The Center's work on 'Federal Budget' Issues

The Center informs the debate over federal budget priorities by analyzing the President’s budget and major congressional proposals throughout the annual budget process. We pay particular attention to the adequacy of funding for programs that assist low- and moderate-income families. We also analyze long-term budget challenges and measures to address them. In addition, we promote measures to improve fiscal responsibility.


A Dangerous Way to “Fix” American Government

October 21, 2014 at 4:21 pm

“A dangerous proposal is circulating in states across the country that could widen political divisions and jeopardize cherished rights and freedoms,” CBPP President Robert Greenstein explains today in the Washington Post’s PostEverything blog.  He continues:

The push is coming primarily from well-organized, arch-conservative groups seeking to capitalize on the decline in public trust in government to limit the federal government’s role and spending powers.  And the method they prefer is a constitutional convention — the first since the 1787 conclave that produced the U.S. Constitution.

Under the Constitution, if two-thirds of state legislatures call for a convention to amend it, one must be convened.  Some of those pushing for a convention say that 24 of the needed 34 legislatures have approved such resolutions.  Advocates of a convention have targeted more than a dozen other states and are developing lobbying campaigns to push for such resolutions there.

The implications are enormous.  At stake, potentially, are the freedoms we take for granted under the Bill of Rights; the powers of the president, Congress and the courts; and the policies the government can or cannot pursue.  Conventioneers could alter absolutely anything about the way the United States is governed.  Some say they want to terminate all federal taxes and to require super-majorities in the House and the Senate to put any new taxes in their place.  Others want to bar the government from carrying out a number of its functions, for example by constraining its ability to regulate interstate commerce.  Whatever changes a convention approved would be enshrined in the Constitution if three-fourths of the states ratified them.

Yet the processes for impaneling the convention, selecting the delegates, setting the convention’s voting rules, and determining what issues the convention would consider and how much of the Constitution it would seek to rewrite are a mystery.  That means that under a convention, anything goes.  There are no rules, guideposts or procedures in any of these areas. . . .

Click here for the full post.

Health Reform Reduces the Deficit, Contrary to Senate GOP Analysis

October 21, 2014 at 5:00 am

A recent analysis by Senate Budget Committee Republican staff that claims health reform will increase the deficit rests on two dubious propositions.  Under more reasonable assumptions, health reform will reduce the deficit, as the Congressional Budget Office (CBO) and Joint Committee on Taxation have consistently estimated.  Just a few months ago, CBO Director Douglas Elmendorf wrote, “the agencies have no reason to think that their initial assessment that [health reform] would reduce budget deficits was incorrect.”

How did the Senate Budget Committee’s Republican staff reach such a different conclusion?

First, they produced an estimate of savings from the health reform provisions that reduce Medicare and other program costs that’s significantly lower than CBO’s.  They did so by assuming that health reform had nothing whatsoever to do with the substantial slowdown in health care cost growth in the past few years.  That slowdown has led CBO since 2010 to lower its projections of Medicare and Medicaid spending by $1.1 trillion over this decade (see graph).

The decline in projected Medicare spending means that health reform provisions that cut Medicare costs directly will save less than previously thought.  (A provision that reduces Medicare costs by a certain percentage will save fewer dollars if that percentage cut is applied to a smaller base of costs.)  But the Senate Republican analysis lowers CBO’s estimate of health reform’s Medicare savings to reflect that effect alone, as though not one dollar of the savings from the slowdown in health costs were due to health reform’s focus on reducing cost growth in the U.S. health care system.

As Kaiser Family Foundation President Drew Altman has written, “Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. . . . [It] is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.”

Even under the conservative assumption that health reform accounts for only a small part of the slowdown in health care costs, it would more than offset the Senate Republicans’ reduction in health reform’s estimated Medicare savings

Second, the Senate Republican analysis overstates the budgetary impact of changes in labor supply (that is, the total hours of work that workers choose to supply) under health reform.  CBO estimates that health reform will cause a small reduction in the labor supply, in significant part because some people who now work mainly to obtain health insurance — a situation known as “job lock” — will choose to retire earlier or work somewhat less; that reduction will shrink total labor compensation by roughly 1 percent from 2017 through 2024, according to CBO.  The Senate Republican analysis assumes that the overall amount of income subject to tax will drop by the same percentage.

But wages and salaries, in fact, represent only about 70 percent of adjusted gross income, which also includes interest, dividends, rental income, capital gains, and some retirement distributions.  Thus, a 1-percent cut in labor compensation would shrink tax revenues by much less than 1 percent.

Correcting the Senate Republican staff analysis for these two factors shows that health reform will still reduce the deficit, as CBO has estimated — not increase it.  Those who seek the best assessment of the fiscal impacts of health reform should stick with CBO’s.

Ryan’s Call for “Dynamic Scoring” in Tax Reform Would Invite More Mischief

October 3, 2014 at 2:18 pm

“The reality of tax reform . . . is that any politically feasible plan to scale back tax benefits doesn’t generate enough money to significantly cut tax rates without increasing the deficit,” my latest post for U.S. News’ Economic Intelligence notes.  “Rather than grapple with this reality, . . . House Budget Committee Chairman Paul Ryan invoked the last refuge of supply-side tax cutters in recent comments about how to proceed with tax reform.”  Specifically:

Ryan wants to change long-established methods for estimating the revenue effects of proposed tax changes that the Congressional Budget Office and Joint Committee on Taxation use to “score” the budgetary effects of such legislation.  Ryan . . . badly mischaracterizes existing revenue estimation methods while ignoring the fatal flaws in requiring budget crunchers to use so-called dynamic scoring.

Contrary to Ryan’s claim, current revenue estimates reflect many kinds of changes in households’ and business’ behavior resulting from proposed policy changes.  But they don’t reflect possible changes in the overall level of economic activity that might result from proposed legislation — and with good reason:

First, estimates of the macroeconomic effects of tax changes are highly uncertain.  Second, the most credible estimates usually show changes that are quite small.  Finally, and quite importantly, dynamic scoring would impair the credibility of the budget process because the resulting budget estimates will inevitably be controversial and subject to political manipulation.

Adopting dynamic scoring for tax reform, my post concludes, is a gimmick that would only invite more mischief.

Reassessing a View on Federal Accounting

September 26, 2014 at 1:55 pm

So-called “fair-value accounting” is misguided because it would make federal loan and loan guarantee programs look more expensive than they really are, as my colleague Richard Kogan and I have explained.  Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds.  We concur.  We have re-analyzed our assessment of investing a portion of the Social Security trust fund in equities and now come to a different conclusion than we did in 2005.

The current method of accounting for federal credit programs fully records — on a present-value basis — all the cash flowing into and out of the Treasury.  In contrast, fair-value accounting would add an extra amount to the budgetary cost, based on the fact that loan assets are somewhat less valuable to the private sector than to the government for several reasons: businesses must make a profit; they can’t put themselves at the head of the line when collecting a debt; they borrow at higher interest rates; and private-sector investors are risk-averse — they dislike losses (in this case, higher-than-expected loan defaults) more than they like equal, and equally likely, gains (lower defaults).  None of these factors represents an actual cost that the government incurs when it makes loans.

Including in the budget a cost that the government does not actually pay would overstate spending, deficits, and debt, making the federal budget a less accurate depiction of the nation’s fiscal position.  It would also treat different federal programs inconsistently, because it would not make a similar adjustment for non-credit programs whose costs are also uncertain and variable.  In a recent article, New York University law professor David Kamin thoroughly explains why “including the cost of risk would skew budget estimates.”

Proposals to invest the Social Security trust funds in the stock market raise similar issues.  Stocks produce higher returns than Treasury bonds on average over the years, but they also entail a greater risk of losing money.  That risk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget.  This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.

(Proposals to replace Social Security with private accounts are very different, since individuals, rather than the government, would bear the risk of holding their retirement savings in stocks.  Individuals are rightly risk-averse.  As a result, any analysis of their well-being — as distinguished from analysis of the impact on government finances — should account for the variability of the stock market.)

Sequestration’s Effects Linger for Housing Agencies

September 16, 2014 at 7:47 am

The 2013 sequestration budget cuts caused severe shortfalls at state and local housing agencies that administer federal rental assistance programs, and the cuts are continuing to affect low-income families, as the New York Times reports.  Most agencies sharply reduced the number of families they assisted by not reissuing housing vouchers when the families using them left the program.  These cuts have continued into 2014, despite the fact that Congress partly reversed sequestration this year.  As of March, housing agencies were assisting some 90,000 fewer low-income families due to sequestration.

The agencies are passing the budget strain on to low-income families in other ways, too.  In New York, the city’s Department of Housing Preservation and Development is raising the rent for nearly one-third of the 32,000 low-income families using its housing vouchers.  This forces families to make tough choices: either absorb rent increases of as much as several hundred dollars per month or move to a smaller, lower-priced unit, if they can find one in New York’s tight rental market.

Such choices are particularly difficult for seniors, who are disproportionately affected by the rent increases in New York.  Many have lived in their current apartment for many years, and they may have difficulty navigating the process of finding, moving, and adapting to a new apartment and neighborhood.

Housing authorities across the nation — from Napa, California, to Alexandria, Virginia — have continued to make similar changes in response to sequestration.  While Congress partly reversed the sequestration cuts in 2014, many housing agencies have been reluctant to reverse rent increases or cuts in the number of families they’re assisting, due in large part to the uncertain budget outlook for 2015.

Congress has yet to complete the fiscal year 2015 budget for the Department of Housing and Urban Development (HUD), which administers the housing voucher program and most other federal rental assistance programs, and it likely won’t until after the November elections.  Moreover, the HUD funding bills approved by the House and the Senate Appropriations Committee would increase housing voucher funding modestly, but not enough to cover the increase in program costs due to rising rent and utility costs.  As a result, they would risk locking in most of the sequestration voucher cuts.

As Congress completes the 2015 budget this fall, it should make a priority of fully restoring the vouchers lost to sequestration, or current voucher holders will face higher rents, while families on waitlists continue to pay unaffordable rents, risking homelessness if they fail to make ends meet.