CRFB

More on the President’s FY2010 Budget Blueprint

Fiscal Policy — Mon, 09 Mar 2009 09:08:00 -0400

In our previous release (President Obama's FY2010 Budget), we discussed the broad fiscal impact of the FY2010 Budget Blueprint. We commended the President for having a specific fiscal goal, honestly budgeting for expected costs, and for providing offsets for many of the new policies he supports. However, we expressed strong concern that the budget included items in the baseline (such as AMT patches, Medicare patches, and the renewal of the 2001 and 2003 tax cuts), as a way to avoid paying for

Analysis of The American Recovery and Reinvestment Act

Fiscal Policy — Tue, 17 Feb 2009 16:49:00 -0500

Today, President Obama signed into law the American Recovery and Reinvestment Act of 2009. The "stimulus bill" represents the latest and largest effort by the federal government to boost the deteriorating economy. (For details of all efforts to date, see www.usbudgetwatch.org/stimulus).

Comparing the Stimulus Packages

Fiscal Policy — Wed, 11 Feb 2009 16:34:00 -0500

Yesterday, the Senate passed its version of the American Recovery and Reinvestment Act of 2009 by a vote of 61 to 37. Differences between the House and Senate are being worked out in a conference committee.

In total, the House bill costs roughly $820 billion over ten and a half years, while the Senate bill costs $838 billion. Although similar in size, the two stimulus bills contain
a number of important differences. The Senate version relies more on tax cuts and less on spending than its House counterpart; and money is distributed more quickly.

Federal Debt and Interest Costs

Fiscal Policy — Tue, 27 Jan 2009 17:03:00 -0500

Summary

The Congressional Budget Office's January estimates of baseline federal budget deficits have grabbed the attention of members of Congress and the public. The
cumulative effects of persistently large deficits show up in the stock of debt held by the public and the net interest costs of servicing that debt. This brief will
provide historical data on those items and CBO's current projections. It also will discuss some of the risks to CBO's estimates.

Debt Held by the Public

The Fiscal Roadmap Project

Fiscal Policy — Thu, 18 Dec 2008 17:12:00 -0500

The Fiscal Roadmap Project was created to help policymakers navigate the serious economic and fiscal challenges facing the country.

Currently, fiscal policy is being shaped in a haphazard way: bailing out a firm here, letting another firm go bankrupt there; attaching conditions to a company bailout, writing a check to another company without strings attached. These are not ordinary times.

CRFB Projects a One Trillion Dollar Deficit

Fiscal Policy — Mon, 10 Nov 2008 17:59:00 -0500

The fiscal year 2009 deficit could reach over one trillion dollars, according to an analysis by the Committee for a Responsible Federal Budget (CRFB). This deficit would be more than twice as large as the 2008 deficit of $455 billion and would represent a post-war record both in nominal terms and as a share of GDP.

"These numbers are simply astonishing," said Maya MacGuineas, president of CRFB. "Of course we can't try to balance the budget right now when the economy is in such turmoil, but when the deficit has that many zeros, you have to ask yourself how we let things get so bad. If a trillion dollar deficit isn't a wake-up call for the need for fiscal responsibility, I don't know what is."

The Committee for a Responsible Federal Budget's analysis begins with the Congressional Budget Office's (CBO) baseline estimate of a $438 billion deficit. It adds $160 billion for costs for since-passed legislation, including an AMT patch, business and clean energy tax breaks, disaster relief, additional discretionary spending, and emergency loans. We assume $62 billion in lower revenues and higher costs from slower economic growth and $150 billion in on-budget bailout costs. We also assume the passage of a $200 billion stimulus package.

Leon Panetta, CRFB co-chair and former Chief of Staff to President Clinton, suggested that these deficit numbers will have real implications for the next President. "Senator Obama is being handed an immense challenge which could impact many of his campaign promises," warned Panetta. "Recall that President Clinton had to drop his plans for middle-class tax cuts in his first year due to fiscal concerns - and he faced deficits of well under $300 billion."

The actual FY 2009 deficit could differ significantly from CRFB's trillion dollar estimate depending on how CBO budgets for the $700 billion Troubled Asset Relief Program (TARP), which could recoup much of its costs over time. CRFB assumes that the program will be accounted for primarily based on the expected net cost to the government (similar to the Federal Credit Reform Act standards), as the Congressional Budget Office has suggested it would likely do; however, the Treasury Department is considering accounting the first $250 billion - spent on the purchasing of bank equities - on a cash basis.

The costs of the foundering economy may also differ. CRFB assumes the cyclical effects on revenue and spending in 2009 will be similar to those of past recessions, while CBO (in September) predicted they would not be as severe, and some analysts are predicting they will be considerably worse. Furthermore, the actual price of stimulus legislation is far from certain. House Democrats have been discussing a $150 billion stimulus package with $60 to $100 billion passed immediately, while President-elect Obama has suggested a $190 billion plan-though those costs could be spread over more than a single year. There is also serious discussion about plans reaching $300 billion or more. Without comments on whether it is warranted, we believe the momentum is moving in the direction of a larger package.

Total borrowing will be much greater than the estimated one trillion dollars in light of various bailouts which require new capital but are not budgeted for on a cash basis.

"Borrowing this much money may be unavoidable given current economic conditions," said former Congressman Bill Frenzel, co-chair of CRFB. "The government's top priority over the next year must be to stabilize the financial markets and the economy. But we can't just borrow a trillion dollars and call it a day. We must tie any stimulus plan to a credible plan to put the budget on the path to recovery, so that we aren't laying the foundation for the next economic crisis stemming from excessive government debt."

See below for the complete release, including a breakdown of CRFB's analysis.

Fiscally Responsible Stimulus

Fiscal Policy — Mon, 10 Nov 2008 17:50:00 -0500

In light of the current state of the economy, it appears likely that Congress will pass another stimulus package...

The Committee for a Responsible Federal Budget recognizes that there is a strong enough risk of a prolonged recession that a fiscal stimulus package may well make sense. Given the many risks associated with a significant downturn, it makes sense to err on the side of caution in determining whether more stimulus is appropriate. Assuming Congress proceeds with plans to offer some type of stimulus package, CRFB offers three recommendations.

1) The package should be designed to accomplish economic, not political, objectives. There is already a good deal of momentum behind the idea that there should be another stimulus package and the size of this package seems to be growing by the week. It is critical that this not become a political package filled with Members' favorite items or unrelated spending and tax initiatives, dress up as stimulus.

Congress has a poor recent track record on this point: the September $700 billion dollar package included tens of billions of dollars in unrelated giveaways like tax breaks for sales of wooden arrowheads and a credit for turning chicken waste into jet fuel. The package also included more substantive measures like the $80 billion patch on the Alternative Minimum Tax, which never received the full and open debate it deserved because it was rushed through as part of an emergency spending measure. If Congress passes a second stimulus proposal, CRFB urges it to pass a "clean" bill that is free of unrelated provisions and political bargaining chips.

2) Borrowing should only be used for temporary measures. Pay-as-you-go (PAYGO) rules need not apply to temporary fiscal stimulus-in fact, any short-term or immediate offsets would defeat the purpose of fiscal stimulus, which relies on deficit spending to help boost aggregate demand and GDP.
However, if the federal government borrows too much, it risks creating serious long-term damage to the nation's economy. While deficits can stimulate growth and encourage consumption in the short-run, they stifle long-run growth by crowding out investment. Interest payments also crowd out other areas of the budget, and present a particularly worrisome situation if they are growing faster than the economy. If the new debt associated with the stimulus becomes permanent, we will pay interest on that borrowing indefinitely in return for temporary employment and consumption gains. The long-term fiscal picture is already quite bleak; and it would be a mistake to make the situation worse by prolonging stimulus policies and borrowing past the window of need.

Accordingly, CRFB strongly urges Congress to make all parts of any stimulus package temporary. The stimulus should not include outlays or tax cuts that extend beyond the period in which they are expected to mitigate the effects of an economic downturn. Permanent policies developed to encourage economic growth, such as fundamental tax reform or investment spending on areas such as energy, infrastructure and research, should be evaluated on their own merits and paid for rather then deficit-financed. Part of the stimulus agreement should be that Congress will find corresponding offsets for any tax or spending policies that are passed as part of a stimulus package, but have costs beyond the period when the economy is in recession.

3) The creation of a mechanism to address fiscal imbalances should be included with any stimulus package. We strongly recommend that any stimulus package include a mechanism to help start the process of addressing the nation's long-term budget imbalances. As the economy struggles to gain its footing, it is not the time to implement the types of policies-raising taxes and cutting spending-that will be necessary to re-balance the country's short- and long-term budget. But a stimulus package should put in place the mechanism to begin crafting a longer-term budget plan. This could take the form of a Members Working Group, or a Task Force to present recommendations that could be implemented once the economy has stabilized. Such an action would send an important signal to markets and our creditors that the current economic crisis is not being viewed as an excuse to borrow endlessly without a credible plan to pay down the debt in the future.

Read the full PDF below.

Guide to Health Care Policy: The 2008 Presidential Election

Fiscal Policy — Fri, 31 Oct 2008 07:56:00 -0400

One of the most pressing issues facing policymakers in the United State is rising health care costs. Cost growth is putting ongoing stress on the budgets of families, employers, and governments. The U.S. already spends $2.2 trillion a year - 16 percent of GDP - for health care. Nearly a third of this comes from the federal government.

Health expenditures are projected to nearly double to $4.3 trillion in a decade, at which point they will represent nearly one-fifth of the economy. According to the Congressional Budget Office, by 2030 they could consume a third, and by 2080 nearly half of GDP.

As health care costs grow, there will be considerable pressure on the federal government's budget. Medicare, which offers retired Americans hospital insurance (Part A), physicians' services insurance (Part B), and a prescription drug plan (Part D), is expected to grow faster than any other single part of the budget as health care costs rise and the population ages. Likewise, Medicaid, which offers insurance for poorer Americans jointly with the states, and the State Children's Health Insurance Program (SCHIP), which works with states to insure children in low-income families who aren't eligible for Medicaid, will see their costs go up. Together, these three programs are expected to rise from 4.2 percent of GDP today to 8.1 percent in 2030 and 18.5 percent in 2082. That would be above the historical average of tax revenue raised to finance all government spending.

The rising cost of private insurance also affects the government's finances because compensation paid in the form of health insurance is not subject to taxation. As health insurance grows as a share of compensation, this "employer exclusion" costs the government more in lost revenues. In 1993, the exclusion resulted in $46 billion in forgone revenue from the income tax. Last year, that number was $106 billion. By 2011 it will be $145 billion.

Despite the amount the federal government spends on health care, there are nearly 46 million Americans without insurance and rising costs threaten to grow the rolls of the uninsured. Furthermore, there are many areas of our health care system where the quality lags behind other nations even as we pay a higher price.

The three inter-related issues - cost, coverage, and quality - dominate the health care debate. While there is little agreement about how it should be done, most Americans agree that something is needed to improve the current system.

Senators McCain and Obama have each proposed a set of reforms to the current health care system. But even accounting for the savings that could be achieved in Medicare, Medicaid, SCHIP, and the employer exclusion, both plans would come at a considerable cost to the U.S. Treasury.

Guide to Tax Policy: The 2008 Election

Fiscal Policy — Wed, 29 Oct 2008 10:58:00 -0400

The next president will have to address fiscal imbalances within the government and a dramatically rising federal debt. National debt has been on a more or less steady rise since 1974 when, after a steady decline from the massive debt accumulated during WWII, it hit a low of 33.6 percent of GDP. Total national debt was more than $10 trillion at the start of fiscal year 2009.

This rising debt is driven by entitlement growth, resulting from demographic changes and rapidly rising healthcare costs. An aging population, especially in light of the retirement of the Boomers, is projected to increase Social Security payments from 4.3 percent of GDP today to 6 percent in 2030. More significantly, Medicare and Medicaid are expected to grow from just over 4 percent today, to 18.5 percent of GDP by 2082. This level will exceed the average level of federal revenues over the past 50 years. Even under the most optimistic economic growth assumptions, revenues will not come close to keeping up with this spending growth.

Under reasonable assumptions, non-interest federal spending will climb to 35 percent of GDP by 2082, while revenue will reach 21 percent. This would leave a 14 percent of gap that would have to be made up for with additional borrowing. Interest on this debt is projected to reach 40 percent of GDP, resulting in the government being 75 percent of the economy.

This crisis may seem to be decades off, but the next president will need to make some choices about how to deal with them in the near term. The longer we wait, the worse these problems become and the more painful the reforms must be to maintain economic stability. At present, the 75-year fiscal gap, which measures the amount that the federal government either would have to cut spending or raise taxes immediately to stabilize the debt-to-GDP ratio over the next 75 years, is 6.9 percent of GDP under realistic assumptions.

The Congressional Budget Office has said that marginal tax rates would have to rise significantly to cover the entire shortfall using only individual and corporate income taxes. The 10 percent rate would have to rise to 25 percent, the 25 percent bracket to 63 percent, and the 35 percent bracket to 88 percent. Those numbers provide a clear indication both that these problems will need to be addressed in the near future, and that the solution will likely require a compromise that includes both spending and taxing changes.

Many analysts and policymakers believe that the tax system also suffers from structural problems that require fundamental reform. Some point to the complexity in the current system, which contains nearly $1 trillion in tax expenditures that often fail to achieve their stated goals. Others point to problems with the corporate income tax, which is among the highest statutory rates in the world.

Many economists believe the current tax code discourages saving and investment and advocate moving toward a consumption tax. Some argue that our tax system should be modified to better encourage or discourage certain types of consumption such as energy, healthcare, or education. Finally, many have distributional concerns over the current tax system, arguing that it either does too much or too little to redistribute income between groups.

But regardless of whether the concern is distribution, complexity, fairness, incentive structures, or economic viability, there is a growing consensus that the current tax system is in need of fixing.

Because of outstanding tax issues, specifically the expiration of the 2001/2003 tax cuts and continued expansion of the AMT, the next president and Congress will have no choice but to address tax policy. As they confront these specific issues, they should also focus on the broader question of how much we want our government to spend, and how we will raise the appropriate revenue to finance that spending.

To make an informed election decision, voters should be aware of the fiscal implications of each candidate’s tax proposals. In the following voter guide, US Budget Watch attempts to shed light on these often-complex policies.

Guide to Social Security: The 2008 Presidential Election

Fiscal Policy — Tue, 28 Oct 2008 09:17:00 -0400

Social Security is the single largest government program. In 2007, the program cost $585 billion and provided benefits for roughly 50 million retirees, dependents, survivors, and disabled workers. It is financed primarily through the payroll tax -- a 12.4 percent tax on wages up to $102,000. The tax is split equally between employees and employers. The remaining revenues come mainly from the taxation of Social Security benefits for wealthier recipients.

Next year, the program’s surpluses will begin to decline precipitously. The Social Security Trustees have repeatedly warned that the program is on an unsustainable path and that the system will begin running cash deficits in 2017. The trust funds have claims on government revenues sufficient to pay promised benefits until 2041, but redeeming the trust fund assets will require the government to raise taxes, cut government spending, or borrow. To finance promised benefits, payroll taxes would have to be increased from 12.4 percent today to around 16 percent in 2041 and increase gradually after that. Alternatively, benefits could be cut across the board by roughly 22 percent by 2041, and modestly cut on regular basis thereafter.

Changes will have to be made to Social Security. Ignoring the problem and pushing the necessary changes to a later date — as has been done in past years — only makes them more painful. Although there are hundreds of proposals to address Social Security’s long-term gap, most fall into two basic categories: cutting benefits or raising taxes.

The following table synopsizes the proposals and positions of both presidential candidates on reforming Social Security. For the full text of this paper, please see the PDF copy attached below.

	Barack Obama's Social Security Proposals	John McCain's Social Security Proposals
Tax Increases	Proposes a payroll surtax of 2-4% for individuals making over $250,000 a year. Has not specified the tax base or whether there would be corresponding benefits.	States "everything should be on the table" but has expressed strong opposition to raising taxes to increase revenue for Social Security.
Benefit Cuts	States "everything should be on the table" but has also argued that "cutting benefits is not the right answer."	Would be willing to accept necessary benefit cuts as part of a compromise plan and would consider reducing Social Security's Cost of Living Adjustments (COLAs).
Retirement Age	Does "not believe it is necessary or fair to hardworking seniors to raise the retirement age" and has stated that he would not do so.	Considering a plan that would increase the normal retirement age to 68 from the scheduled age of 67.
Private Accounts	Argues strongly against privatization. Supports implementing "Automatic Workplace Pensions" outside of Social Security.	Supports "add-on" retirement accounts, but not "as a substitute for addressing benefit promises that cannot be kept."
Bipartisanship	Advocates for taking a bipartisan approach to reforming the system. Argues that to reform Social Security, "we should approach it the same way Tip O'Neill and Ronald Reagan did back in 1983."	Points to the 1983 deal between President Reagan and Speaker Tip O'Neill as a model for reform, stating: "I'll reach my hand out to the Speaker of the House Nancy Pelosi. I'll reach my hand out to Harry Reid."
Resolve to Act	Is "committed to ensuring Social Security is solvent and viable for the American people, now and in the future." States "it is common sense that we are going to have to do something about [it]." Does not mention Social Security frequently on the campaign trail.	States he will "submit a plan to save Social Security... and I'll ask Congress to do the same.... no more kicking the can down the road... no more hoping that a future generation of leaders will have the courage we lack." Does not mention Social Security frequently on the campaign trail.