Fiscal Speed Bumps
As it comes out of the last corner into the final stretch of 2015, Congress finds itself having to navigate four remaining Fiscal Speed Bumps before the end of the year. This Gathering Storm has the potential to disrupt legislative, administrative, and economic activity if not handled in a responsible and timely manner. We've recapped the remaining challenges for 2015-2016 below.
Impending Fiscal Speed Bumps
Appropriations End. Sequester-Level Caps Return (October 1)
Failure to pass appropriations bills or a Continuing Resolution (CR) by the government’s fiscal year-end on September 30 will result in a government shutdown. Assuming policymakers avoid a shutdown, they will still need to decide at what level to fund the government. The Ryan-Murray Bipartisan Budget Act set spending levels for only FY 2014 and FY 2015. For FY 2016, current law spending caps will be dictated by automatic spending reductions commonly referred to as the “sequester.” A number of policymakers and outside analysts have called for repealing or reducing the impact of this sequester.
Permanent sequester repeal would cost $1 trillion before interest over the next decade – although policymakers could enact a partial and/or temporary reduction of the sequester cuts. In any case, lawmakers should fully offset the costs with more thoughtful permanent savings that grow over time, without relying on gimmicks.
Legislation increasing the discretionary caps could also be accompanied by budget process reforms to strengthen their enforcement and restrict the use of gimmicks – such as the use of the Overseas Contingency Operations in the Congressional budget to effectively circumvent the defense caps. We describe such reforms in Strengthening Statutory Budget Enforcement.
In September, CRFB will release a plan to replace a portion of the sequester cuts over the next two years and on a permanent basis with savings elsewhere in the budget.
Highway Bill Expires (October 30)
At the end of October when the current highway bill expires, no new funds may be obligated to transportation projects without additional legislation. Rather than allowing highway spending to come to a halt, Congress' easiest option will be to pass a short-term reauthorization so that its expiration date roughly matches the trust fund's exhaustion. However, if Congress decides to take this route, effectively repeating how they dealt with this same issue in May, they will have to confront another highway funding cliff just as election season is shifting into full gear, and those hoping for a long-term deal will probably be forced to wait for a friendlier legislative climate in the next Congress. Congress should seize on this challenge as an opportunty to develop a long-term solution rather than as another opportunity to punt.
Federal Debt Ceiling is Reinstated (Mid-Fall)
The federal debt ceiling – which was suspended in February 2014 – was reinstated this March, limiting gross federal debt to its current level of $18.15 trillion. Through “extraordinary measures,” the Department of Treasury has been able to delay the need to address the debt ceiling even as the federal government continues to borrow. However, those measures are estimated to run out sometime after the end of October.
Policymakers must increase or suspend the debt ceiling to avoid a potentially disastrous government default, and should do so in a timely manner because waiting until the 11th hour could have negative economic consequences. An increase would ideally be accompanied with improvements to reduce the long-term debt, as well as reforms to the debt ceiling itself. Through our Better Budget Process Initiative, CRFB has presented a number of ideas for Improving the Debt Limit to better promote fiscal responsibility without generating as much economic risk.
“Tax Extenders” Reach Reinstatement Deadline (December 31, 2015)
At the end of 2014, over 50 temporary “tax extenders” expired, including individual and business tax breaks for research and experimentation, wind energy, state and local sales tax, and many others. Most are renewed regularly and can be reinstated retroactively through the end of 2015, and possibly later. Doing so for 2015 would cost over $40 billion before interest, and extending them into 2016 would cost about $95 billion. A permanent extension would cost about $940 billion total, without factoring in interest costs.
Rather than add to the debt, lawmakers should use this deadline as an opportunity for comprehensive, pro-growth tax reform that simplifies the tax code, reduces tax rates and deficits, broadens the tax base, promotes growth, and makes thoughtful choices about how to address each tax extender. Last year, CRFB proposed the PREP Plan, which combined a temporary extension with a fast-track process for tax reform and offset the cost with tax compliance measures.
Highway Trust Fund is Exhausted (Summer 2016)
If highway spending is continued at current levels without additional revenue, the Highway Trust Fund be exhausted by the s. Ultimately, policymakers should close the structural gap between dedicated tax revenue (e.g., the gas tax) and highway spending, which is projected to total about $13 billion this year and $175 billion through 2025. Preferably, this gap would be closed permanently with structural changes to revenue and/or spending, although a fully-offset general revenue transfer could be used to buy time, as it was this July.
CRFB released an illustrative plan in May: The Road to Sustainable Highway Spending, which included a fully-offset, short-term cash infusion into the trust fund, a process for tax and transportation reform, a scheduled 9-cent per gallon gas tax increase if alternatives were not identified, and a spending limit to keep future highway costs in line with revenue.
Social Security Disability Insurance (SSDI) Becomes Insolvent (Late 2016)
This year, the Social Security Disability Insurance (SSDI) Trust Fund will spend about $35 billion more than it will collect in payroll taxes, and sometime in the last quarter of calendar year 2016, it will run out of reserves. At that point, without legislative change, the program’s 11 million beneficiaries will see their benefits cut across-the-board by roughly 20 percent. One option to avoid this cut would be to “reallocate” revenues currently dedicated to Social Security’s retirement program, so they instead flow into the SSDI Trust Fund. But while this would avoid SSDI insolvency, it would modestly worsen the financial state of the retirement program.
Policymakers could instead use his deadline to pursue comprehensive Social Security reform which makes both trust funds sustainably solvent, or more incremental reforms to improve the SSDI program for its beneficiaries and contributors. (In either case, at least a temporary reallocation or inter-fund borrowing would be necessary during the transition).