Committee for a Responsible Federal Budget

Line Items: Going Down Kicking Edition

Sep 25, 2013

Relying on the Kicking Game – The return of Congress to Washington has been about as productive as the return of RG3 to the football field for DC. The Redskins are 0-3 and lawmakers have yet to notch any wins themselves since returning from their summer recess. With two fiscal deadlines right around the corner, our leaders appear ready to punt as usual instead of going for the end zone. As long as policymakers prefer to kick the ball down the field, and kick each other, we will not get ahead of our fiscal challenges, at the expense of our international prestige and competitiveness as well as the standard of living for all Americans. Autumn has officially arrived and with it comes a full agenda. Will the Big Fall see a Big Fail?

Trying to Move the Goalposts on a Government Shutdown – Policymakers have known all along that they had to agree on federal spending before the new fiscal year begins on October 1 or the government will shut down. Yet, they still are running out the clock with disagreements over spending levels and health care. Even if they avoid a shutdown, it will only be for a short time. On Friday the House approved of a stopgap continuing resolution (CR) funding federal operations through December 15 on a largely party-line vote. The bill essentially maintains federal funding at current levels, a source of some contention with the Senate, which supports bypassing sequestration and setting higher spending levels but appears inclined to accept that figure for now. Complicating the situation is that the House-passed CR also includes language defunding the health care reform bill, which is a non-starter for the Senate and White House, which already threatened a veto in the unlikely scenario that it gets through the Senate with that provision. The Senate should take up the bill this week and attempt to remove the health care language through a byzantine process. The Senate may also shorten the length of the CR to November 15. Washington may yet find a last-minute solution as it has done in the past, with parliamentary maneuvers and legislative gimmicks. But avoiding disaster in the near term should not be considered a victory. Political posturing and the introduction of extraneous issues are distracting from the discussion the appropriations process should initiate over the fiscal outlook and how to address the long-term budget challenges. There are better options, as we lay out here. And get answers to all your shutdown questions with our new Government Shutdown Q&A.

Kicking Up Heels on Another Debt Limit Dosey Doe – Even if Washington can put off a government shutdown for a short time, another fiscal speed bump will be right around the corner. Treasury Secretary Jack Lew estimates the federal government will exhaust extraordinary measures to avoid hitting the debt ceiling on October 17, at which point they would default. The House may consider legislation this week raising the debt limit for one year (until after the 2014 elections) in exchange for delaying the implementation of health care reform for one year and other potential concessions such as an outline and clear process for enacting tax reform and achieving some savings from entitlements through policies such as chained CPI. The delicate debt limit dance will have even higher stakes than the shutdown battle because economists warn a default caused by failure to raise the limit would have dire consequences to the U.S. and global economies.

Fed Kicks Back Taper – Many expected the Federal Reserve to begin winding down its purchasing of U.S. bonds last week, but the Fed did not announce the beginning of the “taper.” Federal Reserve Chair Ben Bernanke cited the uncertainty regarding the government shutdown and debt limit as part of the reasoning for delaying the taper. He also noted the "fiscal headwinds" caused by policies such as sequestration that have slowed economic growth. The bond purchasing program has been attempting to stimulate the economy by keeping interest rates low and convincing financial markets that they will maintain a relatively loose monetary policy. Interest rates are already beginning to rise and will increase more once the taper begins, which could be next month. A recent CRFB paper looked at how higher interest rates will affect the debt. Interest on the debt is already the fastest growing part of the federal budget and will account for a greater share over the years, crowding out key public investments. As an example, if rates just 1 percentage point more than expected in coming years, it would wipe out all of the $1.2 trillion in sequester savings.

CBO Goes Long – Last week the nonpartisan Congressional Budget Office (CBO) released its Long-Term Budget Outlook. The report shows that, as we have been saying, "Our Debt Problems Are Still Far from Solved." Despite deficits declining in the next few years, they will soon begin to increase again and the debt will continue to rise to unsustainable levels. CBO projects that public debt will exceed the size of the U.S. economy by 2038. When accounting for the negative economic effects of high debt levels that CBO says is likely, the debt outlook is even worse. Factoring in the economic effects, a deficit savings package of $2 trillion is needed just to keep the economy on its current course, otherwise the economy will be 7 percent smaller in 2038. On the other hand, an additional $4 trillion in savings would result in an economy 7 percent larger after 25 years. Read our summary of the CBO report. In a recent presentation, the director of the CBO made it clear that more work needs to be done saying, "The fundamental federal budgetary challenge has hardly been addressed."

The Can Kicks Back – Washington has developed a solid kicking game over the years, constantly kicking the can down the road when it comes to fiscal matters. All that can-kicking affects younger generations as they will inherit the fiscal mess we create. Millennials are now kicking back. A group called The Can Kicks Back last week released a report, "Swindled: How The Millennial Generation Will Pay the Price of Washington's Paralysis," which examined how the inability to confront our fiscal challenges now will impact their generation. Five major findings of the study are: 1.) the true size of the nation’s debt problem is $200 trillion when you take into account all the future promises government has made but has not funded, which is the full tab Millennials are going to inherit; 2.) the longer our country waits to address its long-term budget imbalance, the greater the burden will be on young people, in part because of compounding interest payments; 3.) Millennials and future Americans have a higher net tax burden than any other generation because older Americans will collect more in benefits than they've paid in taxes over the course of their lifetime while Millennials will be stuck with a giant bill; 4.) changes in government spending have resulted in a shift from investment in the future to consumption in the present; and 5.) Millennials cannot bear the burden being handed to them due to the economic challenges they are already facing, including unemployment, underemployment, falling wages, and massive student loans. The group launches a tour of college campuses this week to educate Millennials and build support for solutions that promote generational equity. 

Health Care Debate Alive and Kicking – October 1 is not only the first day of Fiscal Year 2014, it is also the day that health care exchanges open for business under the Affordable Care Act, allowing Americans to shop for coverage among different health insurance plans. While most of the attention in Washington is on a political fight to defund or delay implementation of the health care reform law through the CR or debt ceiling, substantive discussion over controlling health care costs is also taking place. The Moment of Truth, a project of CRFB, and the National Coalition on Health Care released a study examining how reforming delivery and payment systems can improve efficiency in Medicare and in the health system in general. The report looked at several ideas stemming from an emerging consensus on three principal strategies: 1) reward value of health care services over volume; 2) promote care coordination; and 3) inject more competition into our health care system. Meanwhile, the CBO Long-Term Budget Outlook still forecasts high long-term health care cost growth rates despite the recent slowdown in cost growth because of uncertainty over why the dip occurred and whether it is sustainable.  

Kick-Starting a Discussion on Budget Reform – Another impending fight over the statutory debt limit that is bringing the country to the brink of default, questions about the effectiveness of sequestration and the inability to agree on a budget and spending plan are causing some people to think about reforms to the budget process to make it more efficient and better capable of dealing with the long-term fiscal challenges. Rep. Scott Peters (D-CA) introduced legislation that indexes the debt ceiling to GDP to so that that lawmakers only need to raise the limit when debt is growing faster than the economy. Another bill from Peters requires policymakers to consider ideas to stabilize or reduce debt as a share of the economy if it is projected to rise. The bills mirror recommendations from Alan Simpson and Erskine Bowles, who endorsed the legislation. In recent testimony before the Joint Economic Committee of Congress, economist Mark Zandi suggested some budget reforms to better equip the process to address long-term fiscal imbalances. Namely, he suggested adopting fiscal gap analysis and generational accounting, both of which are part of the bipartisan INFORM Act introduced earlier this year. Check out many more budget reform ideas at budgetreform.org

Tax Reform Taking Shape – House Ways and Means Committee Chair Dave Camp (R-MI) is said to be readying comprehensive tax reform legislation that may include eliminating the federal deduction for state and local taxes. That tax break will likely only go down kicking and screaming since it has lots of supporters. Check out our analysis of the deduction, part of our ongoing Tax Break-Down series examining tax expenditures ripe for reform. Adding to the momentum, two groups representing large corporations and small businesses teamed up to promote tax reform. A joint letter from the RATE Coalition and the Coalition for Fair Effective Tax Rates called for "comprehensive tax reform that simplifies the system by lowering individual and corporate rates and eliminating distorting tax preferences." Try your hand at reforming the corporate tax system using our calculator. Meanwhile, Sen. Mike Lee (R-UT) is offering legislation to reform the tax code to make it more family friendly. His plan would eliminate many tax expenditures like the state and local tax deduction, but create an additional $2,500 per child tax credit and simplify the tax code in several ways. Prospects for tax reform this year or early next year have been bolstered by talk that some sort of tax reform outline or process might be included in a deal involving one of the upcoming fiscal deadlines.    

Debt Decisions AwaitCRFB hosted a forum last week looking at the critical fiscal moments facing the country and what could happen. Panelists generally agreed that the long-term debt is a problem and that all the fiscal deadlines and inability to get anything done are big problems economically and politically. Also, former Comptroller General of the U.S. David Walker recently produced a report with recommendations to secure our fiscal future.

Social Security Reform Won’t Be Kicked Aside – Lawmakers are beginning to see the need for addressing Social Security’s imbalances now, as opposed to waiting for when the solutions will be more painful. Last week Rep. Reid Ribble (R-WI) sent a ‘Dear Colleague’ letter calling for reform now. He offers some suggestions, but also expressed openness to other ideas. Rep. Linda Sanchez (D-CA) recently introduced reform legislation of her own. These developments show that policymakers are heeding our warnings that the costs of delay for strengthening Social Security’s finances are substantial. Making the matter even more relevant, the recent figures from CBO indicate that Social Security's finances are in even worse shape than previously thought. On Tuesday, the U.S. Chamber of Commerce hosted a forum on entitlements. Former Office of Management and Budget director, and CRFB board member, Alice Rivlin said, "I don’t think we need a major overhaul of our programs. I think the Social Security system needs modernization. We should have fixed it ten years ago because it was underfunded even then. Right now, we need to make it sound for the foreseeable future." Create your own Social Security reform plan with our “Reformer” simulator.   

Key Upcoming Dates (all times are ET)

September 26

  • Bureau of Economic Analysis releases final second quarter GDP estimate.

October 1

  • Fiscal Year 2014 begins. A continuing resolution must be approved by this date in order to prevent a government shutdown.

October 3

  • 100th Anniversary of the Revenue Act of 1913, which instituted the federal individual income tax.

October 4

  • Bureau of Labor Statistics releases September 2013 employment data.

October 16

  • Bureau of Labor Statistics releases September 2013 Consumer Price Index data.

October 17

  • The date when Treasury Secretary Jack Lew estimates that extraordinary borrowing measures will be exhausted and the government will breach the debt ceiling.

October 18 - November 5

  • Time range in which the Bipartisan Policy Center estimates the statutory debt ceiling will be breached. A national default will occur unless the debt limit is raised before that point.

October 30

  • Bureau of Economic Analysis releases advance estimate of 3rd quarter GDP.

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