No Spending Cuts in 2013, But Bigger Cuts Later, Under Senate Proposal

February 7, 2012 at 4:09 pm

Senate Republican Whip John Kyl (R-AZ) and six other senators last week proposed to cancel the automatic $109.3 billion “sequestration” (spending cut) scheduled for January 2013 because of what they call its “draconian” defense cuts.  (Their bill is nearly identical to a House bill [HR 3662] that House Armed Services Committee Chairman Howard P. “Buck” McKeon [R-CA] introduced on December 14.)  But, the bill (S. 2065) would offset the cost of cancelling the 2013 cut by expanding the cuts for 2014 through 2021 from $109.3 billion each year to about $125 billion — making those cuts even larger than the 2013 cut that they view as unacceptable.

The 2013 cuts represent the first stage in the Budget Control Act (BCA)’s sequestration process to cut deficits by $1.2 trillion in 2013 through 2021.  Half of the cuts each year will occur in defense and half in certain nondefense programs, both discretionary and mandatory.

The 2013 cuts will reduce that fiscal year’s funding for defense and nondefense programs each by $54.7 billion.  (The nondefense cuts consist of $38.6 billion in cuts to discretionary programs and $16.1 billion in cuts to mandatory programs, about two-thirds of the latter in cuts to Medicare provider payments.)  For subsequent years, the cuts will come from lowering the funding caps that the BCA set for defense and nondefense discretionary funding and from further cuts in mandatory spending.

While eliminating the scheduled cuts for 2013, the legislation would expand the required cuts for 2014 through 2021 by $127 billion: $46 billion in new defense discretionary cuts and $81 billion in new nondefense discretionary cuts.  (The BCA’s nondefense mandatory cuts for 2014 through 2021 would remain unchanged.)  Thus, the cuts in defense discretionary funding in 2014 would grow from $54.7 billion to $59.7 billion and in nondefense discretionary funding from $38 billion to $48 billion.  The impact in subsequent years would be similar.

The legislation would also extend a 2012 pay freeze for federal employees for two more years and cut the federal workforce by 5 percent.  Not only are these policies ill-advised, given the need for an effective federal workforce, but — contrary to claims by the bill’s sponsors — they do not offset the cost of cancelling the January 2013 cuts.  That’s because the savings in the legislation come from reducing the discretionary caps by an additional $127 billion over eight years (and Congress will likely need to limit federal personnel costs simply to comply with the caps already in effect for 2014 through 2021).

This legislation would simply lead to further cuts in discretionary programs in 2014 through 2021 — and a further weakening of those programs’ ability to meet national needs.

Will States Help Keep College Affordable?

February 7, 2012 at 3:54 pm

In Florida, where in-state tuition at public, four-year colleges has jumped by more than 60 percent over the last four years, a key legislative committee last week passed a no-new taxes budget that includes another 8 percent increase.

Meanwhile, the University of Missouri is considering raising tuition by 6.5 percent next year, on top of a 5.5 percent increase this year, to partially offset an expected drop in state funding.  As I noted recently, Governor Jay Nixon has proposed closing the state’s large budget shortfall entirely through spending cuts.

These two examples show why states, if they want to help keep higher education affordable, will need to raise additional revenue from other sources like taxes.

Like many other states, Missouri and Florida are struggling to recover from the revenue collapse caused by the Great Recession.  They continue to face significant gaps between the money they are taking in and the money needed to sustain public services.

Unfortunately, key policymakers in these states refuse to consider a balanced approach that includes more revenues as well as spending cuts.  While they could avoid tax increases while also shielding higher education funding from cuts, that would simply mean even deeper cuts to other services, like K-12 education and public safety.

Lagging state funding for higher education has already helped drive up college costs in recent years. Average annual tuition at public, four-year institutions has grown by 28 percent ($1,800) over the last five years, after adjusting for inflation, according to the College Board.  Even after taking financial aid and education tax credits into account, price increases at these institutions have still outstripped inflation.

While state revenues are growing again, it will take years of sustained growth before they can fund services at anywhere near pre-recession levels.  This means that if states refuse to raise taxes, state support for higher education will likely continue to decline, placing mounting pressure on those institutions to shift more and more of the costs to students.

Like the Ryan Budget? Then You’ll Love These House Spending-Cap Bills

February 6, 2012 at 1:20 pm

The House may soon consider two bills (H.R. 3576 and H.R. 3580) that would limit federal spending to levels similar to those in the budget of Budget Committee Chairman Paul Ryan (R-WI) that the House passed last April.  These bills are part of a package of ten bills that Chairman Ryan and other committee members introduced to change the federal budget process.  As our new paper explains, these two bills would disproportionately hurt low-income people, worsen recessions, rule out balanced deficit-reduction packages, and promote deep cuts in Social Security and Medicare.

Nearly Two-Thirds of Proposed Cuts in Ryan Budget Comes from Low-Income AmericansThe bills — like the Ryan budget on which they are modeled — would require large cuts in federal spending that would likely fall disproportionately on low-income people.  The Ryan budget plan would get nearly two-thirds of its budget cuts over the next ten years from programs that serve people of limited means.  (See chart)

The Ryan plan would also cut Medicare in two major ways.  It would gradually raise the eligibility age from 65 to 67 while repealing the health reform law’s coverage expansions, so 65- and 66-year-olds would have neither Medicare nor access to health insurance exchanges where they could buy affordable coverage.  And it would replace Medicare’s guaranteed benefit with a premium support payment (voucher) that beneficiaries would use to buy coverage on their own, and the voucher wouldn’t keep pace with rising health care costs.

The bills would exacerbate economic downturns by preventing the federal government’s “automatic stabilizers” — like unemployment insurance and SNAP (food stamps) — from expanding as they are designed to do to help rejuvenate a weak economy.  Also, by limiting spending but not tax cuts, the bills would effectively require that all deficit reduction come from program cuts and none from revenues, thereby precluding balanced deficit-reduction packages.  And they would alter congressional budget procedures to make it easier to cut Social Security and Medicare benefits, but not to strengthen these programs’ financing by raising dedicated tax revenues.

In addition, the bills would reverse a quarter-century of bipartisan practice by subjecting basic assistance programs for the poor to automatic, across-the-board cuts.  In the past, both parties have embraced the principle that automatic budget cuts to enforce budget or deficit targets should spare basic assistance programs for low-income Americans to avoid driving these Americans into (or deeper into) poverty.  The House bills would repeal those protections, putting low-income programs at particular risk of deep cuts during and after recessions, when the need for them is greatest.

In Case You Missed It…

February 3, 2012 at 4:54 pm

This week on Off the Charts, we focused on the economy, the federal budget and taxes, state budgets, and health policy.

  • On the economy, Chad Stone pointed out that while the January jobs report is encouraging, a large jobs deficit remains, and he discussed the jobs report with Jared Bernstein.

    Chad also showed that the economy faces a long road back to full health. We excerpted Jared’s congressional testimony on strengthening the middle class and featured a video of Jared answering questions from readers of his blog, On the Economy.

  • On the federal budget and taxes, Robert Greenstein explained that Mitt Romney’s budget proposals would lead to massive cuts in safety-net programs.

    Jared Bernstein and Chye-Ching Huang discussed why policymakers should eliminate the preferential tax treatment of capital gains.

  • On state budgets, Nick Johnson pointed out that local governments are slowing the recovery through job cuts, and Michael Leachman noted that 20 states must begin repaying federal loans they took out to help pay for unemployment benefits.

    Jon Shure explained why the Tax Foundation’s annual ranking of states’ business climate is misleading, and Michael Mazerov lauded states’ efforts to force online retailers and other remote sellers to collect sales taxes.

  • On health policy, Matt Broaddus showed that the tax breaks that Georgia enacted to expand health coverage through the use of Health Savings Accounts have failed to do so.

In other news, we released Chad Stone’s statement on the January employment report, Jared Bernstein’s testimony on strengthening the middle class, and a report on the failure of Georgia’s effort to expand health coverage through tax breaks.

Video: Jared Bernstein Discusses the January Employment Report with Chad Stone

February 3, 2012 at 4:37 pm

Jared Bernstein, Senior Fellow, and Chad Stone, Chief Economist, discuss what the encouraging January employment report indicates about job creation and economic growth.

Chad Stone: “We’re smiling and the markets are smiling and this is actually a good jobs report. It’s one of the few good jobs reports we’ve had in this recovery. We had 240,000 jobs on private and government payrolls combined. 257,000 jobs in the private sector. 23 straight months of private sector job creation. Another two years of that, we’ll have erased the hole that got created by the Great Recession.”