January 28, 2008

Budget Process Step-by-Step

Jan. 28, 9pm: President's State of the Union Address laying out highlights of forthcoming Budget; followed by Democratic response delivered by Kansas Gov. Kathleen Sebelius

Jan. 29: House Budget Committee hearing on Using Fiscal Policy to Bolster the Economy, with testimony by Alice Rivlin (former OMB and CBO Director), Lawrence Summers (Clinton Administration Treasury Secretary), and Robert Greenstein (CBPP). 210 Cannon, 10am

Jan. 29: Senate Budget Committee hearing on the long-term budget outlook for Comptroller General David Walker. Dirksen 608, 10am

Jan. 30: Senate Budget Committee hearing on economic stimulus (although jurisdiction to act on the legislation belongs to the Finance Committee)

Jan. 30-31: Senate Finance to mark-up stimulus package

Feb. 4: President transmits FY 2009 Budget requests to Congress

Week of Feb. 4: House action on stimulus package (bypassing committee action)

Feb 6: Senate action on a stimulus package could begin.

Feb 15: Before Congress adjourns for the President's Day Recess, House leaders are aiming for completion of action on the stimulus package (although anticipated Senate amendments suggest that March 14 is a more realistic target).

Late Feb./Early March: Authorizing committees transmit "views and estimates" on the President's budget proposals to the House and Senate Budget Committees

March 14: Before Congress adjourns for Easter Recess on March 14, the House and Senate Budget Committees are likely to report their respective versions of the FY 2009 Budget Resolution (with Floor action and conference to follow after the recess).

Stimulus Package Update:

Last Thursday, President Bush, Treasury Secretary Paulson, House Speaker Nancy Pelosi (D-CA), and House Minority Leader John Boehner (R-OH) announced a tentative agreement on a $150 billion economic stimulus package including the following:

- Low-income workers would get checks of $300 for individuals and $600 for couples, (regardless of whether they owe any income tax--a key provision for House Democrats);

- Workers who pay income tax and have adjusted gross income less than $75,000 for individuals and $150,000 for couples, would receive tax rebates of up to $600 (for individuals) and $1200 (for couples);

- Everyone eligible for this relief would also receive an additional $300 per child;

- Businesses would be permitted to deduct 50 percent of the cost of new investments in 2008 (for items subject to depreciation of 20 years or less);

- Small businesses would be allowed to write off the entire cost of new investments in 2008 up to a ceiling of $250,000; and

- In order to boost the housing industry, the package would increase the size of mortgage loans that can be insured by the Federal Housing Administration (FHA), and purchased by Fannie Mae and Freddie Mac. (The Fannie and Freddie provisions would sunset after a year.)

Cost of the package: approximately $100 billion for the rebates and $50 billion for business tax relief.

While the Administration and House Leaders hope to complete action prior to the President's Day recess (February 15), the bill is open to unlimited debate and amendment in the Senate (unless cloture is invoked).

Senators may offer amendments including: extension of rebates to retired seniors, expansion of unemployment and food stamp benefits, expansion of the net operating loss "carry-back" period, fiscal relief for States, and infrastructure investment. Republicans may also use the opportunity to have a debate on making the President's 2001 and 2003 tax cuts permanent, when they expire in 2010. This could push final action on a stimulus bill to March, with a target date of March 14 (when Congress adjourns for Easter Recess).

White House Fact Sheet on Economic Stimulus
Baucus Statement on Adding Unemployment and Food Stamp benefits to Package

State of the Union Address

According to recent reports, the President will raise the following budget-related items in tonight's State of the Union Address:

- Earmarks: According to the Washington Post, the President will pledge to veto FY 2009 appropriations bills that do not halve the number and cost of earmarks. In addition, he will issue an executive order directing Federal agencies to ignore FY 2009 earmarks in report language (a prohibition that could be easily circumvented by referencing earmarks in legislative language).

[Context: The continuing level of attention on earmarks is a red herring, distracting attention from the nation's rapidly increasing debt (from $5.8 trillion in 2001 to $9.2 trillion currently) and unsustainable fiscal outlook (due to rapid growth of Medicare, Medicaid, and Social Security). Earmarks are a fraction of one percent of the budget, and deal with the issue of who makes Federal project decisions, not how much is spent in total.]

- Stimulus Package: The President will also urge quick passage of the Stimulus package negotiated with House Leaders.

CBO Annual Report: Devil is in the Details

The first--and sometimes only--section most people look at in CBO's Annual Report (released last Wednesday) is the summary table at the beginning of the book. The summary table projects a baseline deficit of $219 billion for FY 2008, smaller deficits in 2009-2011, and budget surpluses for fiscal years 2012-2018. If this is where you stop reading, you will be left with the false impression that the Federal Treasury is in pretty good shape. This could not be further from the truth.

The reason: CBO is, unfortunately, hemmed in by a set of baseline rules that seriously obscure fiscal reality.

Consider CBO’s projected deficit of $219 billion in FY 2008, the current fiscal year:

-- The $219 billion bottom line includes Social Security surpluses, even though Social Security surpluses are temporary (ending in 2016) and effectively "mask" the ongoing or "structural deficit" in government operations. When the surpluses are properly excluded (as Federal law actually requires), $195 billion is added to the '08 deficit.

-- The CBO projection does not include the costs of the likely economic stimulus package, which will lower revenues and add $150 billion to the '08 deficit.

-- Last fall, Congress appropriated $88 billion of the $193 billion in war-related funding requested by the President for FY 2008. The balance of the war funding is not included in CBO's current '08 deficit projections because the money has not yet been appropriated. However, a war supplemental is a certainty and CBO estimates the additional appropriations will result in $30 billion of additional defense outlays in FY '08. (The balance of the anticipated supplemental appropriations would result in outlays in future years.)

-- Last fall, Congress forestalled automatic cuts in Medicare physician payment rates, but only until January 1, 2008. Preventing these scheduled cuts would add to the '08 deficit.

-- As reflected below, a more realistic deficit projection for the current fiscal year is about $600 billion, and that's without figuring in a recession. In its report, CBO says that it "does not expect the slowdown in economic growth to be large enough to register as a recession." Many economists project a recession this year.

$219 billion (CBO projection for unified budget)
$414 billion (excluding the Soc. Security surplus)
$564 billion (including the stimulus package)
$594 billion (including war supplemental)
$??? billion (a recession would substantially increase the $594 billion deficit).

Looking beyond 2008, the CBO summary table's projection of declining deficits and surpluses in 2012 and beyond, can also be misleading (unless one closely read's the details). Here's why:

-- The projections do not include the revenue losses associated with "fixing" the Alternative Minimum Tax, i.e., preventing it from impacting middle- and upper-middle income taxpayers. This would cost revenue losses in excess of $900 billion over 10 years.

-- The projections do not include the costs of extending the 2001 and 2003 tax cuts. (At the end of 2010, provisions that are set to expire include: reduced tax rates on dividends, capital gains, and ordinary income; a higher child tax credit; the elimination of the estate tax; an expanded standard deduction; and an expanded 15 percent tax bracket for married couples.) Whichever party is elected in 2008, it is likely that some components of the Bush tax cuts that benefit the middle class will be extended. If the next Administration extends all of the tax cuts, the 10-year cost in additional deficits would be $2.7 trillion (in addition to the $900 billion cost of fixing the AMT).

-- Extending the popular "tax extender" provisions would cost more than $500 billion over 10 years. The largest of these is the research and experimentation tax credit, at a cost of $115 billion over 10 years.

-- The projections assume war spending and other costs related to the war on terrorism will not exceed $88 billion per year (because CBO only projects into the future the partial war funding currently enacted for FY 2008).

In addition, it is important to note that CBO's budget projections end with 2018, but that's when our most intractable fiscal problems accelerate. Despite the rosy picture in CBO's 10-year summary table, the report early on acknowledges that "the United States continues to face severe long-term budgetary challenges....Ongoing increases in health care costs (7 to 8 percent annually), along with the aging of the population, are expected to put substantial pressure on the budget in coming decades....Economic growth alone will be insufficient to alleviate that pressure, as Medicare and Medicaid and, to a lesser extent, Social Security require ever greater resources under current law" making the current fiscal path "unsustainable."

CBO: Turmoil in the Financial Markets

CBO's assessment of the threat to the economy from the turmoil in the financial markets: "The financial markets have been buffeted by events stemming from the downturn in the housing sector and the losses associated with subprime mortgage loans--that is, loans extended to borrowers who have low credit ratings and a high risk of default. The ultimate magnitude of the subprime-related losses is highly uncertain, in part because it depends on how the economy evolves over the next few years and how far house prices fall. However, rough estimates by some financial analysts suggest that the losses are in the range of $200 billion to $500 billion. Moreover, because most subprime loans have been pooled into mortgage-backed securities, rather than held by their originators, and those securities have subsequently been restructured as parts of other complex investment securities, who will actually bear those losses is unclear. The uncertainty among investors about their exposure to subprime-related losses has led many of them to reassess the creditworthiness of a wide variety of financial instruments."

New Budget Docs

CBO: Budget and Economic Outlook

CBO Director's Testimony on the Budget and Economic Outlook

CBO Testimony on Stimulus Options

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