Wednesday, January 24, 2007

Welcome to the inaugural issue of the Washington Budget Report . In this e-newsletter, one of Washington's leading budget experts will provide you with plain English, nonpartisan analysis of Federal Budget developments.

Budget, appropriations, and tax issues, and the demographic tidal wave that is about to engulf our nation's entitlement programs, are at the top of our national domestic agenda. The Washington Budget Report's analysis of the Budget will assist journalists, financial leaders, government affairs professionals, nonprofit and corporate leaders, and the general public to identify key issues and track the complex congressional budget process as it unfolds.

• The President told Congress his February 5th Budget will set forth proposals to achieve a balanced budget by 2012. Democratic House Budget Committee Chairman John Spratt (D-SC) has said Democrats will adopt a Budget Resolution with the same bottom line.
  

  Contex: By the end of the upcoming fiscal year, the Gross Federal Debt will have increased since 2001 from $5.8 trillion to approximately $9.5 trillion. The impending political struggle over how to balance the budget by 2012 should be considered in light of recent statements by the fiscal chiefs at CBO, GAO and the Federal Reserve that the real problem is not the near-term deficit—it is the long-term fiscal outlook.

• Addressing the long-term challenges, the President called for action to reform Social Security, Medicare, and Medicaid. The President also called on Congress to "cut the number and cost of all earmarks in half by the end of this session."
  

  Context: Proposals are circulating on Capitol Hill for commissions or working groups on entitlement reform (details below). Regarding earmarks, Appropriations Chairmen Sen. Robert Byrd (D-WV) and Rep. David Obey (D-WI) announced in December that no new earmarks would be enacted for this fiscal year —other than already enacted earmarks (in the defense and homeland security bills). Looking ahead to FY 2008, the House acted on earmark reforms in early January and the Senate passed earmark reform legislation last week (details below).

  State of the Union Address

  Democratic Response

• Today the Congressional Budget Office (CBO) released its key annual report: the Budget and Economic Outlook. Beware of headlines on CBO's "projection of a balanced budget in 2012." CBO acknowledges that its budget scorekeeping rules effectively require it to make unrealistic spending and revenue assumptions . In fact, they note that if more realistic assumptions were used, the projected cumulative budget surplus of $800 billion over the next 10 years, would change to a deficit of $4.2 trillion (and that figure does not include realistic levels of funding for Iraq or broadly supported increases in the size of the military).
  
• Over the longer term, CBO projects that "the aging of the population and continuing increases in health care costs are expected to put considerable pressure on the budget in coming decades . Economic growth alone is unlikely to be sufficient to alleviate that pressure as Medicare, Medicaid, and (to a lesser extent) Social Security require ever greater resources under current law."

  CBO: The Budget and Economic Outlook, Fiscal Years 2008 to 2017

  See Special Backgrounder for highlights of CBO's annual report.

• On January 11th, GAO Comptroller General David Walker told the Senate Budget Committee that "our long-term fiscal outlook is both imprudent and unsustainable…driven primarily by rising health care costs and known demographic trends," namely the baby boom. The Government Accountability Office chief projected that by 2030, interest payments, Social Security, Medicare and Medicaid, alone, would consume all or nearly all Federal revenues. He also observed that "economic growth is essential, but we will not be able to simply grow our way out of the problem."

  Comptroller General's Testimony

• On January 18th, Fed Chairman Ben Bernanke warned the Senate Budget Committee that, because of rising entitlement costs, a " vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits…Ultimately, this expansion of debt would spark a fiscal crisis….(T)he effects on the U.S. economy would be severe ."

  Fed Chairman's Testimony

• In recent years, Congress has frequently looked to bipartisan Commissions to address politically difficult issues. With increasing warnings from CBO, GAO, and the Fed about the dangerous growth of Medicare, Medicaid and Social Security spending, proposals are already emerging in the 110th Congress for a bipartisan Commission or working group.
  
• In a press conference on Monday, Senators Dianne Feinstein (D-CA) and Pete Domenici (R-NM) and former Budget Committee Chairman) introduced legislation to establish a 15-member permanent bipartisan (7 Democrats, 7 Republicans and 1 independent) National Commission on Entitlement Solvency . The Commission would develop proposals to secure the solvency of Social Security and Medicare. Congress would be required to vote on the proposals on an expedited timetable. Only "relevant" amendments could be offered to the Commission-reported legislation.
  
• Earlier this month, Senators Kent Conrad (D-ND) and Judd Gregg (R-NH), Chairman and Ranking Republican on the Budget Committee, said they are looking at establishing a "bipartisan working group" to address the entitlement maelstrom.
  
• The record on Commissions has been mixed. In 1983 the "Greenspan Commission" (also including Senators Daniel Patrick Moynihan and Bob Dole) reported recommendations that solved a short-term financing crisis in Social Security. Other Commissions—the 1988 National Economic Commission, the 1995 Bipartisan Commission on Entitlement and Tax Reform, and the 1999 Bipartisan Commission on the Future of Medicare generated no concrete results.

• House Democrats, in their "first 100-hours agenda" passed a new rule (H.Res. 6) to reinstitute pay-as-you-go (PAYGO ) budgeting, under which Federal budgeting in the House of Representatives will again become a zero sum game: any new tax cuts (or extension of tax cuts scheduled for expiration) or new entitlement spending will have to be offset elsewhere in the budget by increases in revenues or reductions in spending.

  For more details on the new PAYGO requirement, see Special Backgrounder.

• Earmark reform measures were adopted by the House and Senate soon after the convening of the 110th Congress. The House adopted a new rule (H.Res. 6) requiring disclosure of earmark sponsors, as well as justifications for the earmarks, and certification that earmarks will not benefit their House sponsor. The new House Rule is already in effect. The Senate last week voted on similar disclosure requirements, but as an amendment to lobbying and ethics legislation (S. 1) that must clear the House and be signed by the President before it becomes effective. The Senate's amendment would go beyond the House rule with the additional requirement that earmarks be disclosed on the internet 48 hours before a Floor vote. In addition, the Senate bill would also establish a point of order (a procedural mechanism) to allow any Senator to strike from conference reports any earmarks not appearing in the applicable House- or Senate-passed bills (unless 60 Senators vote to protect the earmark).
  
• Reconciliation Reform : House Democrats also passed a little noticed, but highly significant change to the Budget Reconciliation process. ("Budget Reconciliation" expedites legislation to make changes to entitlement laws and the Tax Code to bring them in line with the Congressional Budget Resolution.) The new House rule would prohibit Budget Reconciliation from being used if the result would be increased deficits. If this rule had been in place at the time, the major tax cuts of 2001 and 2003 might not have been enacted because Reconciliation's special rules protected those key bills from filibuster in the Senate. Supporters of the rules change argue that the special protections accorded to Reconciliation bills were never intended for deficit-increasing measures.

• With the FY 2008 congressional budget process about to begin, congressional appropriators are still working to complete FY 2007 appropriations. The 109th Congress failed to complete action on 9 out of 11 regular appropriations bills, except for Defense and Homeland Security funding. Most of the Federal government is currently operating under a temporary funding measure called a "continuing resolution" that expires February 15th . The Democratic Appropriations Chairmen—Sen. Robert C. Byrd (D-WV) and Rep. David R. Obey (D-WI)—announced on December 11, 2006 their intention to resolve the fiscal mess they inherited by enacting a "year-long joint resolution" to dispose of the unfinished appropriations bills (essentially a continuing resolution for the remainder of the year, with some upward adjustments for specific programs).
  
• Today, CBO released its annual report, the Budget and Economic Outlook: Fiscal Years 2008 to 2017. This marks the beginning of the Congressional Budget Process as it lays out a "baseline" or starting point for Congress to develop a Congressional Budget Resolution for FY 2008.
  
• Monday, February 5th : President's transmittal of his FY 2008 Budget. The President's Budget is simply a request to Congress. The constitutional authority to make funding decisions resides in the Congress. After February 5th, the Budget Committees of the House and Senate hold hearings on the President's requests, receive "views and estimates" on the President's Budget from the other committees of Congress, and in March draft a Congressional Budget Resolution setting forth a broad framework of spending and revenue totals to govern subsequent action on individual spending and revenue bills. The Budget Resolution is a congressional budget blueprint; it is not presented to the President for signature and does not become law.