Line Items: Seeing Shadows Edition
Having Our Phil – Punxsutawney Phil saw his shadow last Sunday, traditionally meaning six more weeks of winter. That is no surprise to most of the country that has seen record low temperatures and extraordinary amounts of snow. Most of us have accepted the reality of more wintry weather ahead just as we recognize that little in the way of substantive action will come out of a polarized Washington. But that doesn’t mean we are happy about it. Congress and most government institutions continue to suffer from record-low approval ratings as our leaders are unable to effectively confront the issues that most concern Americans. Voters have seen this movie before have had enough of partisanship and brinksmanship. Will policymakers continue to see shadows and run back in their holes at every turn, or will the frozen apparatus in Washington finally begin to thaw?
No Shadow of a Doubt, Debt Still a Problem – The Congressional Budget Office (CBO) on Tuesday released its Budget and Economic Outlook 2014-2024 with the latest projections for the next decade. The numbers illustrate that the federal budget deficit will decline this year and next (though those numbers aren’t as impressive as they seem at first blush), but then begin rising again. While there is some improvement in the short-term picture, the longer term outlook has worsened with CBO projecting $1.7 trillion more in deficits this decade than previously forecast. Public debt will rise to 79 percent of GDP by 2024 (more than twice the average since World War II) and continue on an upward path. In addition, the new study underscores the budget challenges presented by an aging society and the financial problems facing Social Security in the not-too-distant future with the Disability Insurance Trust Fund due to be exhausted in less than three years. CBO also cautions that the large and growing national debt could impair economic growth and standard of living. We analyzed and distilled what the lengthy study says about our fiscal situation in a brief paper and also continue to focus on its findings in an ongoing blog series. The Campaign to Fix the Debt also produced highlights of the outlook.
Debt Ceiling Coming Out of the Shadows Again – Congress is set to replay a familiar comedy of errors as the statutory debt limit was reinstated on Friday after the suspension imposed by the budget agreement late last year expired. The Treasury Department began “extraordinary measures” to maintain the ability to borrow to meet national obligations by ceasing to issue State and Local Government Series bonds. However, Treasury Secretary Jack Lew warned Congress via letter that those accounting techniques might not last beyond February 27. President Obama is demanding an immediate and clean increase in the debt limit while House leaders want something in return for an increase, but there is no agreement on what should be paired with raising the debt ceiling. A wide array of ideas has been offered, such as reforms to the budget process and ideas that have nothing to do with improving the fiscal situation, like approving the Keystone XL pipeline. There are now reports that the House may vote this week on a one-year debt limit suspension combined with extending the “doc fix” for nine months and reversing recent reforms to military retirement pay included in the budget agreement. However, one of the proposals for offsetting the costs of the plan is the “pension smoothing” gimmick that will actually add to the deficit in the long term. Another offset would include an extra year of cuts to mandatory spending. Meanwhile, the Bipartisan Policy Center and Concord Coalition offer ideas to improve the process so that fiscal responsibility can be promoted with threatening the economy. Have more questions about what the debt ceiling is and what it means? Check out our updated Debt Ceiling Q&A with everything you should know about it.
Still Looking for Common Ground on Unemployment Insurance – The Senate last week came up short in extending emergency Unemployment Insurance benefits. Two votes on a three-month extension, one not offset and one “paid for” with pension smoothing failed to garner enough support. Just after the vote, CBO scored the extension. The CBO assessment confirms what we have been saying all along, that pension smoothing is a gimmick. While the provision reduces the deficit in the first six years, it then begins to increase deficits thereafter.
White House Budget Won’t See the Light of Day Until March – Reports are (subscription required) that the White House Fiscal Year 2015 budget request will be released in two parts in March. By law, the budget was supposed to be unveiled February 3. The word is now that topline budget numbers will come on March 4 and more detailed numbers will come one week later on March 11. Despite the recent budget and appropriations agreements, there is still little question that the federal budget process still needs to be improved. The House Budget Committee marks-up two budget reform bills on Tuesday, one to adopt fair-value accounting for federal credit programs and one to institute biennial budgeting. In addition, the Brookings Institution has an ongoing blog series highlighting budget process reform ideas. For more budget reform proposals visit budgetreform.org.
Farm Bill Finally Comes Out of Its Hole – Last week the Senate passed major farm bill legislation and it was signed by President Obama Friday. The bill reduces deficits by about $17 trillion over ten years by streamlining direct payments to farmers and nutritional assistance programs. Combined with sequester savings, about $23 trillion in deficit reduction is achieved.
Tax Reform Grounded? – The Senate confirmed Max Baucus to be U.S. Ambassador to China, meaning that Congress loses a leader of efforts to overhaul the tax code. While the future of fundamental tax reform this year is up in the air, Baucus’ replacement as chair of the Senate Finance Committee, Sen. Ron Wyden (D-OR), says he will take on the 55 tax breaks that expired at the beginning of the year – known as the “tax extenders” – as a gateway to fundamental tax reform.
Will Doc Fix Hog the Spotlight? – The relevant House and Senate committees last week jointly announced legislation to permanently replace the Sustainable Growth Rate (SGR), known as the “doc fix.” However, no agreement has yet been reached on how to offset the cost of a permanent doc fix. How lawmakers decide to pay for the fix could be the subject of much debate.
Casting Sunlight on Budget Gimmicks – Budget gimmicks abound and we are exposing them. We issued a press release warning about the “pension smoothing” and “war savings” savings gimmicks. The Senate unsuccessfully tried to use pension smoothing to offset the three-month Unemployment Insurance extension and the House is considering it to pay for rolling back military retirement reform along with raising the debt ceiling. Meanwhile, legislation was introduced in the Senate to pay for the military reform reversal with so-called war savings, which is a gimmick because the “savings” result from the expected drawdown of forces from Afghanistan, not any new policy.
Déjà Vu on Military Retirement – This week the Senate is set to take up the issue of repealing reforms to military retirement included in the budget agreement. This could be a recurring theme as many lawmakers are not pleased with the cuts. As with virtually everything nowadays, a main sticking point is whether to pay for the change and how to do so. Senators will consider repeal without any offsets, but amendments paying for the change may be offered. The Bipartisan Budget Act reduced cost-of-living adjustments for working-age military retirees. Though the reforms are minor and there is widespread recognition that more will be required to reform military compensation, many lawmakers are facing pressure to reverse the changes. This episode illustrates why the optimal approach is a comprehensive "grand bargain" that achieves savings from all parts of the budget, so that one group cannot claim to be singled out.
Key Upcoming Dates (all times are ET)
- House Budget Committee mark-up of budget process reform legislation at 10 am.
- Senate Budget Committee hearing on the CBO Budget and Economic Outlook at 10:30 am.
- Treasury Department releases monthly federal budget data.
- Bureau of Labor Statistics releases January 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases second estimate of 4th quarter GDP growth.
- White House releases Fiscal Year 2015 budget request.
- Bureau of Labor Statistics releases February 2014 employment data.
- Bureau of Labor Statistics releases February 2014 Consumer Price Index data.
- Bureau of Economic Analysis releases third estimate of 4th quarter GDP growth.
- "Doc fix" expires.