The Federal Budget and Legislation in 2006

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The Federal Budget and Legislation in 2006

• Bob Greenstein
• Center on Budget and Policies Priorities
• January 25, 2006

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I. Background on the Federal Budget and the
Return of Budget Deficits
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FROM LARGE SURPLUSES TO LARGE DEFICITS IN JUST 4
YEARS
Cumulative Surpluses/Deficits, 2002-2011
Note The January 2001 projection is the
Congressional Budget Office baseline from that
time. CBPPs August 2005 projection adds to the
current CBO baseline a number of new likely
costs, such as the extension of the Bush tax
cuts, AMT relief, and funding of the Presidents
budget request for defense. We also adjust the
baseline to reflect a continuation and gradual
phase-down of operations in Iraq and
Afghanistan. At the start of 2001, the federal
government was projected to amass 5.6 trillion
in surpluses over the 2002-2011 period. Due
mainly to over-optimistic revenue projections,
large tax cuts, and increases in defense
spending, the government is now projected to
amass 3.5 trillion in deficits during that
period a negative swing of more than 9
trillion (or more than 900 billion per year).
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Even with Katrina, Federal Spending as a Share
of the Economy Is Below the 30 Year Average
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Cost of Katrina Expenditures and Administration
Tax Cuts, 2005-2010 (includes cost of interest
payments on the debt)
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LEGISLATION ADDING TO DEFICITSMOSTLY TAX CUTS
AND DEFENSE
Cost in 2005 of legislation enacted since January
2001
Tax Cuts Defense, Homeland Security and
International Entitlements Domestic Discretionary
(except Homeland Security)
48
37
8
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CBPP calculations from Congressional Budget
Office data. Reflects costs in 2005 above a CBO
January 2001 current services baseline projection
for 2005. May not add to 100 due to
rounding. 70 percent of the deterioration in the
budget in 2005 has resulted from legislation
enacted by Congress and the President. And 85
percent of the cost of that legislation stems
from tax cuts or increases in defense,
international aid, and homeland security not
domestic spending.
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WHAT WOULD IT TAKE TO BALANCE THE BUDGET WHILE
PRESERVING THE TAX CUTS?
To balance the budget by 2015 while making the
tax cuts permanent, policy makers would have to
To balance the budget in the next decade while
extending the tax cuts enacted since 2001 would
require cutting Social Security benefits by
nearly half, cutting Medicare or the Pentagon by
roughly two-thirds, or cutting practically
everything else by one-third.
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Source CBPP long-term deficit estimates assuming
continuation of current policy including
extension of the tax cuts and continuation of AMT
relief.
Center on Budget and Policy Priorities last
revised March 2, 2005
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• Drivers of the Long-term Fiscal Problem
• Rising health care costs in the private and
  public sectors alike
• Tax cuts
• The aging of the population

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MAKING THE TAX CUTS PERMANENT WOULD COST TRILLIONS
Cost of tax cuts with interest, adjusted for
inflation
Source CBPP calculations from Congressional
Budget Office data
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Medicaid per-person costs are growing more slowly
than private sector insurance premiums
Source Holahan and Ghosh, 2005 and Kaiser/HRET
surveys
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MEDICAID COSTS LESS THAN PRIVATE HEALTH INSURANCE
Estimated 2001 per capita costs of serving
Medicaid enrollees with Medicaid vs. private
insurance, after adjusting for health differences.
Source Hadley and Holahan, Inquiry, 2004
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The Tax Cuts and Social SecurityCosts through
the next 75 years
Tax cuts if made permanent
75-year shortfall in Social Security
Note The figure for the tax cuts represents the
costs of the 2001 (EGTRRA) and 2003 (JGTRRA) tax
bills. Estimates of the tax cuts assume that the
tax cuts are extended as proposed by the
Administration and include the additional cost of
Alternative Minimum Tax relief attributable to
the 2001 and 2003 tax bills. The cost of the tax
cuts is assumed to grow only with the economy
after 2015. The Social Security estimate comes
from the 2005 Trustees Report. All figures are
net present values of costs from inception
through 2079.
Center on Budget and Policy Priorities last
revised May 26, 2005.
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• III. The Decisions that Congress and the
  President Now Are Making, and the Bigger Policy
  Choices that Lie Ahead

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BUDGET CUTS ENACTED IN 2005 OR NEARING ENACTMENT
Even though tax cuts and defense increases are
overwhelmingly the causes of current deficits,
Congresss budgetary efforts in 2005 have
concentrated on cutting domestic spending. At the
same time, Congresss current budget plan would
worsen the deficit by enacting additional tax
cuts that are more costly than the planned budget
cuts.
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BUDGET RECONCILIATION BILL NEARING ENACTMENT

• Analysis by the Congressional Budget Office
  indicates the bill would
• Cause many low-income people eligible for
  Medicaid to forgo needed health care because of
  increased co-payments and premiums
• Result in 8 bill in child support going
  uncollected due to cuts in child support
  enforcement
• Shift billions of dollars in welfare reform and
  child care costs to the states
• Raise charges for many student loans

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CUTS IN DOMESTIC DISCRETIONARY PROGRAMS AFFECT
MOST PROGRAM AREAS
Proposed real cuts in funding for discretionary
programs in FY 2010 in the congressional budget
resolution
-11
-12
-13
-13
-15
-21
Note To calculate funding cuts, the FY 2010
proposed funding levels are compared to the FY
2005 funding levels adjusted for inflation. The
official CBO baseline is adjusted to take out the
continuation of emergency funding enacted in
2005. Under Congresss current budget plan, cuts
in domestic discretionary programs would grow
over time, reaching very substantial levels by
2010.
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Average Value of Tax Cuts, 2005

Source Tax Policy Center
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WHO GAINS FROM THE TWO NEW TAX CUTS THAT TOOK
EFFECT JANUARY 1?
Average tax cuts in 2010, when these tax cuts are
fully in effect
Source Tax Policy Center
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HOW MUCH DO THE TAX CUTS COST?
Annual cost of the tax cuts compared with
federal agency budgets
Note The figure for the tax cuts represent the
annual cost when fully effective (including AMT
relief) of the 2001 and 2003 tax bills, scaled to
the size of the economy in 2005. Agency budgets
represent outlays in 2005.When the tax cuts
take full effect in 2010, the top 1 percent of
households will receive tax cuts that total about
as much as the federal government spends on
education, and nearly eight times what it spends
on environmental protection.
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Likely Consequences of Unbalanced Approach to
Deficit Reduction

• Large cuts over time in programs for the poor
• Increases in number of uninsured Americans
• Federal government may be unable to fulfill some
  core functions
• More cost shifts to states

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The Goal Balanced Approach to Deficit Reduction

• Balanced approach would include revenue increases
  and spending cuts, especially since a main reason
  we have deficits is because of recent tax cuts.
• Cuts would not fall disproportionately on
  low-income programs.
• Balanced approach was taken in 1990 and 1993 by
  Presidents Bush and Clinton.

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Studies Find Recent Tax Cuts As Likely to Reduce
Economic Growth as to Increase It
tax legislation will probably have a net
negative effect on saving, investment, and
capital accumulation over the next 10
years. -- Congressional Budget Office making
the 2001 and 2003 tax cuts permanent would raise
the cost of capital for new investments, reduce
long-term investment, and reduce economic
growth. --Brookings Institution
economists Studies by Federal Reserve
economists, the Joint Committee on Taxation, and
other noted experts have produced similar
findings.
Sources Congressional Budget Office, The Budget
and Economic Outlook An Update, Aug. 2003, p.
45 Gale Orszag, "Budget Deficits, National
Saving, and Interest Rates," prepared for the
Brookings Panel on Economic Activity, September
2004, p. 34 Elmendorf Reischneider (Federal
Reserve economists), Short-Run Effects of Fiscal
Policy with Forward-Looking Financial Markets,
National Tax Journal, Sept. 2002, pp. 357-86
Joint Committee on Taxation, Macroeconomic
Analysis of HR 2, Congressional Record, May 8,
2003, pp. H3829-32.
Center on Budget and Policy Priorities last
revised Nov. 2, 2004
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Some First Steps Under a Balanced Approach to
Deficit Reduction

• Restore Pay As You Go rules
• Shelve tax cuts not yet in effect do not extend
  expiring tax cuts without paying for them
• Adopt Medicare commissions recommendations to
  curb excessive Medicare provider payments
• Adopt Presidents reforms in farm subsidies
• Pare back earmarks in appropriations bills
• Adopt Joint Tax Committee proposals to curb
  unproductive tax breaks and shelters and reduce
  tax avoidance
• Use better inflation measure for everything from
  Social Security COLAs to indexing of tax code