'Line' Items: Baseline Edition

Baseline Instinct – The Congressional Budget Office (CBO) on Tuesday released its much-awaited 2012 Budget and Economic Outlook. According to CBO, if current law is maintained, deficits will decrease significantly in the period from 2013-2022; but that is a big if. Under the current law baseline, a major reason that deficits will shrink is due to major revenue boosts because the 2001/2003 tax cuts will expire and the Alternative Minimum Tax (AMT) will hit more middle-income families. However, the tax cuts were already extended once, in 2010, and the AMT is “patched” every year so that it doesn’t hit the middle class. The current law baseline also assumes that the sequester under the Budget Control Act will reduce the deficit by $1.2 trillion and that the Sustainable Growth Rate will result in substantial cuts to Medicare reimbursements to physicians, even though Congress always enacts "doc fixes" to prevent the Medicare cut and nobody wants the sequester in its current form to take place. As CRFB said in a statement, “these policy assumptions are politically unrealistic, suboptimal, and not a long-term fix.” Even under this rosy scenario, spending will rise significantly after 2022 as the result of rising healthcare costs and an aging population. CBO is bound by law to construct its official baseline based on current law, yet it recognizes that upholding current law may not be the likeliest scenario. Therefore, CBO also provided an “alternative fiscal scenario” where many current polices are maintained, such as the tax cuts are extended; the AMT is indexed for inflation, thereby sparing the middle class; Medicare payment rates are maintained; and the sequester will not take effect. Under the current policy baseline, deficits will average 5.4 percent of GDP in the period from 2013-2022, instead of the 1.5 percent projected under the current law baseline and public debt will reach 94 percent of GDP in 2022 instead of 62 percent. See CRFB's analysis of the CBO Outlook.

All the Baselines Covered – CRFB offered its own Realistic Baseline along with an analysis of the CBO Outlook. CRFB’s baseline makes assumptions similar to those in CBO’s alternative fiscal scenario, with two notable exceptions: CRFB assumes that other temporary tax provisions (the "tax extenders") will remain expired or be offset while CBO assumes that they will be extended and deficit-financed, and CRFB assumes that war spending is drawn down while CBO assumes that it grows with inflation. The CRFB realistic baseline projects that deficits will average 4.5 percent of GDP over the next decade and that public debt will reach over 86 percent of the economy in 2022.

Budget Baselines and Economic Lifelines – The dire economic projections in the CBO outlook have rekindled the debate over whether U.S. policy should focus on fostering the sluggish recovery or reducing the deficit. Yet, as CRFB pointed out, it is not an either/or proposition – short-term economic recovery and long-term debt reduction can be balanced with smart policies. In congressional testimony last week, Federal Reserve Chairman Ben Bernanke also sent this message: “Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible--indeed, they are mutually reinforcing.” Under questioning, Bernanke also reiterated that he supports a “Go Big” approach to deficit reduction. CRFB points out that it is a matter of timing and composition of a comprehensive fiscal plan. By phasing in deficit savings over time and using a targeted approach, as opposed to across-the-board spending cuts, economic growth and deficit reduction can go hand-in-hand. The CBO report also underscores that key decisions on taxes and spending now will significantly affect the budget and economic outlook.

Payrolling Along – The congressional conference committee on extending the payroll tax holiday and other items met twice last week, with more meetings planned this week. The negotiators agreed that the payroll tax holiday should be extended for one year, but have yet to find agreement beyond that. How to pay for the extensions continues to be a primary sticking point. CRFB offered its thoughts on what the conference committee should and shouldn’t do. The committee has until the end of the month to reach agreement. 

U.S. As Charity Case – Move over Easter Seals, the national debt is becoming the hot new charitable cause. Billionaire Warren Buffett has promised to match the donations of any member of Congress towards reducing the national debt. He also agreed to match the $300 donation of a high school student. So, should Jerry's Kids be worried? Economists have discussed how the mounting national debt could crowd out private investment, but will it also crowd out giving to charitable causes? Maybe the charity drives should be aimed towards curing a dysfunctional Washington.

Giving at the Office – Some Senators have made a big deal of saving a portion of the funds allotted to finance their offices and returning the money to reduce the debt, even using gigantic checks as props. Their counterparts on the other side of the Capitol want to follow suit, demanding that unspent funds from their office budgets, known as representational allowances, go straight to deficit reduction. While these are great moves in the right direction, such gestures will not be nearly enough to put the country on a sustainable course. We need lawmakers to come together and agree to a fiscal plan.

Lining Up for Budget Reform – In light of the inability of policymakers to agree to an annual budget, efforts to reform the budget process continue to gather steam in Washington. Last week the House approved The Baseline Reform Act (HR 3578), which prohibits CBO from assuming that discretionary spending increases with inflation in its baseline. It also passed legislation (HR 3582) that will require CBO to provide dynamic scoring of major legislation, which seeks to account for the macroeconomic affects of proposals. This week the House is expected to vote on a bipartisan bill (HR 3521), which will provide the president with expedited authority to single out items to be rescinded in spending bills passed by Congress. The House will also consider HR 3581, which will put Government Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac on-budget and use fair value accounting for federal credit programs. In addition, legislation has been introduced in both chambers that seeks to reduce the use of gimmicks in federal budgeting. The Honest Budget Act would make it harder to pass appropriations bills without a budget in place; require a supermajority vote to designate items as "emergency" spending that bypasses budget rules; and eliminate several other gimmicks. These efforts come as Senate Majority Leader Harry Reid (D-NV) announced last week that the Senate will not consider a budget resolution this year – showcasing the budget dysfunction in Washington and need for budget reform. Meanwhile, most members of the European Union approved of new fiscal rules meant to bring more discipline and transparency to nations’ budgets in the hopes of preventing future debt crises like the one currently gripping the continent. See more ideas for budget process reform here.

Tax Expenditures on the Line – With a heated debate going on over how revenues should be involved in reducing the deficit and calls for fundamental tax reform coming from both sides of the aisle, tax expenditures -- the credits, exemptions, exclusions, deductions and other tax subsidies that essentially are federal spending through the tax code -- are getting serious attention. The CBO Outlook examined the issue of tax expenditures and CBO Director Douglas Elmendorf expanded on the topic in his blog. The Tax Policy Center also looked at the issue in a recent report, which got our attention. Eliminating, or at least limiting, tax expenditures could go a long ways towards making the tax code simpler, more transparent, progressive and efficient, while also providing additional revenue for deficit reduction. See more tax expenditure reform ideas here, here, and here.

Going Down the Line for Savings – Congress is considering a number of bills aimed to take a small bite out of the deficit. Last week the House passed HR 3835, which will continue the current pay freeze on federal civilian employees and members of Congress through 2013, as well as legislation to repeal the CLASS act, which was a part of the 2010 health care reform legislation that created a new entitlement program for long-term care. The House this week plans to vote on HR 1734, which would create a BRAC-like commission to oversee the selling or redevelopment of federal property. And a group of senators have introduced legislation to implement the so-called Buffett Rule, which says that high earners should pay a higher tax rate than their secretaries. The bill would require that millionaires pay at least a 30 percent tax rate.

Key Upcoming Dates (all times ET)

February 7

• Senate Budget Committee hearing on "The Outlook for U.S. Monetary and Fiscal Policy" with Federal Reserve Chair Ben Bernanke at 10 am.
• House Subcommittee on Government Organization, Efficiency, and Financial Management hearing on improper payments at 10 am.
  
• Joint Economic Committee hearing on extending the payroll tax cut holiday at 2:30 pm.
• Senate Finance Committee hearing on Senate version of highway bill at 3:00 pm.
• GOP presidential contests in Colorado, Minnesota and Missouri.

February 13

• The President will submit his FY 2013 budget request to Congress.

February 17

• Dept. of Labor's Bureau of Labor Statistics releases January 2012 Consumer Price Index (CPI) data.

February 22

• Arizona GOP debate sponsored by CNN at 8 pm.

February 28

• GOP presidential contests in Arizona and Michigan.

February 29

• The temporary payroll tax cut, unemployment insurance, and doc fix extensions will expire.
• US Dept. of Commerce's Bureau of Economic Analysis releases its second estimate of 2011 fourth quarter GDP.

March 3

• Washington Caucus

March 5

• Reagan Library GOP debate sponsored by NBC (time TBD)

March 6

• Super Tuesday - presidential contests in Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia.

March 6-10

• Wyoming Caucus

March 9

• Dept. of Labor's Bureau of Labor Statistics releases February 2012 employment data.

March 10

• Presidential contests in Kansas and the Virgin Islands

March 13

• Presidential contests in Alabama, Mississippi, and Hawaii

March 16

• Dept. of Labor's Bureau of Labor Statistics releases February 2012 Consumer Price Index (CPI) data.

March 17

• Missouri Caucus

March 18

• Puerto Rico primary

March 19

• Oregon GOP Debate sponsored by PBS at 9 pm.

March 20

• Illinois primary

March 24

• Louisiana primary

March 29

• US Dept. of Commerce's Bureau of Economic Analysis releases its third and final estimate of 2011 fourth quarter GDP.