Finally, Deficit Neutral Stimulus

Finally, the Senate got it right: we have a deficit-neutral stimulus. In fact, the bill would even slightly reduce deficits by $1.4 billion over the coming decade, according to CBO. After months of failed attempts to pass deficit-increasing stimulus packages, Senate Democrats just cleared a hurdle this morning by successfully invoking cloture on the $26.1 billion package, and final passage in the Senate is expected shortly. The package includes an education jobs fund, which was previously attached to (and subsequently removed from) a supplemental bill and an extension of the increased Medicaid payments to states -- previously dropped from HR 4213.  The two provisions would cost $10 billion and $16 billion, respectively. According to CBO, transfer payments to state governments have among the highest bang-for-buck (its multiplier ranging from 0.7 to 1.8), so it's good that in doing a stimulus, the Senate chose both effective policies and a fiscally responsible way of doing them.

2010-2020 (billions)
Spending Provisions
Education Jobs Fund $10
Medicaid Extension $16.1
Subtotal, Spending $26.1
Medicaid AMP Provision -$2
Food Stamp Reduction in 2014 -$11.9
Rescissions -$2.8
Eliminate Advanced Refundability of EITC -$1
Other Revenue Offsets
Subtotal, Offsets -$27.5
Deficit Impact -$1.4

Since the cost is not that big, it isn't hard for Senators to find offsets. The most notable offset is an early termination of the ARRA increase in food stamp benefits. The one-time increase was supposed to last until 2014, when the normal inflation-adjusted benefit caught up and overtook the ARRA benefit; however, CBO estimated earlier this year that the benefit would not catch up until 2018. This offset would simply terminate the ARRA benefit in March 2014. Another spending offset is a minor change to the Medicaid AMP, the drug reimbursement formula. Other deficit-reducing changes are mostly minor tax provisions, including the elimination of the advanced EITC -- a move the Administration has called for since last year--and many changes relating to the taxation of foreign income and subsidiaries.

CBO estimated that the bill would reduce deficits by about $1.4 billion from 2010-2020. It was tabled earlier in the week after it was discovered that it would increase deficits by $5 billion. Subsequent changes were made.

We're glad that legislators are getting the message. Lawmakers have decided that additional state support was necessary and then offset those costs over the coming decade, providing short-term spending boosts without further jeopardizing our fiscal health -- exactly what CRFB has been recommending should lawmakers and economists agree that additional spending is needed. After the debacle with HR 4213, when provision after provision was stripped away until a deficit-financed unemployment extension was passed, this bill provides stimulus in a fiscally responsible way. But this is just the beginning of fiscal responsibility -- when you're in a hole, the first thing you need to do is stop digging. There will be plenty more for both Democrats and Republicans to do over the coming months to actually begin reducing deficits in significant ways.

We will have this package up on as soon as it becomes law.