The substance of the budget negotiations

The substance of the budget negotiations

It appears the primary action on budget negotiations has shifted from the White House to a discussion between Leaders McConnell and Reid. Still, the White House discussions appear to be continuing, and even if they fall apart, the positions of the various parties are still important.

Piecing together information on a moving target from several sources, here’s my best interpretation of where things stood as of late Thursday / Friday. I believe this is consistent with most reporting from major news sources. I think it’s also somewhat more detailed, at least compared to anything I have seen so far. If knowledgeable insiders wants to suggest corrections to what I describe below, please email me.

There are three levels of negotiations:

  1. The Biden group:  VP Biden, Budget Director Jack Lew, Treasury Secretary Geithner, and NEC Director Sperling, negotiating with House Majority Leader Cantor, House Minority Leader Pelosi, Senate Majority Whip Durbin, and Senate Minority Whip Kyl;
  2. Discussions between the Speaker and the President about a possible Grand Bargain; and
  3. A new round of discussions between Senate Minority Leader McConnell and Senate Majority Leader Reid.

I explained Leader McConnell’s proposal last Thursday, but cannot provide any additional detail on the substance of his negotiations with Leader Reid, such as whether they are thinking of including some or all of the agreed-upon savings provisions from the Biden group.

I will therefore focus on my admittedly imperfect understanding of the substance of the Biden group negotiations and the Grand Bargain discussions.

The Biden group

This negotiation appears to be working under a least common denominator principle. Only those policy changes that all parties agree to are included. This kind of approach results in a smaller package and less savings the more people and the wider the perspectives you include in the negotiation, so it’s unsurprising that this is a modest package.

As I understand it, the most recent least common denominator of that group includes:

  • $203 B in health mandatory savings over 10 years. All of this is spending cuts (technically, reductions in the rate of spending growth). I think that “health” here includes only Medicare and Medicaid, with maybe a few billion savings from cutting a bell or whistle attached to the Affordable Care Act (aka ObamaCare). Of this $203 B in savings, $195 B comes from traditional cuts in how much the government pays a doctor, hospital, or other health provider for a given service. The other $8 B comes, I think, from changes that more directly affect beneficiaries (maybe a smidge more means-testing or higher copays, these amounts are small enough to likely be trivial in their effect).
  • $220 B in other mandatory savings over 10 years. I understand that one quarter of this ($55 B) comes from policy changes that would look to an average person like a spending cut. The other $165 B are real policy changes that involve policy pain to certain constituencies, but to the average person they don’t look like spending cuts. Higher fees on Fannie & Freddie, on defined benefit pension plans, on aviation, and telecommunications spectrum and property sales all fit in this box because they are technically user fees rather than tax increases.. This is real deficit reduction and these are not gimmicks. Even though they are technically classified as spending cuts, you cannot conclude that they actually reduce government spending or the size of government (good luck figuring that one out – it’s an accounting convention).
  • $1,050 B ($1.05 trillion) in discretionary savings over 10 years. I understand this is a $2 B cut in the topline for next year (FY12) relative to FY11. After that, the topline would be allowed to grow at 2/3 the rate of inflation. The savings figure is (apparently) calculated by subtracting the resulting amounts from a baseline under which spending grows at the rate of inflation.
  • No change to how CPI is calculated, as was apparently discussed as part of a Grand Bargain.

That totals $1.473 trillion of savings over 10 years. I use a 20% rule-of-thumb for interest savings over this timeframe, meaning I assume almost $300 B of interest savings would result from these amounts of direct policy changes. If that’s right, you’re looking at a ballpark of just under $1.8 trillion of savings over 10 years.

As with any measure of deficit reduction, you have to be careful about the baseline. Unfortunately, I don’t know the discretionary baseline they’re using here, and in particular what it assumes for war costs in Iraq and Afghanistan. This makes me skeptical about the $1.05 trillion number until I get clarification.

This package is, I understand, smaller than it was earlier last week. I understand the Biden group had been circling around about $330 – $350 B in health savings and about $260 – 330 B in other mandatory savings. I am told that Democrats pulled items off the list throughout the week, insisting they were conditional on Republicans agreeing to tax increases, resulting in the above position late in the week.

This would explain the “$2 trillion” number you hear coming from the President and Congressional Democrats. I understand the White House / Democratic position to be a package that would score as about $2 trillion of spending reductions plus interest savings contingent upon Republicans agreeing to additional tax increases. If Republicans are unwilling to raise taxes, than it appears Democrats are in the ballpark of about $1.75 trillion of spending reductions plus interest savings as described above.

This means the narrative of Democrats insisting on tax increases as part of a deal, and Republicans refusing those tax increases, applies not just to the Grand Bargain discussions, but also to the more modest results of the Biden group.

The President’s position in a so-called Grand Bargain

I don’t know the details of the Speaker’s position in the so-called Grand Bargain discussions, but I think I understand the President’s position in those talks. It includes the following on the spending side:

  • all of the above from the Biden group (including, I think, the larger health and other mandatory savings amounts);
  • plus an additional $150ish B of discretionary savings over 10 years, for a total of about $1.2 trillion relative to an inflation baseline (with the same caveat as above);
  • plus making technical corrections to the Consumer Price Index as a measure of inflation, which would slow the growth of future Social Security COLAs and increase future income tax revenues;
  • plus raising the Medicare eligibility age to match scheduled increases in the Social Security age;
  • plus [a little?] more means-testing and higher copayments in Medicare, and maybe some Medigap reforms;

on the tax side, I understand the President’s proposal would:

  • make permanent the bottom four income tax rates and other tax relief provisions not for “the rich,” preventing tax increases scheduled for 2013;
  • allow the top two individual income tax rates to increase in 2013;
  • increase total government revenues by about $1 trillion over the next ten years (again, I’m skeptical because I don’t know the baseline here); and
  • include some form of commitment to future comprehensive tax reform, with specific parameters that I don’t yet know.

(photo credit: White House by Pete Souza)

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