Off the Charts Blog | Center on Budget and Policy Priorities

Debt-ceiling silly season has returned, my latest post for the US News & World Report Economic Intelligence blog warns.  By late fall, we’ll face another dangerous political showdown on raising the debt ceiling to prevent a first-ever U.S. default.

Brinksmanship in 2011 over raising the debt limit started us on the road to the harmful across-the-board sequestration cuts, and there’s no telling what bad ideas policymakers may adopt this year to secure the votes needed to raise it again.

We’d be better off scrapping the debt ceiling entirely.  But the next best move would be to copy Denmark, the only other developed country with a statutory debt limit anything like ours.  As I explain:

There’s a crucial difference, however, between our debt limit and Denmark’s: the Danes do not play politics with theirs. . . .  When the financial crisis caused a sharp increase in government debt in 2008-2009, the Danes raised their debt ceiling — a lot.  The 2010 increase doubled the existing ceiling, which was already well above the actual debt, to nearly three times the debt at the time.  As [the Peterson Institute for International Economics’ Jacob Funk Kirkegaard reports, “The explicit intent of this move — supported incidentally by all the major parties in the Danish parliament — was to ensure that the Danish debt ceiling remained far in excess of outstanding debt and would never play a role in day-to-day politics.”

Click here for the complete post.

As our loyal readers surely know, House Republicans have proposed a budget calling for up to $5.7 trillion in tax cuts as part of deficit-neutral tax reform, but they have yet to propose a single cut in tax expenditures (credits, deductions, and other tax preferences) to begin filling this huge revenue hole.

Now, Ways and Means Committee Chairman Dave Camp (R-MI) has taken a major tax expenditure off the table:  the deduction for charitable donations.  “I think it is important not to cap that area,” he said yesterday in response to a question, Tax Notes Today reports.

This isn’t the Republican plan’s first political reality check.  As we noted in April, a Ways and Means hearing examined the mortgage interest deduction, one of the largest tax expenditures (as is the charitable deduction) and considered ripe for reform across the political spectrum.  But top Republicans on the committee “made clear . . . that they plan to proceed with caution when it comes to deciding [its] fate,” according to Politico.

The mortgage interest and charitable deductions benefit a wide cross-section of American taxpayers so, not surprisingly, they enjoy broad public support.  That’s true, as well, of the other leading tax expenditures (such as the tax-free treatment of employer-provided health care) that policymakers would have to scale back significantly to have any hope of offsetting the huge proposed tax cuts.

Chairman Camp’s statement is just the latest sign of how at odds with political reality the Republican plan is.

The House Appropriations Committee-approved plan to divide up 2014 discretionary funding among the 12 appropriations subcommittees would lead to deep cuts in a broad range of non-defense areas and shift tens of billions of dollars from domestic programs to defense and other security programs, our new analysis explains.

Total discretionary funding under the plan would equal the amount that the Budget Control Act (BCA) allows if sequestration continues next year as scheduled.  But the plan gives defense programs much more funding than the BCA allows under sequestration, raising them close to the BCA cap before sequestration.  And it gives non-defense programs much less funding than the BCA allows under sequestration.

But, if policymakers took the opposite approach, raising non-defense programs close to the pre-sequestration level, they would have to cut defense programs by about 10 percent below their current level.

The plan makes clear that if overall discretionary funding remains at the post-sequestration level in 2014, policymakers can protect funding in one major area only by making deeper cuts in other areas.  The fundamental problem is that the overall funding level for discretionary programs under sequestration is too low.

The Administration threatened earlier this week to veto the first appropriations bill based on the plan (H.R. 2216, which funds military construction, veterans’ programs, and related programs), stating, “adhering to the overall spending limits in the House Budget’s topline discretionary level for fiscal year (FY) 2014, would hurt our economy and require draconian cuts to middle-class priorities.”

This graph shows how deeply the plan would cut non-defense areas in order to accommodate its funding increases for defense and other security programs.  Overall funding for the Departments of Education, Health and Human Services, and Labor would be 18.6 percent below this year’s level after sequestration, while the bills funding the Interior Department, the Environmental Protection Agency, and the State Department would be 14 percent below the current level.  The declines are even bigger once inflation is taken into account.

A far better approach would be to replace sequestration with a balanced package of spending cuts and revenue increases and fund discretionary programs at the BCA levels without sequestration, as the President’s budget and the Senate-passed budget resolution do.

Medicare has grown financially stronger in both the short and long term compared to last year, its trustees said in their annual report.

The trustees reported that Medicare’s Hospital Insurance (HI) trust fund will remain solvent — that is, able to pay 100 percent of the costs of the hospital insurance coverage that Medicare provides — through 2026.  At that point, the payroll taxes and other revenue for the trust fund will still be able to pay 87 percent of hospital insurance costs, as we explain in our updated analysis (see graph).

Policymakers will need to close this shortfall with additional revenues, program changes that slow the growth in costs, or most likely both.  But contrary to claims by some policymakers and pundits, Medicare will not go “bankrupt” or cease to operate after 2026 — as that term may suggest.

In fact, Medicare’s financial outlook has significantly improved, thanks to health reform. The trustees project that the HI trust fund will remain solvent nine years longer than before Congress enacted the Affordable Care Act.  The Medicare hospital insurance program faces a shortfall over the next 75 years equal to 1.11 percent of taxable payroll — that is, 1.11 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period.  This is much less than the 3.88 percent of payroll that the trustees estimated before health reform.

Medicare does face substantial long-term financial challenges, stemming from the aging of the population and the continued rise in costs throughout the U.S. health care system.  It is essential that policymakers take further steps to curb the growth of costs throughout the health care system as we learn more about how to do so effectively.  In the meantime, we can achieve some additional Medicare savings over the next ten years in ways that preserve its guarantee of health coverage and don’t raise the eligibility age or otherwise shift costs to vulnerable beneficiaries.

Click here for our analysis of the trustees’ report, and here to listen to the audio recording of our related media briefing.

We just issued statements on today’s reports from the Social Security and Medicare trustees:

• Robert Greenstein on the Social Security trustees’ report
• Paul Van de Water on the Medicare trustees’ report