Budget Background

Yesterday, Senate Majority Leader Harry Reid introduced his revised plan to increase the limit on the debt (this time by $2.4 trillion) from the current $14.3 trillion to $16.7 trillion—an amount sufficient to allow the Treasury to continue borrowing to finance our deficits through early 2013. This revised plan is essentially the same as his previous plan – it would allow the Treasury to continue borrowing through the election in November 2012, and it still falls short of matching the amount of the debt limit increase with the same amount of deficit reduction by more than half. 

Senator Reid will claim that, relative to the January 2011 baseline of the Congressional Budget Office (CBO), the CBO estimate of his plan would reduce the deficit by $2.4 trillion, but it turns out that the plan relies on several gimmicks to claim he matches his debt limit increase.  Sen. Reid’s plan, measured against the latest baseline based on the continuing resolution for regular appropriations for 2011 (this is two baseline updates since January 2011), would reduce the deficit by only $0.9 trillion, according to CBO.  Nearly every penny (97 percent) of the policy (non-interest) savings in Reid’s plan come from setting limits in law on discretionary spending at levels lower than the CBO baseline.  In 2012, discretionary appropriations would be only $2 billion less than the $1.050 trillion enacted for 2011 (not including war spending).  Over the 2012-2021 period, discretionary outlays would amount to $701 billion less than the CBO baseline (adjusted for enactment of the April 2011 continuing resolution), assuming future Congresses and presidents strictly adhere to the discretionary levels in the Reid plan.

Unprecedented Increase In The Debt Limit

The $2.4 trillion increase in the debt limit is —

  • A 17-percent increase from the current debt limit, putting the new debt limit 48 percent higher than when President Obama took office;
  • The largest debt increase in history;
  • The fourth debt limit increase during President Obama’s tenure;
  • A year and a half extension of our credit card—much longer than the average debt-limit increase over previous decades, which typically allowed the government to function for seven to nine months before re-evaluating; and
  • Extraordinarily large because of President Obama’s and Sen. Reid’s political desire to not have another public discussion of the issue again before the presidential election in November 2012.

Statutory Limits On Discretionary Spending, Enforced By Sequestration

Sen. Reid would set discretionary appropriations limit of $1.048 trillion for 2012 and $1.051 trillion for 2013.  The amount enacted for 2011 was $1.050 trillion. Reid’s plan would create separate limits for security (defined as spending for defense and veterans) and non-security (all other appropriations) for 2012 and 2013.  For 2012, security spending would be reduced by $3 billion relative to 2011 enacted, while non-security spending would increase by $1 billion (see table below).

For each year from 2014-2021, there would be only one statutory limit on total appropriations. Compared to the CBO baseline, updated for the enacted full-year continuing resolution for 2011, outlays flowing from the proposed Reid limits would be $701 billion lower over the next 10 years. Sen. Reid claims that savings would be higher, but makes his comparison to a baseline that assumes higher appropriations for 2011 than what was finally enacted.

The 2012 discretionary levels in the revised Reid amendment are below the president’s request, but are $29 billion above the amounts envisioned by the House-passed budget resolution and the Cut, Cap, and Balance plan (H.R. 2560).  Of particular note, the Reid proposal would reduce security spending by $29 billion relative to the House-passed levels, and increase non-security spending by $57 billion.

Comparison of Discretionary Levels

Reid Plan Claims Phony Savings From War Spending

The revised Reid plan still claims $1.1 trillion in “savings” from “winding down the wars in Iraq and Afghanistan.” This is phony. The markets are looking for Congress and the president to reduce the debt by making significant structural changes in the promises we make to people in entitlement programs, not by claiming to save money the federal government has no plans to spend.

Ever since President Obama’s first budget director made the mistake of claiming that the president’s first budget request (fiscal year 2010) reduced the deficit by spending less on the wars, no one has seriously claimed deficit reduction from phasing down war spending. Reid claims that House Budget Committee Chairman Paul Ryan’s budget “also included this savings in its deficit reduction calculation.”  But Chairman Ryan’s budget only displayed his budget totals as a change from the baseline calculation required of the Office of Management and Budget and the CBO in the Budget Enforcement Act, just as the president’s budget for 2012 did.  Still, neither of those two budgets made Sen. Reid’s mistake of arguing that winding down the wars is a deficit reduction proposal of any significance.

A Way to Bust the Discretionary Caps and Avoid a Sequester

The Reid proposal sets up a process so that Congress can enact a law to avoid sequestration for exceeding the discretionary caps, called “Suspension in the Event of Low Growth.”  This reactivates portions of sections 254 and 258 in the Balanced Budget and Emergency Deficit Control Act, which expired along with the last statutory discretionary caps in 2002.  These sections instruct CBO to inform Congress when real GDP falls below certain thresholds, and would trigger Senate consideration of joint resolution that would preempt a sequester that otherwise would occur.  The joint resolution would be privileged in the Senate with limited debate, would be unamendable and require only a simple majority to pass.

Given recent news from the Dept. of Commerce that first quarter 2011 real GDP was revised down to 0.4 percent, it is possible that if the economy deteriorates further, this suspension language would permit Congress to invoke this “low-growth” clause and more easily exceed the discretionary caps and avoid sequestration within months of enacting Reid’s debt limit legislation.  However, according to the Congressional Research Service, even though Congress attempted to use the “low growth suspension” tool during the 12 years of the discretionary cap regime, a joint resolution to suspend the caps was never enacted. 

Reid Plan Punts The Budget Process For Two Years

The Reid plan would “deem” budget resolutions for fiscal years 2012 and 2013, punting the budget process for two years until after the 2012 election and trampling regular order.  The Reid plan would preempt any need for a Congressional budget for the next two years, substituting current law spending and revenue levels for members’ decisions about the appropriate levels to set for a Congressional budget.  (Reid would set aggregate spending and revenue levels at CBO’s latest baseline for FY12 and CBO’s March 2012 baseline for FY13.)  This has several implications:

  • For the authorizing committees, any new spending would have to be offset for 10 years, but the Reid plan does not assume that committees would produce legislation that would reduce the deficit (nor are there any reconciliation instructions in the Reid plan).
  • To extend all current tax policy scheduled to expire at the end of December 2012, offsets would be necessary to avoid Senate budget points of order.  Statutory PAYGO (S-PAYGO) would still exempt the extension of certain tax policies from the S-PAYGO scorecard (and thus prevent sequestration), but the Reid amendment raises the procedural hurdles for tax policy in the Senate by setting the revenue aggregates at CBO’s current law baseline, which reflects the increase in revenues that will occur if current tax rates expire as scheduled.
  • Replacing the usual budget resolution process with two “deemed” budget resolutions created by this plan, the Reid bill seeks to change law that is in the jurisdiction of the Budget Committee without the bill having been reported from the Budget Committee.  This bill violates the Congressional Budget Act and would trigger a point of order that, if raised, would take 60 votes to waive.  (If the point of order is sustained, then the bill would come off of the Senate floor.)

Mandatory Spending

Sen. Reid’s legislation includes only a token amount of savings ($11 billion over 10 years, averaging only $1 billion per year) in mandatory spending programs.  

While Reid’s plan would zero out the Senate PAYGO scorecard along with the budget resolutions that he would deem for FY12 and FY13, the plan would leave the S-PAYGO scorecard untouched.  Nor would the Reid plan prevent any of his mandatory savings from being added to the current surplus that is still left on the S-PAYGO scorecard from the “deficit reduction” in the health bills enacted in early 2010.  Thus, any mandatory savings in this bill would not go to deficit reduction, but instead would be available for future spending increases or tax cuts that would not have to be offset to avoid a sequester.

Agriculture

Sen. Reid’s plan would reduce the ratio of base acres (a farm’s historic planted average of a crop) on which direct payments are made, from 85 percent to 59 percent.  Because FY 2012 direct payments would be based on the 2011 crop season (based on contractual agreements) there will be no savings in FY 2012.  The reductions would begin in FY 2013, and CBO estimates that spending would be reduced by $11 billion from 2013-2021.

Education

The Reid plan would terminate federally subsidized student loans for graduate students and, using flawed credit reform accounting, claims a savings of $18 billion over the FY 2011-2021 period.  According to CBO, a fair value scoring of this proposal would net only $16 billion in savings over the same period.  Regardless of the level of savings, none of these funds are used for deficit reduction, and are instead used to funnel $18 billion in new funding to the Pell Grant program.  Under improved budget scoring that has been used for other credit programs, this proposal would increase the deficit by $2 billion.

Program Integrity Savings

CBO estimates that the Reid plan would spend about $50 billion on efforts to improve “program integrity” (reducing erroneous payments in entitlement programs and increasing revenues by increasing tax enforcement on non-complying taxpayers), but would yield about only $60 billion, for an average but negligible improvement in the deficit of about $1 billion per year.