Fixing fiscal problem won't be easy

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The federal debt has soared during the past two presidencies, more than tripling in dollar terms and growing substantially faster than economic output (as measured by Gross Domestic Product). Budget FY 2017, download Historical Tables (PDF)

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Having frequently decried rising debt on the campaign trail, the president is now promising that the government’ financial affairs will be put in order. Consider this excerpt from his statement at the start of a White House meeting last week. Remarks by President Trump in budget meeting, whitehouse.gov, 2/22/17.

Unfortunately, the budget we’re inheriting -- essentially inheriting -- is a mess.  The finances of our country are a mess.  But we’re going to clean them up. *** I want the American people to know that our budget will reflect their priorities.  We’ll be directing all of our departments and agencies to protect every last American and every last tax dollar.  No more wasted money.

Does this mean no more increases will be requested in the debt ceiling, which is currently suspended but will be reset at the current level (roundly $20T) as of March 16? No! Budget deficits are a habit that at best would take several years to break, and the administration will predictably be requesting further suspensions of or increases in the debt ceiling. This may not happen in March, however, as the US Treasury could employ “extraordinary measures” to postpone the day of reckoning for several months.

Few in the Nation’s capital have reason to want a government shutdown, but congressional Democrats will likely seek concessions of some kind for going along with a debt ceiling increase. [Economic adviser Larry] Kudlow: Forcing a federal shutdown over debt ceiling [would be] “political suicide,” Rob Williams, newsmax.com,
2/14/17.

Another deadline is looming for fiscal year 2017: spending authority for government operations will expire after April 28 unless the current “continuing resolution” (in lieu of an approved budget) is extended. The administration is expected to seek supplemental spending (for defense spending & border security) versus a simple extension of current spending levels through Sept. 30, which again will probably set up a bargaining situation with the current minority party. In Trump’s future looms a familiar shutdown threat, Andrew Taylor, AP,
2/21/17.

At issue is the annual must-do legislation funding government agencies and departments. The path for the huge spending measure — by Republicans' own choice a piece of leftover business from last year — would be difficult and complicated in a smoothly running Washington. But partisanship has engulfed the city, and the upcoming measure is made even more challenging once upcoming Trump requests for $18 billion or more for the Pentagon and money for his contentious border wall are added to the mix.

And then there’s the budget for fiscal year 2018 (which will begin on October 1). What is the president’s first budget proposal (due to Congress in April) going to look like, and will it provide a blueprint for cleaning up the fiscal “mess” or not? Discussion follows: the budget game (including a suggested goal); current budget trends; policy changes under consideration; next step.

I. Budget game – The budget process has players, rules, and a goal that is open to discussion. We are reminded of a simulation model based on projected budget data that was used in 2008.

The goal was taken to be postponing the projected date for the government’s insolvency (2033 in the base case), while achieving improvements in one or more selected functional areas (e.g. National Security, Green Economic Stimulus, Health & Wellness, etc.). A true “Budget Hero” was expected to achieve improvement in the functional area(s) selected, i.e., not just be a budget hawk. Budget adjustments were made on a static basis (ignore economic effects of spending/tax cuts or increases).

The specified spending cut options were limited in scope (e.g., one could eliminate the “no child left behind” program, but not the Department of Education), and therefore weren’t likely to make much difference without tax increases. It was possible to defer the go bust date until 2045, however, by making all the spending cuts (some of which seemed clearly inadvisable). In the final game, we identified what the designers of the game evidently saw as a better strategy. To win “Budget Hero,” raise taxes,
6/16/08.

Game 3 - Three badges were selected this time, namely Green Economic Stimulus, Energy Independence, and Efficient Government. No spending cuts were played, and spending for environmental programs was generously increased. To cover the extra spending and then some, we eliminated the Bush tax cuts, added extra taxes for the rich, increased payroll taxes, raised the gas tax by 50¢ a gallon, etc.  There were no warnings that the economy was tanking, a taxpayer revolt was brewing, or Congress might launch new spending programs (as has been known to happen when “extra money” becomes available).

The results of the new strategy were great.  Debt virtually eliminated by 2018.  The budget bust postponed until 2070+. And just look at those Green and Energy Independence badges; we would wear them with pride.


In our opinion, the goal of the budgeting process should not be to postpone the go bust date, nor to slow deficit spending to sustainable levels (e.g., 3% per year corresponding to economic growth), but rather to balance the budget and keep it that way. Plans to balance the budget over, say, 10 years are impractical because the hard decisions will keep being put off until after the next election (there is always another election on the horizon). SAFE letter to the members of Congress,
6/3/13.

What was the reaction to SAFE’s letter? There was an encouraging response (posted at the end) from Senator Rand Paul (R-KY); we didn’t hear from the other 534 members.

1I. Budget trends – The deficit for fiscal year 2016 was nearly $600 billion and this figure is projected to grow substantially in coming years - due to soaring outlays for Social Security, healthcare programs and interest expense. Meanwhile, outlays for discretionary programs (basically national defense and the other traditional functions of government) will shrink as a share of the overall budget.

Here are three charts showing the foregoing trends – total deficits or surpluses as % of GDP, projected outlays by major budget category as % of GDP, and net interest in billions of dollars. The budget outlook for 2017 – 2027 (20 slides), Congressional Budget Office,
1/24/17.

total deficits


projected outlays by major category

Net interest

Although the underlying data are inherently imprecise, these charts portray the fiscal future that should be expected unless significant changes are made in current policies. Things could turn out worse, moreover, as a fiscal meltdown could occur that would force sudden and disruptive changes. In sum, as the president says, his administration “inherited a mess.”

III. Policy changes – Is the Republican majority preparing for policy changes that could achieve major reductions in deficit spending and balance the budget within a few years? There are basically four cards available to play:

#CUT DISCRETIONARY SPENDING – Plans are afoot to cut spending in some areas, and the aggregate savings could be considerable. More spending is contemplated in other areas, however, such as defense and border security. It remains to be seen how much spending would be cut overall. Trump vows to cut waste in first budget, Dave Boyer, Washington Times,
2/22/17.

Among cuts that have been under consideration are conservative targets such as the National Endowment for the Arts and the Corporation for Public Broadcasting, and major reductions for the Energy and Commerce departments. But Mr. Trump also has indicated that he wants to spend more on bigger-ticket items such as infrastructure and transportation.

Even a relatively aggressive budget plan from the Heritage Foundation – which has been shared with but not necessarily embraced by administration officials - doesn’t propose a level of discretionary spending cuts sufficient to achieve budget balance. Some 2/3 of the contemplated budget savings would be achieved through changes in entitlement programs. A blueprint for balance, heritage.org,
2/23/16.

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#RESTRUCTURE ENTITLEMENT PROGRAMS – To our knowledge, there are no plans for making changes to Social Security or Medicare – which the president said on the campaign trail would be maintained as they are.

It is proposed to “repeal and replace” GovCare, which might entail changes to Medicaid as well in that much of the expansion in healthcare insurance (HCI) coverage under the Affordable Care Act has been due to an expansion of Medicaid coverage. However, it’s far from clear what the “replace” version of GovCare would look like. Republicans can’t agree on how to replace Obamacare after repeal, Paige Winfield Cunningham, Washington Examiner,
2/26/17.

In the absence of a Republican agreement on the new healthcare ground rules, it’s difficult to say how much savings would be realized from repealing and replacing GovCare. To the extent that individual mandates to carry HCI were eliminated in favor of enhanced subsidies, overall government outlays for healthcare might turn out to be higher than projected - Obamacare subsidies projected to more than double over next decade [from $42B in 2017 to $97B in 2027], Ali Meyer, Washington Free Beacon,
2/16/17 - instead of being reduced.

As for block-granting Medicaid funding for the states or rolling back the expansion in Medicaid eligibility, widespread political resistance is predictable. Republican governors on Obamacare repeal: not so fast, Tami Luhby, news4jax,
2/24/17.

• Governors have a vested interest in Obamacare, particularly in Medicaid expansion, which has extended coverage to 11 million low-income adults in the 31 states that have accepted it. Some 16 of those states are headed by Republicans. *** Some governors have been very vocal about keeping Medicaid expansion. Ohio Governor John Kasich says he won't "sit silent" and watch the program get "ripped out."

• Some Republican governors agree with their Democratic peers that block grants could reduce the effectiveness and reach of the safety net. And leaders of non-expansion states are concerned that funding might be frozen at current levels, which would leave them at a disadvantage since they did not broaden their programs.


One HCI idea that may offer real promise (but apparently hasn’t gained much traction thus far) is establishing high risk pools for people who require very expensive medical treatment, providing subsidies as necessary, while reducing premium costs on other HCI plans to levels that people can afford without subsidies. How to lower Obamacare premiums, Betsy McCaughey, Washington Times,
2/20/17.

There are, at most, 500,000 people in the individual market who would need high-risk coverage — not the millions Democrats claim. *** Covering each of them will cost at least $32,000 a year, based on recent risk-pool experience. All in all, that’s $16 billion or more a year. It’s a small price compared with the $56 billion the nation currently shells out on Obamacare subsidies. *** [House Speaker Paul] Ryan claims to use high-risk pools but his plan provides a mere $2.5 billion a year, not enough to make them work.

#RAISE TAXES – Officially, at least, here is one approach to balancing the budget that won’t be used. Republicans have promised “tax reform,” which is envisioned as reducing the overall tax burden on business firms and individuals, and that’s what the administration will try to deliver. [Treasury Secretary Steve] Mnuchin: Tax reform by August, Joseph Lawler, Washington Examiner,
2/23/17.

Mnuchin said Thursday that the focus of the plan would be on middle-class tax reductions, simplification, and business competitiveness. Trump's campaign proposal, however, called for major high-end tax cuts. Mnuchin has indicated an interest in seeing any tax rate cuts for high earners offset by taking away deductions.

As for potential revenue loss, Secretary Mnuchin reportedly said “the Treasury would analyze the plan using the assumption that tax reform would accelerate growth and generate new revenues to make up for tax cuts.” In other words, he seems to be accepting the House Republican premise that tax reform should be revenue neutral (on a dynamic scoring basis).

Absent tax rate increases, no tax reform plan is likely to attract much support from the other side of the aisle. Accordingly, Republicans must be united if they hope to pass a tax plan. [Senator Orrin] Hatch: Partisan only tax reform looks likely, Joseph Lawler, Washington Examiner,
2/1/17.

It would seem to follow that the “border adjustment” feature of the House Republican version of corporate income tax “reform” may have to be abandoned. This would be just as well, in our view, even if the corporate income tax rate doesn’t wind up being cut to the hoped-for level (candidate Trump said 15%, the House Republicans said 20%). Proposed replacement for the corporate income tax,
2/13/17.

See also the comments of former Senator Phil Gramm (R-TX), who like us believes that a corporate tax cut should not be “paid for” by imposing a regressive tax on imports. Phil Gramm rips GOP’s import tax plans, Joseph Lawler, Washington Examiner,
2/23/17.

Gramm, a Texan and former chairman of the Banking Committee, wrote that the House GOP proposals have "little basis in economic logic, hinder economic efficiency, violate the letter and the spirit of numerous trade agreements, subject the economy to excruciatingly painful adjustments, [and] expose America and the world to unacceptable economic risks."

Underlying the border adjustment proposal, we suspect, is an undeclared yearning for a big tax increase that could be rationalized as good policy. Another proposal making the rounds, championed by Jim Baker, George Shultz, Hank Paulson, etc., is to impose a carbon tax that could then be at least partially rebated to low income families (creating one more in the family of entitlement plans that have been spawned over the years). Prominent Republicans pitch carbon tax plan to top Trump aides, Jennifer Dlouhy & Margaret Talev, bloomberg.com,
2/8/17.

The Republican and business leaders lent their stature to an approach for addressing climate change that mirrors an idea already advanced by Exxon Mobil Corp. Supporters say the tax is a conservative solution to climate change that replaces a regulatory regime with a free-market approach for addressing the greenhouse gas emissions.

#PRUNE REGULATIONS – How could cutting “red tape” help to balance the budget? Regulations on business and individuals represent an undeclared tax on the private sector, the aggregate burden of which has been estimated to total some $2 trillion per year. To the extent that burdensome regulations were eliminated, the economy would be stimulated, and unlike a tax cut there would be no upfront revenue loss. A big push to cut regulatory red tape,
2/6/17.

Some business executives have suggested that the payoff to their firms from rolling back regulations might well exceed the benefits from cutting taxes. Congress must stop death by decree, Stephen Moore, Washington Times,
2/19/17.

The CEOs almost all listed the federal tax code as an albatross, but not the heaviest one. *** most insisted [t]he biggest restraint on growth is federal red tape and regulation. Manufacturers, energy firms, financial services, agriculture interests — across all industries — federal rules were seen as mindless, inefficient, costly and incomprehensible.

Every regulation has supporters, or it wouldn’t have been approved in the first place, and the pace of eliminating burdensome regulations may not be as rapid as we would like. Still, the House has passed a slew of rollback resolutions under the Congressional Review Act, which for the time being are immune from filibusters in the Senate, and many of these resolutions may wind up being enacted into law. Lawmakers brace for Trump’s first address, Susan Ferrechio, Washington Examiner,
2/26/17.

. . . the bulk of regulatory reform must be codified by legislation passed in Congress. Republicans this year have been rapidly repealing Obama-era regulations and have passed more than a dozen rollback measures in recent weeks. Next week, Congress will give Trump more of what he wants, and has scheduled several measures aimed at easing the burden of government regulations.

IV. Next step – We don’t see the policy changes on the drawing board (Part III) as sufficient to achieve a balanced budget. At best, they represent “a good start,” and we would urge that a goal of balancing the budget by X date be specifically proposed and reflected in the fiscal year 2018 budget proposal.

Achievement of such a goal would necessarily entail (1) substantial targeted cuts in discretionary spending to get the process started, and (2) restructuring of entitlement plans to reduce outlays over the longer term.

Will the president get serious about the budget when he addresses the joint houses of Congress tomorrow night? No predictions, but this would be an ideal opportunity for him to do so. Trump has historic opportunity on budget, entitlements, Jenny Beth Martin, Washington Times,
2/10/17.

**********FEEDBACK**********

Sad to say, Trump is riding the tiger.  Nothing is impossible but balancing the budget is close to impossible. It will take severe actions to stop the bleeding.  The big question is can Republicans take this type of action and survive politically? - SAFE member (MD)

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