A Review of Budget Challenges Faced by Congress

March 2011

With the U.S federal budget playing a leading role in newscasts and newspaper headlines and with the government facing unprecedented budget challenges, NETWORK provides this short resource as an overview of our major fiscal challenges. 

Congress is currently struggling with both long and short-term budget deficits, a debate on the continuing resolution to fund the government through FY 2011, and the president’s proposed budget for 2012. Congress also has to deal with the issue of raising the debt limit, as well as debating the president’s deficit commission’s proposals.

Current Debate on the Safety Net

Many in Congress are focused on making vast, draconian cuts in safety net programs to solve our budget crisis, but it is vital to remember that social safety net programs comprise only 14% of our federal budget. The 14% of our budget that provides for programs such as WIC, public housing vouchers for people who are elderly or disabled, job training programs, or Pell grants for low-income college students is a far cry from being the source of our deficits. If we are clear and honest about the causes of both our long-term and short-term deficits, we can begin to implement realistic solutions that rebuild our fiscal priorities for a nation that works.

Types of deficits

Short-term deficits result from temporary spending needs. These contributions to the deficit are highly concentrated over a relatively limited amount of time and—if the programs are suspended—those costs decrease as the years go on. This most commonly occurs with stimulus spending during recessions. Long-term deficits, however, can be attributed to structural imbalances between revenues and spending.

Three major contributors to the short-term deficit of the last decade:

• Wars in Iraq and Afghanistan
  • Since 2001, the global war on terror has added more than $1 trillion to our national debt and since 2003 has been estimated to contribute to 23% to our yearly federal deficit.
• 2001 and 2003 tax cuts
  • Tax cuts enacted during a time of two wars greatly contributed to our short-term fiscal imbalance. In 2009 alone, the 2001 and 2003 tax cuts decreased revenue by $231 billion.
• Stimulus spending related to the economic downturn
  • According to the Center on Budget and Policy Priorities (CBPP), the recession added  $400 billion  to the deficit for each year from 2009 to 2011 due to lost tax revenue and payments for unemployment insurance, food stamps and other safety net programs designed to respond to increased need in times of economic downturns. 
  • While stimulus efforts have resulted in costs of nearly $1.1 trillion, these efforts are widely praised for staving off even higher unemployment and are credited with preventing even greater increases in poverty and hunger. For more information on NETWORK’s position on deficit spending, click here)

Contributors to the long-term deficit:

• Rising healthcare costs
  • The 2010 Healthcare reform law makes great strides to reduce costs, and we must continue to look for new ways to decrease the growth of healthcare costs, while increasing the quality of care. Even with the improvements from the new healthcare law, the Congressional Budget Office projects that federal expenditure for healthcare will go from 5% of GDP this year to over 10% of GDP by 2035.
  • Both public and private healthcare spending contributes significantly to our rising deficits. Due to tax breaks for employer sponsored health coverage, when health care costs rise faster than Gross Domestic Product (GDP) growth, more and more income is exempt from taxation which will result in less revenue. Therefore, unless GDP growth can increase faster than our healthcare costs, the revenue base will continue to shrink.
  • For the past three decades, healthcare costs have been growing two percentage points more per person than the GDP growth per person.
• Aging of the population
  • Baby boomers retiring in increasing numbers are predicted to inundate and overwhelm both Medicare and Social Security.
  • With a greater number of retirees applying for benefits combined with decreasing payroll tax revenues, expenses for Social Security benefits is expected to exceed revenues by 2019.
• Insufficient revenues
  •  America has a long-term structural imbalance between spending and revenue. Revenues during 2010 as a percentage of GDP were at their lowest point in decades.
  • Citizens for Tax Justice (CTJ) released a report detailing that the U.S has some of the lowest tax collection rates as a percentage of GDP among Organization for Economic Cooperation and Development (OECD) countries. Among the 27 OECD countries, only Turkey and Mexico collect fewer taxes as a percentage of GDP.
  • According to CTJ, corporate tax rates in the US have been declining while other countries’ corporate tax rates have been steadily increasing. Currently, the U.S has the fifth lowest corporate income taxes as a percentage of GDP among the OECD nations.

Funding for Fiscal Year 2011

H.R. 1, which would fund the government for the remainder of FY11, is waiting to be considered in the Senate. The House passed it in February, and H.R 1 includes horrific cuts to—or the entire elimination of—vital human needs funding. The Democratically controlled Senate is not likely to pass this legislation with all of the cuts included in the House bill. Reconciliation between the two bills will be needed, and with the current continuing resolution expiring March 4, an additional shorter-term continuing resolution will be required to fund the government past the first week of March.

Funding for Fiscal Year 2012

With the release of the president’s budget on February 14, the debate on funding for FY 2012 began, before funding for FY11 was complete. The president’s budget makes great strides in creating a responsible plan to lower the deficit by raising revenues, decreasing unnecessary military spending, ending subsidies to oil and gas industries and ending the 2001 and 2003 tax breaks for households with greater than $250,000 yearly income. It remains to be seen the degree to which Congress will implement the president’s budget into actual, appropriated funding. Though the proposed FY 2012 budget is a significant step toward decreasing our federal deficit, we are gravely concerned about major, proposed cuts to programs that support low-income, vulnerable populations, such as LIHEAP (Low-Income Home Energy Assistance Program).

Why Deficits Matter

An increasing federal debt limits the ability of government to respond in times of fiscal crisis and increases the amount of funding detoured from programs benefiting the public. Currently, 6% of our federal budget is spent on interest on the national debt, which includes both the principal and interest payments

According to the Congressional Budget Office, if we do not rein in our federal deficits, national debt will exceed GDP by 2023 and interest on the national debt would consume our yearly federal budget. The U.S. historically has run deficits but we have allowed them to grow too high. The government needs to respond to ensure America’s future stability. 

Debt Limit

The current debt limit is $14.29 trillion. By most estimates, this will be reached sometime between the end of March and mid-May. Federal debt is the accumulation of deficits both short and long-term. The United States has held at least some debt for most of its history.

The debt ceiling has been raised almost 100 times since Congress first imposed a limit on the amount of debt the federal government could accumulate. The latest increase came in early 2010. Congress has never failed to raise the debt limit when it was needed.

Because the debt limit has never been reached, it is impossible to know exactly what the consequences of reaching it would be. However, Treasury Secretary Timothy Geithner recently sent a letter to Congress detailing some of the expected fallout if the limit were not raised in time. According to the letter:

• “The Treasury would be forced to default on legal obligations of the United States, causing catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.”  
• Default would raise all borrowing costs for the government, individuals and businesses. “Equity prices and home values would decline, reducing retirement savings and hurting the economic security of all Americans, leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.”  
• The dollar’s dominant role in the international financial system would be severely weakened, causing further increases in interest rates and scaring investors away from U.S. markets.
• The U.S. would be unable to meet all obligations, including but not limited to:
  • Social Security and Medicare benefits;
  • veterans’ benefits and other defense costs;
  • federal civil service salaries and retirement benefits;
  • tax refunds;
  • unemployment benefits to states;
  • student loan payments;
  • Medicaid payments to states; and
  • payments necessary to keep government facilities open.

This scenario is much different from that of a government shutdown. During the shutdown of the ‘90s, the government was able to make necessary payments. However, if the debt limited were to be reached, the government wouldn’t be able to acquire the cash to fund its obligations. And the resulting erosion of trust in the U.S. government’s ability to pay its debts would have consequences for decades to come.

For these reasons, bills to raise the debt limit have always been considered must-pass legislation. The danger in having a bill that has to pass is that controversial measures could be forced through as amendments. This year’s vote on the debt limit increase is expected to be accompanied by draconian spending cuts and dangerous structural changes, due to the anti-government stance of many new House Republicans.

Some of these structural changes would be extremely irresponsible. Among them are:

1. The Balanced Budget Amendment to the Constitution
2. A deficit reduction package modeled after the proposal by the President’s Deficit Commission
3. A cap on total government spending as a percentage of GDP.

For more information on the debt limit debate, click here.

Balanced Budget Amendment  

The Balanced Budget Amendment is just what it sounds like: a Constitutional Amendment to ban the federal government from running a budget deficit. An amendment to the Constitution is very difficult to pass, but in this political environment it is possible, especially if attached to the debt limit bill. However, the balanced budget amendment could do great damage to the budget process in the United States.

Historically, the federal government has not usually run up very high deficits. Government spending tends to be at its highest during wars and recessions—both considered emergency situations necessitating high government spending. An amendment like this would severely limit the government’s ability to respond to crises in the future. Furthermore, it would disproportionately benefit the rich by making it harder to raise revenues or close tax loopholes than to cut programs. Investments tend to have long-term gains that cannot be measured by a single budget cycle. By banning deficit spending, the amendment would be limiting our ability to invest in the prosperity of future generations.

Deficit Commission

A bipartisan group of about 30 senators are working together to put the recent National Commission on Fiscal Responsibility and Reform’s deficit-reduction proposal into legislative language.

While the Deficit Commission is to be commended for highlighting a commitment to protecting the disadvantaged and avoiding disrupting the fragile recovery, it comes up short in many ways. For instance, this plan--often referred to as the Bowles Simpson plan--focuses too much on spending cuts. About 70% of the plan closes the deficit through spending cuts, leaving only 30% to revenue increases.

It’s too early to know what the group of senators will include in their bill--they are still negotiating that among themselves. However, here is an overview of what was included in the commission’s proposal.

The commission set goals for deficit in both the long and short term. With their reforms implemented, the commission believes it’s possible to reduce the deficit to 2.3% of GDP by 2015. The report also called for debt to be stabilized by 2014 and reduced to 60% of GDP by 2023.

In order to reach those goals, the commission called for reforms in six major areas:

• Discretionary Spending Cuts – force budget discipline by capping spending at below 22% of GDP, cut low priority programs in both security and non-security departments
• Comprehensive Tax Reform – reduce rates, broaden the base, simplify tax code, reduce “tax expenditures,” reform corporate taxes, and cap revenues at 21% of GDP to avoid excessive taxation
• Healthcare Cost Containment – replace current reimbursement program with reforms to physician payments, cost-sharing, malpractice law, prescription drug costs, government subsidized medical education
• Mandatory Savings – cut agriculture subsidies, modernize military and civil service retirement systems, reform student loan programs, and create a sustainable path for the Pension Benefit Guarantee Corporation
• Process Changes – reform the budget process to make sure debt remains on a stable path, spending stays under control, there is an accurate measurement of inflation, and taxpayer dollars go where they belong
• Social Security Reforms to Ensure Long Term Solvency & Reduce Poverty – reform Social Security for its own sake, not just to reduce deficit.

Cap on Spending

The most concerning component of the commission’s plan is the creation of a cap on government income and spending. It would cap revenues at 21% of GDP and limit spending to less than 22% of GDP. While this is the historical average of government expenses, imposing a limit is a dangerous and ineffective way to reduce spending. The country needs to control spending by reducing the need for government programs, not by imposing a cap and letting current needs go unmet. By focusing on improving the wellbeing of all Americans, we could cut government spending and improve the quality of life in the U.S.

This cap could pass as a part of the 30 senators’ bill, or it could be included in any number of votes, including the debt limit vote.

Conclusion

NETWORK believes that long-term deficits and debt must be brought under control. However, this must be done in a responsible manner. Increasing revenues, cutting defense spending, and improving safety net programs must all be considered. Continuing to fund weapons instead of food is not only morally reprehensible, but it is also unsustainable and detrimental to the long-term health of our country.