Breaking down the nation’s current fiscal crisis

This post contributed by Terence Houston, ESA Science Policy Analyst

Background

Last week’s non-defense discretionary spending (NDD) summit emphasized the theme of a balanced approach towards addressing the nation’s growing national debt. Whether you value investments in scientific research, education or the environment, the current debate over our nation’s fiscal crisis deserves close attention as it will determine long-term investments in a broad spectrum of federal programs that impact everyday life for millions of Americans.

Due to Congress’s political inability to tackle the federal debt in a meaningful fashion, in 2011, it passed the Budget Control Act (P.L. 112-25), a law that sets an automatic trigger across discretionary spending programs in January 2013 totaling $1.2 trillion unless Congress develops an alternative plan to reduce the federal debt by at least that amount. Broken down, the spending cuts total $54 billion per year (7.5 percent) to defense programs and $54 billion per year (8.4 percent) to non-defense programs through Fiscal Year 2021.

As policymakers work address the nation’s growing federal deficit, it is helpful to take a step back to examine what is and what is not the driving force behind the national debt. Perspectives on what’s a stake with reference to the upcoming sequester can be found in a report the Bipartisan Policy Center (BPC), which gives a succinct summary: “Our unsustainable fiscal situation is driven by healthcare inflation, the retirement of the baby boomers, and an inefficient tax code that raises too little revenue. Yet the sequester does nothing to address these problems, instead cutting almost exclusively from defense and non-defense discretionary spending, which are already projected to decline substantially as a percentage of the economy over the coming decade.”

Discretionary spending

As emphasized during the NDD summit, further cuts that strictly focus on non-defense discretionary spending are economically unwise and ineffective at bringing any long-term deficit reduction. An Aerospace Industries Association report concludes that well over one million jobs would be lost between 2013-2014 if the non-defense discretionary spending cuts are implemented (in total, 2.14 million jobs would be lost, if the defense cuts are included). According to BPC, non-defense discretionary spending accounts for 13 percent of the budget while defense spending accounts for 14 percent of the budget.

A report from the nonpartisan Congressional Research Service (CRS) notes that discretionary spending as a whole is already projected to fall over the next ten years: “By FY 2022, according to the Congressional Budget Office’s baseline projections, discretionary spending will fall to 5.6 percent of GDP, its lowest level ever,” the CRS report states. Further, according to BPC, full implementation of the sequester will only delay by two years the date at which public debt surpasses 100 percent of the nation’s gross domestic product. Meanwhile the sequester would come at the expense of federal investments that fuel the economy, safeguard the public and maintain our overall global competitiveness. The sequester would include reductions in scientific research ($1.1 billion), air transportation security and traffic control ($1.6 billion), disaster relief ($0.7 billion) and disease control ($0.5 billion), according to BPC.

A nonpartisan roadmap for avoiding the sequester and instituting a balanced approach has been outlined by the National Commission on Fiscal Policy and Reform, led by former Senator Alan Simpson (R-WY) and former President Clinton White House Chief of Staff Erskine Bowles.  Among its recommendations, the Simpson-Bowles report recommends the creation of a “Cut-and-Invest” Committee that would identify two percent in discretionary spending cuts and invest one percent of the savings into “high-priority investments” that include “increasing college graduation rates, leveraging private capital through an infrastructure bank, and expanding high-value research and development in energy and other critical areas.” And in contrast to the blunt indiscriminate method that would be implemented under the sequester, Simpson-Bowles recommends that federal agencies be given the latitude to determine areas of their budgets that can be gradually cut.

Revenue

The notion promoted by some in Congress that any increase in revenue must be offset by a decrease in revenue elsewhere is fiscally unsound and is contrary to what is called for in Simpson-Bowles. For over ten years, we’ve had an unprecedented level of tax cuts that has led to a sharp decrease in revenue with no proposed revenue increase offsets. The tax cuts enacted during President George W. Bush’s tenure alone have added some $1.8 trillion to the national debt over the past decade.  A report from Citizens for Tax Justice cites the total cost at nearly $2 trillion when just covering the FY2001-2009 period, which does not include the two-year extension President Obama signed.

According to the BPC report, tax expenditures make up 26 percent of the budget. That’s nearly equal to defense and non-defense discretionary spending programs combined. Yet, substantial tax reform that creates a direct net increase in revenue hasn’t been enacted in nearly 20 years, since the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). A key aspect of the Simpson-Bowles plan’s  tax elements calls for eliminating several tax expenditures for both income and payroll taxes. The plan also calls for gradually increasing the gas tax by 15 cents from 2013 to 2015 to replenish the Highway Trust Fund. The last gas tax increase was also enacted under the Omnibus Budget Reconciliation Act of 1993.

Mandatory spending/Medicare/Medicaid

As noted in the BPC report, it is not discretionary spending, but mandatory spending that accounts for the majority of federal spending and is the primary diver of US debt. According to the Congressional Research Service (CRS), Medicare alone has more than quadrupled its share of federal spending over 40 years, growing from 4.9 percent of total federal outlays in FY 1970 to 23.2 percent in FY 2011. CRS further reports that mandatory spending has risen from 9.7 percent of GDP in FY 2000 to 13.5 percent of GDP in FY 2011 and is projected to rise to 14.3 percent of GDP in 2022. The Simpson-Bowles plan outlines hundreds of billions of dollars in Medicare/Medicaid savings through reforms that reduce fraud, excess payments and implementation of medical malpractice reform.

CRS notes: “Over the next decade, spending on mandatory programs outside of Medicare, Medicaid, and other federal health programs is expected to remain flat or decline.”  At the same time, the Simpson-Bowles balanced approach includes Social Security reform to index retirement eligibility to life-expectancy, coupled with a hardship exemption for individual who cannot work above 62 and do not require disability benefits. It also proposes increasing the Social Security tax to cover 90 percent of all wages by 2050, the same percentage it covered in the early 1980s. Lawmakers who champion the value of entitlement programs should be the first to support policies that ensure their long-term sustainability.

Restore a real PAYGO

Further, lasting comprehensive legislation to address the federal deficit should also enforce the PAY-AS-YOU-GO (PAYGO) rule as it was enacted under the Budget Enforcement Act of 1990 (P.L. 101-58). Under PAYGO, any spending increases must be offset with spending decreases in the budget. Additionally, any tax cuts must be offset by revenue increases elsewhere.

The law was allowed to expire in 2002 under President George W. Bush. While some argue that the expiration was necessary due to the “war on terror,” Bush was the first president since before the Civil War who did not enact revenue increases to offset increased military spending when leading the country into a multiple-year war. War-time presidents Abraham Lincoln, Woodrow Wilson, FDR, and Lyndon Johnson all signed into law substantial revenue increase legislation during their tenures.

No formal legislative attempt to reinstate PAYGO came until Congress passed the Statutory Pay As You Go Act in 2010. However, unlike the 1990 law, the bill, having been enacted just after the recession, included emergency spending exemptions for unemployment benefits, disaster relief, tax cuts and efforts intended to aid the struggling economy. To counter this, the Simpson-Bowles plan recommends the establishment of a disaster relief fund specifically designated to appropriate emergency funding in times of disaster. As the Simpson-Bowles commission notes, “Any given disaster may itself be unpredictable, but the need to pay for some level of disaster relief is not.”  The budget funding level would be determined by “the rolling average of disaster spending in the most recent 10 years.” Simpson-Bowles recommends reforming the 2010 law to remove the Medicare physician payment exemption as well.

The current House Republican majority passed a non-binding PAYGO rule in early 2011 limiting the spending exemptions in the 2010 law. However, this rule differs from the 1990 law in that it exempts tax cuts from having to be offset with increases in revenue.

Solutions: Moving forward by looking backward

In short, the collective data would seem to suggest the most meaningful deficit reduction measures would include reforms of Medicare and Medicaid and tax reform that generates a net gain in revenue. Congress could also take a page from history and look to its recent deficit reduction bills that were enacted in 1990, 1993 and 1997, particularly since these bills preceded a surplus that lasted four years from FY 1998 through FY 2001. The 1990 and 1993 budget bills specifically were the last two measures that included both reforms to Medicare, Medicaid and net tax increases (the 1997 bill focused exclusively on cuts to Medicare and healthcare services).

Of course, the most recent roadmap to fiscal prosperity lies in the Simpson-Bowles reform plan. It should be noted that the sequester, if implemented, would cut discretionary spending below what is recommended by Simpson-Bowles for both non-defense and defense discretionary programs. Hence, what we’re facing is not really a choice between cutting defense or non-defense programs. It’s a choice about whether we are going to continue to hack at the 27 percent of the budget, which has already been significantly cut or tackle meaningful reform in a manner not seen since the 1990s, reforms to the tax code to increase revenue and reforms that lower mandatory healthcare spending. Simpson and Bowles have also noted that the mere act of producing a plan, what they refer to as the “announcement effect,” will have positive effect on the economy by mitigating uncertainty among individuals and businesses.

Lawmakers who value our defense and non-defense discretionary programs have to decide if for the good of the country, they are willing to improve both how our government collects revenue and how we pay for entitlements. Throughout the economic downturn, Americans have made tough economic choices on how they spend money. It’s past time for lawmakers to do the same.

Photo credit: Senate Budget Committee

Author: Terence Houston

Science Policy Analyst for ESA.

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