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Rhetoric Versus Reality in the President's Budget: A Package Touting Fiscal Discipline Laden with Hidden Costs and Unbalanced Sacrifice
Ed Lorenzen
February 8, 2005
The administration is portraying the President's budget that was released yesterday as an austere budget that makes tough choices in order to reign in the deficit. The emphasis on reducing the deficit is a welcome change from the “tax cuts and butter” policies justified by “deficits don’t matter” rhetoric from the administration in recent years. Unfortunately, the administration’s newfound deficit hawk vigor appears to apply only to the priorities of others, but not to any of the President’s priorities.
In order for a deficit reduction plan to be credible and politically sustainable, all parts of the budget must be on the table and the burden of deficit reduction should be distributed fairly. The President’s budget falls short on that score. In fact, the savings proposed in the President’s budget are more than offset by the costs of the President’s tax and spending initiatives.
Fiscally responsible members of both parties should insist on a budget that provides for balanced deficit reduction without relying on gimmicks or hidden costs. Outline:
Gimmicks, Hidden Costs and Unrealistic Assumptions
· A five-year budget "window," which by its nature fails to display the costs of making the tax cuts permanent as well as the increased costs of the Medicare prescription drug benefit that will again cause rising deficits just as the baby boomers begin to join the entitlement rolls in large numbers after 2010. Under the Congressional Budget Office baseline issued last month, the deficit would bottom out at $236 billion in 2010 before beginning to climb again and reaching $565 billion by 2015 (2.8% of GDP) if the tax cuts enacted in 2001 and 2003 were extended (not counting AMT relief). · The budget fails to include any costs for extending the temporary patch in the Alternative Minimum Tax (AMT) enacted in 2003 and extended for one year in 2004. According to CBO, extending the AMT relief enacted in 2003 would add $218 billion to the deficit over the next five years -- $56 billion in 2009 alone. A full fix of the AMT -- to prevent the alternative tax from negating promised tax cuts and becoming the de-facto tax calculation for the upper-middle class -- would cost substantially more than that. The task of finding a fix for the AMT will presumably be left to the President’s tax reform commission, complicating the already difficult task facing that commission. · Perhaps the most unrealistic element of the President’s budget is the reliance on large, unspecified saving in discretionary spending after FY2006 to achieve deficit reduction targets. Although most of the discussion has focused on the specific reductions in discretionary spending programs for fiscal year 2006 the President’s budget assumes much more substantial unspecified reductions in the following four years. The budget calls for a reduction in total non-defense discretionary outlays from $497 billion in 2006 to $488 billion in 2010, but does not provide any details on how those savings would be achieved or even how they would be allocated among programs or agencies. This follows the pattern of previous budgets that assume substantial unspecified reductions in discretionary outlays in the outyears that are replaced by higher spending levels when the administration has to present specific policy proposals to justify the spending levels. For example, the budget submitted by the President last year assumed non-defense discretionary outlays of $478 billion in fiscal year 2006, but when the administration had to put forward specific policies to justify the spending levels in the budget proposed this year outlays would be non-defense discretionary outlays for FY2006 would total $498 billion. It is therefore reasonable to assume that when the President proposes his budget next year with specific policies for discretionary spending for fiscal year 2007 discretionary outlays will be higher than assumed in the current budget. · The proposed Retirement Savings Accounts and Lifetime Savings Accounts would shift substantial amounts of revenue from future decades into the next five years, allowing the proposal to raise nearly $17 billion in revenue in the five‑year budget window, but then digging a deeper hole in future budgets. In fact, numbers in the Treasury Department’s Blue Book indicate that the RSA proposals will cost more than $15 billion from 2011-2015. This revenue loss would continue to grow substantially after 2015. · The budget incorporates the costs of the supplemental appropriations for operations in Afghanistan and Iraq that the administration has said it will submit for 2005. This is a welcome improvement from previous budgets which failed to include any costs for continuing military operations. However, the budget does not include a request for continuing funding in 2006 through the regular appropriations process. Furthermore, the budget does not include any costs for overseas military operations and reconstruction efforts after 2005. A serious effort to reduce the deficit must put all areas of the budget on the table and not single out any part of the budget unfairly. Not only does the President’s budget fail to spread the burden of fiscal discipline evenly, the savings from imposing fiscal discipline on parts of the budget would not go toward reducing the deficit but rather funding other priorities. By using the growing concern about deficits to justify substantial cuts in domestic programs while extending and expanding tax cuts, the President’s budget is more accurately described as the second step of the so-called “starve the beast” strategy rather than a serious effort at reducing the deficit.
Over the last several years, Congress has enacted a series of tax cuts and expansion of mandatory spending for agriculture and Medicare. These policy choices were justified in part by the projections of a large budget surplus (although by the time the Medicare prescription drug benefit was enacted the surplus projections that were originally used to justify the increased spending were long gone). For a variety of reasons, the projections of budget surpluses turned out to be too optimistic. Policy choices that appeared affordable in the context of projected surpluses should be reconsidered.
The sacrifices required to respond to the change in the fiscal outlook should begin with the parts of the budget that benefited from the choices that were made when the budget outlook was more positive. The President’s budget takes the exact opposite approach, calling for substantial reductions in parts of the budget that saw little or no increase in the past few years while extending and expanding the tax cut policies that were enacted in the surplus era. It is particularly troubling that some of the deepest reductions are in Medicaid, nutrition programs and discretionary spending programs that affect the most vulnerable in society while the tax cuts and middle class entitlements are left untouched. The President’s budget calls for reinstating budget enforcement mechanisms of discretionary spending limits and PAYGO rules. Unfortunately, the President continues to propose that tax legislation be exempt from these rules. The only common sense way to restore fiscal discipline is to apply budget rules to all legislation that would increase the deficit. There is bipartisan support in the House and Senate for reinstating the pay-as-you-go rules that were established in 1990 and extended in 1997 with bipartisan support. The seemingly arcane proposal to include extension of the expiring tax cuts in the baseline could have significant implications for budget enforcement, particularly if pay-as-you-go rules are reinstated. If the extension of the expiring tax cuts are included in the baseline, legislation making those tax cuts permanent would not be scored as increasing the deficit and therefore would not be subject to pay-as-you-go or other budget enforcement rules. This would severely undermine any budget enforcement rules that are established. It is worth noting that the sunset provisions were added to the tax cuts enacted in 2001 and 2003 in order to make the total costs of the tax cut fit within the budget limits demanded by centrists. Changing the budget rules to allow these tax cuts to be permanently extended without being subjected to budget limits would break faith with the deal that was made with centrist legislators to limit the costs of the tax cuts to fit within budgetary limits. The President’s budget calls for discretionary spending limits for the next five years at the levels proposed in the President’s budget, which assume a freeze in non-defense, non-homeland security discretionary spending. As noted above, maintaining a freeze on those programs for five years is extremely unlikely. Previous experience has demonstrated that discretionary spending limits can be a useful tool for fiscal discipline if they are set at reasonable levels but can actually work against fiscal discipline if they are set at unrealistic levels. Fiscally responsible legislators in both parties should make it clear that they are willing to work with the administration on a budget that makes tough choices as part of a credible deficit reduction, but are not interested in helping complete the “starve the beast” strategy. Centrist legislators should insist that all parts of the budget are on the table. An essential first step should be an agreement to reinstate pay-as-you-go rules for all legislation that would increase the deficit, including tax cut legislation. Links: |
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