Off the Charts Blog | Center on Budget and Policy Priorities

The House Budget Committee will consider two bills tomorrow that, contrary to their titles, would harm the congressional budget process.  The House passed similar bills last year, and we have previously explained how they would make budget estimates less transparent and less useful.

• The “Baseline Reform Act” (H.R. 1871) would require the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB), in constructing budget baselines that project future funding levels, to assume that discretionary appropriations will remain frozen indefinitely, with no adjustment for inflation.  The bill would have no effect for 2014 through 2021, since the baseline for those years assumes that appropriations conform to the levels specified in the Budget Control Act of 2011.  Beyond 2021, though, the proposal would make projections of deficits and debt unrealistic and misleading, we explained last year.

• The “Pro-Growth Budgeting Act” (H.R. 1874) would require CBO to prepare “dynamic” estimates of the budgetary impact of major legislation.  Because the effects of tax and spending changes on the overall economy are highly uncertain, trying to include these factors in budget estimates would impair the credibility of the budget process, our 2012 report explained.

The Budget Committee may also soon consider a third budget process bill that would also have unfortunate consequences.

• The “Budget and Accounting Transparency Act” (H.R. 1872) would add an extra amount to the recorded budgetary cost of federal credit programs, beyond their actual cost to the government, to reflect what private lenders would charge if they issued the loans and loan guarantees.  We have updated our in-depth analysis of this proposal and have issued a new, shorter explanation.

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.

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.

The House narrowly approved a “debt prioritization” measure today that would — in case of a prolonged standoff over raising the debt ceiling — direct the Treasury to pay bondholders and Social Security recipients first.

The bill says nothing about the millions of other people and businesses who count on timely federal payments — including veterans, doctors and hospitals who treat Medicare patients, soldiers, state and local governments, private contractors, and recipients of unemployment, SNAP, and Supplemental Security Income benefits.

Lawmakers shouldn’t fool themselves:  simply putting bondholders at the front of the queue won’t avert financial chaos or soothe creditors.  One rating agency explicitly warned in January that honoring interest and principal payments but delaying payment on other obligations would trigger a review and hence a possible downgrade.

We’ve said before that lawmakers shouldn’t play politics with the debt ceiling.  The United States is virtually alone among advanced countries in setting a debt ceiling independently of the decisions that drive higher debt in the first place — the decisions about how much to spend and how much to  collect in revenues.  Among other problems, that disconnect enables lawmakers to support tax cuts and wars that necessitate borrowing (see graph), then oppose raising the debt limit to let the government pay the resulting bills.

The most sensible approach would be to abolish the debt limit altogether, which serves no useful purpose and provides opportunities for political mischief while putting the nation’s financial standing at risk.  The Financial Times and the Economist agree, and economists surveyed by the University of Chicago overwhelmingly agreed that the debt ceiling “creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.”

At the very least, lawmakers should raise the debt limit in a timely way and for an extended period of time so that the government does not risk defaulting on any of its obligations.

The Senate narrowly adopted an amendment to its recent budget resolution that would require the Congressional Budget Office and Joint Committee on Taxation to prepare “dynamic” estimates of the budgetary impact of tax legislation.  But, policymakers should reject the temptation to use “dynamic scoring” to estimate how tax reform proposals would affect the budget, as we have explained.

Contrary to widespread misunderstanding, the standard estimates of tax and spending proposals from CBO and other federal agencies aren’t “static.”  They incorporate many changes in individual and business behavior that occur in response to changes in tax rates and other policies.  They don’t, however, include estimates of whether (and by how much) a change in tax or spending policy would affect the overall economy, such as its impact on economic growth — which, in turn, would affect revenues.

There are several very good reasons why federal agencies don’t use dynamic scoring.

• Estimates of the macroeconomic effects of tax changes are highly uncertain. Economists don’t agree on the size of macroeconomic feedbacks from reducing marginal income tax rates or other tax changes.  They would likely be small, however, according to most studies.  That is, they would not have large enough effects on revenue estimates to justify the problems that dynamic scoring would create.

• Dynamic scoring would impair the credibility of the budget process. Because the estimates of macroeconomic feedbacks are so uncertain, observers would almost surely view the revenue estimates on which they are based as biased and politically motivated.  And, to use dynamic scoring for the first time in estimating a tax reform proposal would appear arbitrary and seem like a budgetary gimmick.

• To assure fairness and consistency in the budget process, federal agencies would have to use dynamic scoring for spending bills as well as tax bills. Government investments in infrastructure, education, and basic research can boost long-term economic growth, just like private investment.

• Dynamic scoring would make deficit reduction harder to achieve. Given our nation’s projected long-term budget deficits, the single most important goal of tax reform should be to raise substantial revenue, in a progressive manner, as part of a balanced deficit-reduction plan that also includes reductions in projected spending.  With dynamic scoring, however, policymakers could replace real changes in tax policies with speculative revenue gains based on the assumed macroeconomic benefits of tax reform, in which case deficit reduction would lose out.