What to Expect From the President's FY 2016 Budget
On Monday, the President is scheduled to release his FY 2016 Budget. Based on press reports, we know some rough outlines of what he will be proposing. Here are some other things to look for.
Will it put debt on declining path?
Our long-term fiscal challenge is addressing the unsustainable growth in the national debt. Thus, all of this year's budgets, including the President's, should put debt as a percent of GDP on a declining path over the next ten years and beyond. After CBO’s baseline release this week indicated that debt will start to rise after 2018, we calculated that $2.4 trillion in deficit reduction will be needed to put the debt on a clear downward path. The budget somewhat hit this goal last year, when OMB projected that the FY 2015 budget would put debt on a declining path, but CBO's re-estimate projected that debt would continue to grow as a percent of GDP. CBO has generally, though not always, projected higher debt when it re-estimates the budget due to different economic and technical assumptions and not counting some gimmicks, so we may have to wait for that score. The President has said his budget will place debt on a declining path, but will it hold up to scrutiny?
Will it address the growth of entitlements?
CBO currently projects that mandatory spending will continue to become a larger share of government spending. The President’s FY 2015 budget partially addressed the growth in entitlement spending by proposing Medicare savings, particularly by provider payment reductions, prescription drug changes, and increased means-testing premiums. An important question is whether he keeps those proposals. But more importantly, will he put forward any more proposals? Last year, the President's Budget did very little to change the trajectory of Social Security which is both the largest program in the federal government and scheduled to become insolvent within two decades. We were quite disappointed when the President dropped chained CPI after including it in the prior year’s budget. As we’ve shown, the longer policy makers wait to address Social Security's looming insolvency, the harder it will become. The solutions to Social Security are relatively straightforward, and our readers can try their own hand at reform through our Social Security Reformer.
How will he pay for his initiatives?
Last year, the President paid for new initiatives with dedicated offsets and had enough savings to offset proposed sequester relief. According to White House fact sheets, new revenue from high earners will offset new investments, like free community college, and new tax cuts. But we are looking forward to hearing the specifics and hope he maintains other savings from previous budgets and includes new savings for any other new initiatives, especially since the budget will apparently include a similar amount of sequester relief as last year. Because of our unsustainable debt course, abiding by the principles of PAYGO is the bare minimum standard. Will the President's budget adhere to this standard?
What does he say about tax reform?
President Obama has routinely been supportive of business tax reform and has outlined a broad framework with goal of reducing the top rate to 28%. Will this year's budget provide further specifics on the kinds of policies would offset a rate reduction? The budget will also establish an important marker on the baseline for tax reform, specifically whether the costs of extending expired tax breaks will be assumed in the baseline or if those costs will need to be offset. Last year's budget used temporary revenue from the business tax reform to shore up the Highway Trust Fund. Will it be the same this year? See our prior blog on the President's highway plan. Try your hand at corporate tax reform with our tax reform calculator.
Will he ensure doc fixes are fully offset?
Despite the fact that Congress has offset a doc fix 98 percent of the time, some in Congress do not want to offset the patch to the Sustainable Growth Rate (SGR) when it comes up in March. In the past, the President's budget assumed the costs of repealing the SGR in the baseline so replacing it was not treated as a cost requiring offsets, but the budget included more than enough Medicare savings to offset those costs. It's not clear whether the President will insist that some of those offsets accompany any SGR fix to prevent it from adding to the debt. We recently provided a package of illustrative offsets for paying for a replacement of the SGR.
How will he address the exhaustion of the Highway Trust Fund?
Two years ago, the President unfortunately proposed the gimmick of using declining war spending as an offset to pay for highways. Last year's proposal was an improvement: it avoided gimmicks by using temporary revenue from corporate tax reform to shore up the trust fund. But that was only a short-term solution, funding only the four years that his proposed highway bill would have covered, but not closing the structural gap between spending and revenue. He was hesitant to endorse a gas tax increase despite falling gas prices apparently making that a more likely possibility. Will he include another option to close that structural gap between spending and revenue?
What does he say about imminent Social Security Disability Insurance trust fund depletion?
In the past, the administration has said that the impending insolvency of SSDI should be addressed by a reallocation of payroll taxes from OASI to DI. However, past budgets have included small SSDI savings by prohibiting double-dipping of disability and unemployment benefits, by increasing funding for Continuing Disability Reviews, and by requesting $400 million to fund early intervention pilot projects aimed at helping workers with disabilities remain in or re-enter the workforce. With DI trust fund exhaustion date now less than two years away and the OASI trust fund facing growing shortfalls, will he propose further reforms of DI or the old-age program to accompany any revenue reallocation? Late last year, we launched the SSDI Solutions Initiative, dedicated to identifying practical policy proposals to improve the SSDI program for its beneficiaries and contributors.
What are the sequester relief details?
The President has said that he will propose full sequester relief for FY 2016 for non-defense spending, while increasing defense spending by the same dollar amount. This would increase defense and non-defense discretionary caps by $37 billion each for total FY 2016 sequester relief of $74 billion. However, we don't know how much will the budget will propose lifting caps in subsequent years? Last year, the sequester relief gradually declined after the first year. Will the president completely eliminate the mandatory sequester as he did last year? Will he propose offsets as he did last year? Will those offsets be ones with potential support in Congress? Replacing the sequester with permanent reforms to lower entitlement spending would be better both for the budget and the economy. The President can look to the Ryan-Murray budget deal that had partially replaced the sequester in FY 2014 and 2015 as inspiration for working across party lines.
Check back Monday for our response and analysis of the President’s budget.