I will describe in some detail the President’s new budget proposal, then provide a few big picture reactions to it.
I have been keeping my recent posts fairly short. This one is instead more of a reference post, and it is not for the faint of heart. I hope it is useful, I know it is long. Consider yourself warned.
Today the President proposed:
- a negotiating process;
- deficit and debt targets;
- a new budget process trigger mechanism;
- and new spending cuts in Medicare, Medicaid, other entitlements, and defense.
Compared to the budget he proposed in February, he offers no new proposals in non-security discretionary spending (I think), taxes, or Social Security.
The President proposes a 16-person bicameral bipartisan Congressional budget negotiation, led by VP Biden, beginning in early May. Each Congressional leader (Boehner, Pelosi, Reid and McConnell) would name four Members. The group’s goal would be “to agree on a legislative framework for comprehensive deficit reduction.”
The President’s timeframe could foul up the normal budget calendar. This is a consequence of him waiting to go second.
Deficit & debt targets
The President proposes a budget deficit “of about 2.5% in 2015” and that is “on a declining path toward close to 2.0% toward the end of the decade.” (That second test is a mess.) Compared to what he argues he proposed in February (using OMB scoring), that’s only 0.7 percentage points lower in 2015 and only 1 percentage point lower in 2021.
He proposes that debt/GDP be “on a declining path … by the second half of the decade.”
Budget credibility: Quite low, for three reasons.
- Several of the largest specific proposals described below have very low credibility (they’re almost gimmicks).
- All proposals of this nature phase in their changes over time, but these proposals push that farther than most. The later the pain begins, the more time there is for Congress to undo it. The President’s proposal backloads the savings so much that they talk about a 12-year window rather than the traditional 10 years. That’s a sign of a weak proposal.
- OMB says the President’s February budget reduces the 2021 deficit to 3.1% of GDP. CBO said the same policies would result in a 4.9% deficit in that year. That’s a big gap, and the same will likely be true here. CBO is likely to say that the President’s specific policies don’t come close to hitting his stated deficit targets. If they’re right, the trigger would not be a failsafe and would kick in with big tax increases.
While the President reiterates two big tax proposals from his February budget, he does not propose explicit new tax increases.
Despite having signed a law last December that prevented income, capital gains, or dividend tax increases for all Americans, the President stresses that next time he will insist that tax rates on “the rich” should go up. Next time begins in 2013. Small business owners, this means you.
He also reiterates his proposal to limit itemized deductions for high-income taxpayers. The lion’s share of revenue loss from individual tax expenditures comes from broad-based and wildly popular preferences: the deductibility or exclusion of home mortgage interest, of retirement plan contributions, of charitable contributions, of state and local income and property taxes, of employer-provided health insurance, and of capital gains. The last two times he proposed this he had almost zero Congressional support, including from his own party.
While he is not proposing new explicit tax increases beyond those he proposed in February, his new trigger proposal would likely result in big tax increases.
The Trigger (“Failsafe”)
The President proposes a new debt trigger, similar to policies in place a couple of decades ago. (The most well known is called “Gramm-Rudman-Hollings.”) The trigger is new and important.
The President’s proposal is structured as an if … then … proposition.
If, by 2014, the debt/GDP ratio is not (stabilized and projected to decline by the end of the decade)
… then certain mandatory spending programs are cut across-the-board, and certain taxes are increased, by enough to ensure the debt meets the “if” test.
It’s unprecedented (but not crazy) to structure this as a debt test rather than a deficit test. As a rule of thumb, a deficit of 3% of GDP roughly keeps debt/GDP stable, so the President’s test is roughly equivalent to:
If, by 2014, the deficit/GDP is not 3%, and below 3% by the end of the decade…
The President’s team thinks that his specific policy proposals would reduce the deficit enough that the trigger would never kick in. He therefore calls it a “failsafe.” In past years the term “backstop” has been used for similar triggers. Under this logic the trigger is not used to force cuts, it’s used to ensure them.
If, however, the President’s scoring is wrong and too optimistic, or if the trigger becomes law but the specific policy changes don’t, then this proposal serves a new purpose: it would be a mechanism that automatically changes policy unless Congress acts to stop it. That’s a big distinction. As a general rule, a backstop trigger has a much better chance of being sustainably implemented than an action-forcing trigger.
Trigger proposals like this pop up every few years. Two big questions about any such proposal are:
- What happens if the trigger kicks in?
- How does this affect Congress’ incentive to legislate?
What happens if the trigger kicks in?
The President’s proposal is similar to past triggers in that it exempts all discretionary spending, Social Security, and interest on the debt. While past triggers limited the amounts that Medicare and Medicaid could be cut, the President’s trigger appears to exempt them entirely. The White House fact sheet says the trigger “should not apply to Social Security, low-income programs, or Medicare benefits.” Elsewhere it says the trigger applies only to mandatory spending.
Assuming that “low-income programs” includes Medicaid, this means the trigger appears to apply to at most about $300 B (if triggered this year) in “other mandatory” spending. Half of that would hit federal retiree payments, a quarter would hit veterans’ benefits (if not defined as “low income”), and the rest would hit smaller things like farm subsidies.
It therefore appears that the President’s trigger would exempt more than 90% of government spending from the automatic across-the-board cut.
The trigger would also raise taxes by implementing “across-the-board spending reductions …