- which is really the Baby Boom bubble problem we have, it's the demographic problem -- that's what I think is the appropriate budget window we should be looking at.”

“Those numbers are so huge, those numbers are so scary,” he said.

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Johnson said that some Republicans are trying to work with the Obama administration to compromise on a new spending agreement and new debt ceiling later this summer. “What we're hoping to do is to be able to agree on the problem, which from my standpoint is the first step in any negotiation.”

“Most people who look at the budget, from right to left, would say, you know this reduction in the budget deficit is great, but we need to go further,” said J.D. Foster, an economist with the conservative Heritage Foundation.  “But let’s not kid ourselves. The long term problems are just as great as they ever were and the long term is getting much, much closer.”

The shift in thinking speaks to the new found lack of urgency in fixing the deficit. Just yesterday, Republican House Speaker John Boehner (R-OH) didn’t even mention the deficit or long term debt in a major economic speech before the National Association of Manufacturers.

Boehner stressed that "we're still not seeing real growth," a problem caused by government red-tape, an "outdated" tax code and "shortsighted" polices. But the deficit went unmentioned, unlike in a 2011 speech before the Economics Club of Washington, when the speaker quoted a colleague as saying, "It is clear that our debt hangs like the Sword of Damocles over their hiring decisions."

YET ANOTHER STANDOFF ON THE DEBT CEILING  

The Republican ethos since the 2008 financial crisis has been grounded in deficit reduction. While Boehner apparently no longer thinks the deficit warrants top billing, a majority of House Republicans continue to press for a balanced budget and deep cuts in domestic programs. Paul Ryan and other conservative House members have scoffed at Senate Democratic efforts to boost spending on social programs and raise taxes, and are pressing to approve spending bills for the coming fiscal year at levels well below those agreed to in the 2011 Budget Control Act.

This rift will likely shape a budget standoff this fall when Congress will once again be required to approve an increase in the government’s borrowing authority or risk default or a government shutdown. While many Democrats are certain to argue that the shrinking deficit projections offer cover for postponing additional spending cuts and canceling the sequester, Republicans like Johnson care more about what happens starting in 2024 than 2014.

“Republicans have been continuing to press for cuts in Social Security, Medicare and Medicaid,” said Paul Van de Water, a Senior Fellow at the liberal Center on Budget and Policy Priorities. “And since the 10-year picture has gotten somewhat better as of late, I think it could well be an effort to keep the heat on, so to speak, to provide ammunition for their efforts to cut back on entitlement and social programs.”

The House last March passed a new budget largely along partisan lines that would achieve a surplus within ten years through deep spending cuts and reforms to Medicare and other entitlements. That austere budget blueprint is now being used as a guidepost by House appropriators to draft spending bills for the fiscal year that begins in October.  Moreover, Boehner has vowed to force the White House and Democrats to match any increase in the government’s borrowing authority later this year with equivalent cuts in spending – on top of the across the board spending cuts already in effect under sequestration.

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But in mid-May, the CBO projected a $642 billion budget deficit for the fiscal year ending Sept. 30--the lowest level of deficit spending to date under President Obama, who faced $1 trillion or more in annual deficits during his first term.  Moreover, the long-term deficit projection was much improved.  CBO estimated a 2015 deficit of $378 billion. However, the cumulative effect in the next decade of deficit spending through 2023 is projected to be $6.3 trillion.

Absent a gloomy deficit picture for the near-term, Republicans and other deficit hawks would prefer to look to the distant future, where a demographic time bomb awaits Social Security and Medicare long after Baby Boomers have entered their golden years. In short, the new GOP plan is to convince a Congress that focuses on two-year election cycles to base their policy around what happens when Malia and Sasha Obama, the president’s daughters, are middle aged.

“I think it’s a very good idea to be looking at 30-year budgets,” said Robert Bixby, executive director of the Concord Coalition, an anti-deficit group. “Obviously, we all understand that they are uncertain, and the further out you go the more uncertain. But really you know the main budget problem has always been our long term structural deficit, which is caused by basically demographics and health care costs – some of those long term things.”

“So the more emphasis that’s put on the structural deficit and less on the short term cyclical deficit, which is getting better, so much the better,” Bixby told The Fiscal Times.

The CBO releases a 25-year budget forecast each year, although the projections are notoriously inaccurate. These projections contain kernels of demographic truths, but they're mixed with economic figures that veer toward fiction with each passing year. They report the debt only as a share of the total economy, since using dollar amounts--without adjusting for economic growth—automatically creates the impression of impending doom.

Economists at the regional St. Louis Federal Reserve Bank last year examined 34 years of CBO estimates and concluded in a paper that they were "unreliable" beyond 12 months.

For example, when the CBO examined two possible scenarios last June in its long-term forecast, it found two potential extremes that all hinged on how President Obama and Congress dealt with the fiscal cliff at the start of this year.

The debt-to-GDP ratio could either fall to 53 percent by 2037, if the across-the-board tax rate hikes from the fiscal cliff had actually occurred. Or, the ratio could jump to a Japan-like 200 percent, if Congress had revoked the sequestration budget cuts and tax rates had stayed at their temporarily low 2003 levels.

Neither scenario occurred. Instead, the forthcoming CBO update will be shaped by a compromise in which tax rates increased for the top 1 percent and the gridlock that could not find an alternative to the sequestration.

“The world is an unpredictable place,” said Robert D. Reischauer, a former CBO director. “The uncertainty grows rapidly as one goes out beyond even five years.”