Prospects for action on the fiscal problem
02/18/19 Filed in: Spending | Taxes | Budget
Reader feedback at end
Our political leaders often profess to be fiscally conservative, particularly when they are criticizing policies of political opponents. Consider, for example, the response to the State of the Union address that Rep. Paul Ryan (R-WI) delivered on 1/25/11.
•Since taking office, President Obama has signed into law spending increases of nearly 25 percent for domestic government agencies — an 84 percent increase when you include the failed stimulus. All of this new government spending was sold as "investment." Yet after two years, the unemployment rate remains above 9% and government has added over $3 trillion to our debt. [At the time, gross federal debt was slightly over $14 trillion.]
•Then the president and his party made matters even worse, by creating a new open-ended healthcare entitlement. *** Healthcare spending is driving the explosive growth of our debt. And the president's law is accelerating our country toward bankruptcy.
•Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly. And that is exactly what Republicans pledge to do.
Nice words, but they weren’t matched by the subsequent actions of congressional Republicans (including Ryan, who went on to become Speaker of the House and then decided to leave Congress at the end of 2018). The deficit is currently running around $1 trillion per year, and total debt just hit $22 trillion.
According to the Congressional Budget Office, projected deficits will exceed real economic growth over the next decade and beyond – for which reason federal debt will constitute a growing drag on the US economy. Here’s a chart showing the growth of federal debt held by the public (gross federal debt less internal trust fund balances). The budget and economic outlook: 2019-2029, cbo.gov, 1/28/19.
Budget deficits (an excess of outlays over revenues) can theoretically be eliminated by either raising taxes or cutting spending. Spending discipline is the surest way to balance the budget, however, given the oft-demonstrated tendency to fritter away increased tax revenues from new taxes or higher tax rates on more spending. Also, tax hikes produce less revenue gain than might be expected due to slowing economic growth, and beyond a certain point (as predicted by the Laffer curve) may actually reduce tax revenue.
Most of the CBO-projected increase in outlays is attributable to three basic categories of outlays: Social Security, federal healthcare programs (35%), Social Security (31%), and interest expense (21%, due to both rising debt and rising interest rates) – none of which are subject to direct budget review. These 3 parts of the budget explain 87% of spending growth, Committee for a Responsible Federal Budget, 2/7/19.
There is precious little support in DC for shrinking deficits these days, e.g., the president didn’t even mention deficits or debt in his recent State of the Union address. Trump ignores biggest threat, Philip Klein, Washington Examiner, 2/5/19.
The tea party movement has waned, and it would be hard to identify a dozen congressional Republicans who are actively pushing for lower spending. As the national debt hits $22 trillion, these are the only people trying to cut spending, Jack Hunter, Washington Examiner, 2/14/19.
As for the opposition party, Democrats seem more inclined to raise taxes and launch new programs – such as a Green New Deal or Medicare for All – than to champion the cause of fiscal responsibility.
Given the foregoing, it’s hard to foresee a rebirth of fiscal discipline (which was last evident in DC during the second term of the Clinton administration). But hope springs eternal, and SAFE would like to offer some modest suggestions for the next budget cycle.
A. Timing – The president’s budget proposal for fiscal year 2020 is already past due, and it probably won’t be submitted to Congress until mid-March (some six weeks late under the congressional budget rules). Donald Trump is ignoring the law today, and no one really cares, Niels Lesniewski, rollcall.com, 2/4/19.
Given the protracted delay in completing appropriation bills for fiscal year 2019 (due to the border barrier funding controversy, which remains in play because of the president’s declaration of a national emergency), it seems understandable that the Office of Management and Budget is running late on the president’s budget proposal for FY 2020. Also, Budget Director Mick Mulvaney has been pretty busy lately, as he’s doing double duty as the acting White House chief of staff.
It’s not as though the members of Congress are being held up, because they aren’t bound by the president’s budget proposal anyway. The House and Senate will either complete and reconcile their respective budget resolutions by May (the official deadline is April 15) or, more likely, choose to operate without a budget resolution this year because they can’t agree on the terms.
The current outlook reminds us of 2013, when the House (then GOP controlled) and Senate (then Democratic controlled) passed budget resolutions with a $5 trillion difference in 10-year projected spending. When budgets collide, 3/25/13.
B. Budget system – A joint select committee (16 members) spent months reviewing the congressional budget and appropriations process rules in 2018, but failed to agree on any proposed changes. This outcome suggested that the poor performance of Congress in managing the budget is due to a lack of political will rather than a “broken” system.
One could make a case for a fundamental rules change, such as the adoption of a balanced budget amendment to the Constitution. Balanced budget proposed as government reopens, Courtney Joiner, dailysignal.com, 1/29/19.
Sens. Mike Lee, R-Utah, and Chuck Grassley, R-Iowa, reintroduced an amendment to the Constitution on Thursday requiring the federal government [to] balance its budget annually. “We expect families, businesses, and state and local governments all to stick to their budgets and live within their means—there is no reason that the federal government should not have to follow the same set of rules,” Lee said in a formal statement. The amendment would require a two-thirds vote from the House and Senate to allow Congress to run a deficit, raise taxes, or increase the debt limit.
Adoption of a BBA would require a 2/3 majority in both the House and the Senate, however, and this goal doesn’t have anywhere near that much support. There would also be a practical issue as to how much time would be allowed to reduce annual deficits from $1 trillion per year to zero.
We would like to suggest one procedural change to fix a problem that was discussed at several of the JSC sessions. Instead of periodically raising the debt limit (which has been suspended for over a year, but will snap back at the then current debt level on March 2), why not acknowledge that this device serves no useful purpose and abolish it?
As matters stand, the government will continue to run a deficit and the administration will resort to the usual “extraordinary measures” (financial gymnastics) to stay under the debt limit. Treasury Secretary Steven Mnuchin will eventually (say in June) advise Congress that the ability to take extraordinary measures has been used up and corrective action must be taken to avert a default. Dem House to face debt limit hike in summer 2019, Niv Ellis, thehill.com, 11/8/18. Congress will then raise the debt limit or suspend it again, as everyone knew would be necessary from the start.
With all the real work that needs to get done in DC, it seems silly to waste time and effort on this kind of meaningless exercise.
C. Savings opportunities – For the past two years, the president’s budget proposals have advocated scores of spending cuts, which were clearly explained and presented in a discrete volume. While the savings opportunities identified would hardly suffice to balance the budget, they might shift the deficit trend line from rising to declining. See, e.g., Major Savings and Reforms volume, FY 2019 (download PDF).
In total, this volume highlights 2019 proposed savings of $48.4 billion in discretionary programs, including $25.8 billion in program eliminations and $22.6 billion in reductions. The volume also describes the major mandatory savings proposals summarized in Table S-6 of the Budget volume. Many of the eliminations and reductions in this volume reflect a continuation of policies proposed in the 2018 President’s Budget that have not yet been enacted by the Congress.
One might think these efforts would have been appreciated, but to our knowledge few if any of the savings recommendations have been seriously considered. In addition to including an MSR volume in the president’s budget proposal for FY 2020, therefore, we would suggest that the subject be specifically addressed in the president’s budget message – and followed up on during the year.
Additional savings opportunities may be found in the Prime Cuts database maintained by Citizens Against Government Waste. Here’s a link to the 2018 edition, which “contains 636 recommendations that would save taxpayers $429.8 billion in the first year and $3.1 trillion over five years.”
D. Entitlements – Existing entitlement programs (Social Security, Medicare, Medicaid, etc.) will almost surely prove unaffordable in coming years due to a soaring number of beneficiaries resulting from an aging population, thereby necessitating massive tax hikes (with resultant harm to the US economy) or program restructuring. Going for Broke, Michael Tanner, Cato Institute, 2015.
Our current political leaders don’t seem inclined to take the heat for reforming entitlements. Unless and until that changes, the best that can be hoped for is that they will refrain from making a bad situation worse. Thus, for example, we would recommend rejection of:
•The Social Security 2100 Act, which has been jointly introduced by over 200 House Democrats. This legislation would marginally increase Social Security benefits, to be paid for by hiking payroll taxes (which are already at about the highest acceptable level for American workers). Lower income retirees would supposedly receive up to a 44% increase in benefits, but most of the additional payout would take the form of a 2% increase in benefits for higher income retirees. Why Social Security expansion may stiff the poor, Andrew Biggs, nationalreview.com, 2/13/19.
•The federally funded parental leave program that is being advocated by Ivanka Trump et al. Ivankacare: Trump faces conservative opposition to family leave program, Melissa Quinn, Washington Examiner, 2/12/19.
E. Taxes – In the wake of the tax cuts enacted in December 2017, sentiment has developed for generating new tax revenues to offset some of the revenue losses and/or fund new spending programs.
Thus, the president gloats about revenue flowing into the US Treasury as the result of hiking tariffs on imports. He makes it sound as if the tariffs are being paid by the other countries concerned, whereas the burden will actually fall on US businesses and consumers. Trump says the Treasury is taking in “MANY billions of dollars” from the tariffs on China, Bob Bryan, businessinsider.com, 1/3/19.
A number of legislators are backing the supposedly win-win idea of imposing a carbon tax, i.e., levy on carbon emissions resulting from the burning of fossil fuels. Moderate Republicans tend to favor the idea of paying out the tax proceeds to the American family as “dividends,” whereas Democrats would prefer to invest the proceeds in “green energy” subsidy programs. Either way, the scheme would drive up energy prices while doing little if anything to shrink the government’s deficits. Seeking middle ground on MMGWT, Section B (Carbon taxes), 1/28/19.
Raising taxes is not invariably a bad idea. For example, conservatives should cheerfully support the elimination of special tax preferences that have been used to support favored businesses or business practices (aka crony capitalism).
It was generally thought that scores of these provisions (aka extenders) had been left out of the tax law as modified by the Tax Cuts and Jobs Act of 2017, but they were stealthily reinstated by the Budget Reconciliation Act in February 2018. More shutdown drama, mediocre results, Section B (Tax preferences), 2/12/18.
SAFE was outraged by the reinstatement of business tax preferences, and we went on record that they should be eliminated for good at the earliest opportunity. Letter to Rep. Kevin Brady (R-TX), who then headed the House Ways and Means Committee, 2/26/18.
For what it’s worth, Rep. Brady now seems to have come around to our way of thinking. Kevin Brady proposes to drain the swamp by ending the corrupt “tax extenders,” Washington Examiner, 12/12/18.
F. Path forward – Unless fiscal responsibility is restored in DC (ideally by balancing the federal and then keeping it that way) over the next few years, an exceedingly painful and disruptive financial crisis seems inevitable.
Congress exercises the “power of the purse” under the Constitution, which provides a useful check on presidential power. It seems unlikely, however, that the 535 members of Congress – serving in two legislative bodies, representing different states with varying interests, and having no common master – can effectively operate the budget system.
It follows that presidential leadership would be essential to get the job done, as well as effective support from congressional leaders. The outlook for such a combination may improve after the 2020 presidential election, if (1) the president wins reelection and decides to tackle the fiscal problem in his second term, or (2) a Democratic or independent candidate with fiscally conservative instincts wins the White House. If neither of these things happen, the situation will likely continue to deteriorate.
No guarantees as to the results, but SAFE will do what it can to push for a favorable outcome.
#We are doomed on the budget, unless we further expand our energy industry and cut spending on entitlements. This can only happen if Trump wins reelection. – SAFE director
#Clinton had a surplus and put that down against the current year deficit because he did not want to refund it to us because he thought we would not spend it correctly. Senate Republicans will do nothing to disturb their club and its perks. – SAFE director