New Year, New Congress, and a New Chance to Strengthen our Fiscal and Economic Future

Jan 13, 2015

The newly convened Congress has a fresh opportunity to address our nation’s long-term fiscal and economic challenges. Despite recent reductions in short-term deficits, more work needs to be done to put our nation on a sustainable long-term fiscal path and provide a solid foundation for economic growth.

The “lame duck” session addressed a couple of notable fiscal and economic policy items. Congress and the Administration agreed on a government funding bill for most programs through fiscal year 2015 and avoided a government shutdown. Congress and the Administration also agreed on a temporary extension of a variety of tax provisions that had expired at the end of 2013.

The 113th Congress, however, failed to tackle a number of critical issues. The 114th Congress has a new opportunity to address our debt and long-term fiscal challenges, strengthen our economy, and put our nation’s fiscal future on a sustainable path.

APPROPRIATIONS FOR FISCAL YEAR 2015

The 113th Congress averted a shutdown and agreed to appropriate $1.1 trillion for discretionary programs in 2015 — $11 billion lower than last year’s amount. The most significant change was a decrease in overseas contingency operations, or OCO (military operations and related activities in Afghanistan and other countries), that was partially offset by an increase in emergency funding for Ebola preparedness and response. Congress provided full-year funding for all discretionary programs, except those under the jurisdiction of the Homeland Security subcommittee, which will expire on February 27, 2014. Between now and then, Congress will have to address the expiration of those funds, or risk a shutdown of Homeland Security activities.

FY 2015 represents the sixth straight year that appropriations have declined in terms of nominal dollars. As a share of the overall economy (gross domestic product or GDP), discretionary appropriations are 40 percent smaller than they were in 2009 and are projected to continue to decline for the foreseeable future based on current law, declining from 6.1 percent of GDP in 2015 to 5.1 percent of GDP in 2024. At that level, discretionary funding would be lower than its lowest point in the past 30 years, which was 5.8 percent in 2000. Discretionary programs encompass an array of important government programs, including national defense (which is approximately half of total discretionary funding), education, transportation, infrastructure, and food and drug safety programs.

Statutory budget caps guide projections of discretionary funding. The current caps, which were originally enacted in the Budget Control Act of 2011, can be modified by changes to law or by increasing funding for emergency programs that are not constrained by the caps. The 113th Congress modified the caps when it passed the Bipartisan Budget Act of 2013 (the "Murray/Ryan Agreement") and provided additional emergency funding for certain programs. Any increases in discretionary funding above the current cap amounts would lead to more spending and higher deficits.

What changed from FY 2014 Discretionary Spending to FY 2015 Discretionary Spending?
Not much.

Discretionary spending is projected to decline steadily as a percentage of GDP

TAX EXTENDERS

In the final days of 2014, policymakers enacted into law a temporary extension of various tax provisions for businesses and individuals that had expired at the end of 2013. The law affected numerous provisions of the tax code ranging from the tax credit for research and experimentation to the deduction for state and local sales taxes. The most significant provision is an investment incentive that allows businesses to write off certain investments faster. The total cost of the extenders is $42 billion over the next ten years, according to the Joint Committee on Taxation.

The legislation extended these provisions through 2014, however, nearly all of the provisions expired again on December 31, 2014.1 As a result, individuals and corporations will be able to claim various tax benefits for their 2014 tax returns, but it is uncertain whether the benefits will be continued in 2015. This greatly diminishes the value of the provisions as incentives. Instead of continued stopgap measures, lawmakers should work toward broad, long-term tax reform that provides clarity and certainty for individuals and businesses.

UPCOMING DATES

Lawmakers face a number of urgent fiscal tasks over the coming months. These upcoming legislative deadlines present an opportunity for Congress to take action to strengthen our economy and put the nation on a more sustainable fiscal path.

  • February 27, 2015 — Homeland Security Appropriations for the rest of FY 2015: Congress must pass legislation by this date to fund discretionary spending under the purview of the Homeland Security subcommittee to avoid a disruption of programs and services.
  • March 16, 2015 — Debt Ceiling: On March 16, 2014, the debt ceiling will be reinstituted. The debt ceiling has been suspended since February 2014, when lawmakers passed a last-minute measure in order to avoid a potential default on obligations. Due to so-called "extraordinary measures," the Treasury can circumvent default for a period of time after March 16. However, if lawmakers fail to act before these "extraordinary measures" are exhausted, the Treasury would not have sufficient funds to meet the government’s obligations and would enter default. That would have dire consequences for our economy.
  • March 31, 2015 — Medicare’s Reimbursements to Physicians: Without action by Congress, Medicare’s reimbursements to physicians will be cut by nearly 24 percent after this date. By addressing the root causes of this flawed policy, lawmakers can avoid "patching" the program with another temporary "doc fix," as they have done 17 times since 2003.
  • April 15, 2015 — Budget Resolution: Congress should meet this statutory deadline for adopting a budget resolution for fiscal year 2016. Congress has failed to pass a joint budget resolution for the past five years, which has left it without an overall blueprint for managing the budget.
  • May 31, 2015 — Highway Trust Fund Exhaustion: Congressional action will be necessary by this date to address the projected exhaustion of the Highway Trust Fund in order to maintain highway and mass transit funding. A failure to act could shutdown construction during the prime season for building and maintaining the nation’s highways and mass transit system.

LONG-TERM BUDGET CHALLENGES

The newly convened Congress also has the opportunity to address our long-term fiscal challenges. Though our budget deficits have fallen from their peak levels during the recession, deficits are projected to begin rising again in 2018, according to CBO. These continuing deficits will cause our national debt to grow and hurt our economy by lowering investment, raising interest rates, and reducing wages. If current policies are not changed, federal debt is projected to soar to 183 percent of GDP within 25 years and climb ever higher in subsequent years, which would have a devastating effect on the economy.

Our deficits and debt are on an unsustainable path

The growing federal debt is projected to reduce average income per person by $5,000 in 2039

Three important factors drive the growth of debt over the long run: the aging of the population; the growth of healthcare spending; and our inefficient tax system. The aging of the population will push up future spending for Social Security and healthcare as baby boomers become eligible for benefits and as people live longer in retirement. Federal spending on healthcare is also projected to climb sharply as overall healthcare prices continue to increase and as more people gain health coverage through Medicare, Medicaid and the insurance exchanges. Although the recent slowdown in the growth of healthcare spending is welcome news, CBO projects that federal spending on major healthcare programs in 2050 will be nearly twice what the government spent in 2014, measured as a share of the economy. Lastly, our tax system is broken in many respects. Altogether, the current federal income tax code, tax regulations, and explanations add up to more than 70,000 pages. Our tax laws are unnecessarily complex and loaded with numerous deductions, exemptions, credits, preferential rates, and other loopholes that distort economic decision-making and hurt our economy.

The aging of the baby boom generation will boost the number of Americans age 65 and older

Despite a slowdown in the growth rate, projections of federal healthcare are still expected to rise significantly

CONCLUSION

There is nothing to gain from a recurrence of the fiscal brinksmanship of recent years, which failed to solve our fiscal challenges and damaged the economy. In a study funded by the foundation, Macroeconomic Advisers estimated that fiscal uncertainty from 2009 to 2013 raised unemployment by 0.6 percentage points — the equivalent of 900,000 lost jobs. Moreover, the longer we delay fiscal reforms, the more significant the changes will have to be. Under CBO’s alternative fiscal scenario, PGPF estimates that taking action this year to begin to stabilize the debt would require changes to revenue and/or spending of an aggregate of 3.4 percent of GDP. If action is delayed until 2025, this number climbs to 5.8 percent of GDP — a 70 percent increase.

Delaying action to stabilize the debt will make solutions harder in the long run

The approaching fiscal deadlines and the congressional budget process provide an opportunity for lawmakers to work through their differences, set priorities, and work together on a sensible plan to address our long-term fiscal challenges. Addressing fiscal issues in a timely and proactive manner will help our economy, and our nation as a whole. By enacting a bipartisan plan that puts our long-term budget on a sustainable path, lawmakers could reduce uncertainty about our fiscal future, provide a much-needed boost to business and consumer confidence, and help our economy grow, now and in the future.

1 Although nearly all of the provisions expired at the end of 2014, two provisions had expiration dates of December 31, 2015. (Back to citation)

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