U.S. Budget Watch

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1 CHAIRMEN BILL FRENZEL JIM NUSSLE TIM PENNY CHARLIE STENHOLM PRESIDENT MAYA MACGUINEAS DIRECTORS BARRY ANDERSON CHARLES BOWSHER STEVE COLL DAN CRIPPEN VIC FAZIO WILLIAM GRADISON WILLIAM GRAY, III WILLIAM HOAGLAND JIM JONES LOU KERR JIM KOLBE JAMES MCINTYRE, JR. DAVID MINGE MARNE OBERNAUER, JR. JUNE O NEILL PAUL O NEILL RUDOLPH PENNER PETER PETERSON ROBERT REISCHAUER ALICE RIVLIN CHARLES ROBB MARTIN SABO ALAN K. SIMPSON GENE STEUERLE DAVID STOCKMAN JOHN TANNER LAURA TYSON PAUL VOLCKER CAROL COX WAIT DAVID M. WALKER JOSEPH WRIGHT, JR. Analysis of Fiscal Policy Proposals of Senator Scott Brown and Elizabeth Warren June 26, 2012 is a project of the Committee for a Responsible Federal Budget, a non partisan, non profit organization committed to educating the public about issues that have significant fiscal policy impact. The Committee includes many of the past directors of the Congressional Budget Committees, the Congressional Budget Office, the Office of Management and Budget, and the Federal Reserve Board. neither supports nor opposes any candidate for office. Its reports are intended to promote understanding and discussion of the federal budget and of how specific policy proposals would affect the deficit. SENIOR ADVISORS ROBERT STRAUSS 1899 L Street NW Suite 400 Washington, DC Phone: Fax:

2 Methodology offers the following analyses of Senator Scott Brown s and Elizabeth Warren s respective fiscal positions as laid out on their respective campaign websites and especially from their campaigns correspondence with the Boston Globe. Although the next Congress will not be seated until January 3, 2013, our analysis covers the full ten year period starting October 1, 2012, the start of fiscal year 2013, in order to be consistent between the two candidates. In addition, while we usually do more rounding in our estimates, because both campaigns are often very specific in their estimates, we have included some very specific estimates for comparison. 1

3 Senator Scott Brown s Specified Fiscal Positions Note: Senator Brown s campaign cites various figures from the Simpson Bowles plan, main plan here and supplementary examples here, which he also mentions as good starting point for... discussion. In several instances, the Brown campaign cites singleyear deficit reduction figures as five year figures, thereby understating their deficitcutting potential, which we quantify on a ten year basis below. Repeal the 2010 health care legislation, or Affordable Care Act (ACA). For the period, the ACA is currently projected to reduce deficits by a total of $119 billion, as updated for CLASS Act repeal and other developments to date. Repeal would therefore increase deficits by $119 billion from the current policy baseline. Over the same period, the ACA is projected to cost about $1.8 trillion in expansions of health care coverage, while cutting other federal health care spending by about $970 billion, and also raising revenues through penalty payments, excise taxes on high premium plans, Hospital Insurance surtaxes on high incomes, and other sources. As with all CBO scoring involving components affecting Medicare, ACA scoring is indeed in the context of current law Sustainable Growth Rate (SGR) cuts of about 30 percent in provider payments, but the ACA scoring does not include those savings as such. To the degree that the CBO score (here, e.g., Reductions in Annual Updates to Fee For Service Payment Rates, with updates aggregated in our summary here) might be changed by changing from the context of SGR to interactivity with the standard doc fix of freezing basis provider payments (before ACA productivity based reductions), CBO has not offered scoring of such an alternative scenario, which was not part of HR 2 of January It would certainly be possible to combine the two, SGR payment cuts and ACA productivity based cuts, for more savings than either one would achieve on its own. The Obama administration has indeed been double counting some of the ACA s deficit reduction with its claims of extension of the life of the Medicare Trust Fund. Without that double counting, the Medicare Trust Fund would be in the same state as if the ACA had never been enacted, which is to say, neither expanded nor diminished. The has analyzed this issue, here and here. Freeze federal pay. A one year freeze would reduce spending by about $40 billion, , starting with $3.3 billion the first year. Additional years would compound the 2

4 spending and deficit reductions. We do not have a separate score for a governmentwide ban on bonuses. Cut the federal workforce by 10 percent. Under a scenario where essential services were exempt from workforce reductions, 10 percent cuts in remaining agencies would reduce spending by about $45 billion from Reduce federal reliance on contractors. With an extra 25,000 contract workers disengaged every year over 10 years, this could save as much as $205 billion over 10 years. Reduce federal travel budgets. This could save about $10 billion, Reduce federal advertising budgets by 60 percent. This should reduce spending by about $5 billion through Reduce agriculture subsidies. Eliminating the subsidies named by the Brown campaign would reduce spending by about $56 billion, Reduce defense spending. Senator Brown indicates support for President Obama s proposed non war defense spending request of $614 billion, which is $10 billion less in appropriations than CBO projects. Maintained over time as a percentage of CBO projected spending, the spending cuts would total about $100 billion through 2022 (with the remainder in the immediately following years, as portions of authorized spending takes several years to be spent). The wars in Iraq and Afghanistan are already scheduled to be drawn down, for total spending reductions of $851 billion, (from appropriations reductions of $932 billion, as above, some of which would have been spent after 2022) relative to an extrapolation of today s spending levels. Because the war drawdown is occurring under current policy, however, most experts agree that there are no real savings from this proposal. Require Social Security numbers for the Child Tax Credit. SSNs are already required for the EITC, which Senator Brown names instead, and because recent legislation has been submitted along these lines for the Child Tax Credit, we are analyzing that here. The estimated spending reductions from such legislation are $8 billion,

5 Reduce Improper Payments. Pursuant to legislation passed under President George W. Bush, the Obama administration is currently reducing improper payments across different programs, as tracked at CBO scoring already has these projections in its baselines, i.e., not for further savings. President Obama s 2013 budget proposes some further savings, which CBO estimates would reduce deficits by a further $7 billion through It will be exceptionally difficult to capture additional savings beyond these. Sell some federal property. The Civilian Property Realignment Act points toward the sale of properties totaling $500 million in collective value, with some administrative costs in identifying properties to recommend for sale. This is certainly plausible. Implement Technology Efficiencies. The Information Technology Investment Management Act of 2011 has not been scored by the CBO, and there is no current basis to predict net federal spending reductions due to increased technology use. Create more efficient government. The GAO report lays out a host of overlapping programs, and there is almost certainly room for significant savings from the elimination of some duplication. However, no specific savings are yet clear enough, for example, to have inspired score able legislative proposals. President Obama proposed in January to save $3 billion over 10 years by merging agencies with overlapping functions, which is a plausible figure for Senator Brown s endorsement of these kinds of savings. Malpractice reform. By reducing health care costs, CBO has estimated that this could save the federal government $67 billion over ten years. Civil service pension reform. This could save $5 billion through 2022, or several fold more under other variants. Reduce the tax gap / improve collections. Increasing tax payment compliance usually involves additional federal hiring and/or equipment, and each segment of compliance is more difficult to achieve than the last. President Obama s 2013 budget includes significant efforts for closing the tax gap, which CBO estimates would bring net deficit reduction of $45 billion, Tax reform. Senator Brown supports comprehensive tax reform, to reduce deductions and lower tax rates. Whether done in a revenue neutral way or in order to increase or decrease revenue, besides effects on revenue, the consequences of such tax 4

6 reform can be beneficial to the economy by reducing tax compliance costs and by freeing corporations and individuals to make less encumbered economic decisions. Senator Brown writes, Until Congress can show that it will manage taxpayers hardearned money responsibly, I believe we re better off stopping all tax increases.... I am open to raising revenues by closing loopholes as part of comprehensive tax reform so long as it results in lower rates for everyone and doesn t just grow government. Net revenue increases would lower deficits. Federal revenue as a percentage of GDP. Senator Brown notes that CBO projects federal revenue to reach 18.5 percent of GDP in the year 2022 (also specified in supplemental data to CBO s Long Term Outlook) under the Alternative Fiscal Scenario of the 2001/03/10 tax cuts permanently extended. However, that projection includes revenues under the Affordable Care Act, which Senator Brown proposes to repeal. By 2022, ACA revenues are projected to amount to 0.8 percent of GDP, so that under this scenario, federal revenues would plateau instead at 17.7 percent of GDP, from 2022 forward. Compared to current policy baselines (not to current law, where for example all 2001/03/10 tax cuts would expire), over the ten year period , Senator Brown s proposals would reduce deficit spending by about $510 billion, with another $100 billion in reduced interest costs on the federal debt, for total ten year debt reduction of $610 billion, leaving the federal debt in September 2022 at 82.2 percent of GDP, or 2.9 percent less than under the most likely current policy scenario in CRFB s Realistic Baseline. *** 5

7 Elizabeth Warren s Specified Fiscal Positions The Warren campaign cites the current budgetary situation [as] largely a function of four factors: the Bush tax cuts, the wars in Iraq and Afghanistan, the aftermath of the 2008 financial crisis, and interest payments on the national debt. All of these are big factors; so are some others, especially health care spending. Most prominently, Medicare s cash flow deficit during the next ten years is projected at $3.3 trillion, little of which is covered by the Medicare trust fund (more below). Let upper income tax cuts expire, and set the estate tax at 2009 rates. Warren campaign: $968 billion in extra revenue over ten years. CRFB s analysis of JCT and CBO projections: $941 billion, fiscal years End subsidies for oil and gas. Warren campaign: $41 billion in ten year deficit reduction. CRFB estimate, from JCT s scores of OMB s 2012 and 2013 budgets: $39 billion. Tax carried interest at ordinary income rates. Warren campaign: $13 billion in additional revenues over 10 years. JCT score: $16 billion, , with some variability between scores dependent on the precise methods enacted. Eliminate agriculture direct subsidy payments to producers. Warren campaign: $23 billion in reduced spending over 10 years. CBO: Complete elimination could come to $50 billion, Buffett rule. Warren campaign: $47 billion (which is the JCT eleven year score). JCT, : $46 billion. Create more efficient government. Warren campaign: $3 5 billion savings over 10 years. This is plausible, and it corresponds to President Obama s January proposal to save $3 billion over 10 years by merging agencies with overlapping functions. Selling unneeded federal properties. Warren campaign: $4 billion. This is certainly plausible. End the war in Afghanistan faster than the current timeline. The United States is already on the path to winding down most of our operations in Afghanistan, and to maintaining current levels of security and other operations in Iraq, from $159 billion in 6

8 appropriations in 2011 to $39 billion by If the proposed acceleration were to the same projected plateau point from 2016 forward but with only half as many appropriations above that than projected, the total outlays reduction would be about $36 billion from Allow Medicare more negotiation authority for prescription drugs prices. The Congressional Budget Office has determined that such legislation would not necessarily lead to any significant change in prices. Other proposals, however, could reduce federal spending, such as legislating Medicaid s drug prices with rebates to apply to Medicare, as President Obama has proposed, which CBO estimates could save $137 billion over then years. Reduce health care waste in Medicare and Medicaid. The Warren campaign cites a 2011 single year range of waste at $197 billion to $402 billion. The Government Accounting Office identifies $70.4 billion in wasteful federal health spending, all categories, in Significant, partial cuts of such waste are underway as documented and projected at which CBO scoring already has in its baselines, i.e., not for further savings. President Obama s 2013 budget proposes some further savings, which CBO estimates would reduce deficits by a further $7 billion through It will be exceptionally difficult to capture additional savings beyond these. Investing in the Future. Warren supports federal spending on jobs, helping small businesses, transportation, energy, education, water and sewer infrastructure, and other areas. Many of these correspond to items in President Obama s proposed Jobs Bill, most recently of February Those spending lines that apply to 2013 and later total $184 billion. If Warren s proposed additional funding of the National Institutes of Health amounted to a 20 percent increase, that would be an extra $60 billion in spending through (The full cost of upgrading the nation s water and sewer systems, for example, could come to around $335 billion over twenty years, not included in our tabulations here. Estimates for upgrading the national power grid vary widely and depend on targets for strength, back up lines, and new source locations.) The Social Security trust fund is currently projected to last until 2033, as Warren indicates. However, Social Security is already in a cash flow deficit, with a ten year total cash flow deficit estimate of $971 billion through In 2013, for example, Social Security is projected to spend about $74 billion more in benefits than it takes in cash inflows, not counting principal and interest from the Social Security trust fund. Because this $74 billion is money that the government owes itself in the form of bonds, it must 7

9 now generate the cash to pay back to itself in order to transfer the cash to the bank accounts of millions of beneficiaries. The federal government does not hold such cash. Instead, the cash comes from a combination of current tax revenues and the sale of government bonds to the public. Therefore, the federal deficit in 2013 will be $74 billion higher in order to cover Social Security s cash flow deficit, and the overall federal debt in 2022 will be higher by $971 billion plus interest. By fulfilling trust fund obligations, the government converts intra governmental debt to public debt, financed in the same way that deficit defense spending is covered by taxes and/or additional public debt. In addition, even from the trust fund accounting perspective, two big problems present themselves. Social Security s Disability Insurance trust fund is scheduled to run out in And after the entire trust fund runs out in 2033, if this accounting method were held consistent (i.e., if Social Security were not at all funded from general revenues), then after 2033, either benefits would have to be slashed by 25 percent across the board, or payroll taxes would have to be raised by 33 percent to make up the difference, or some combination of the two. From this perspective, reforms much earlier will allow adjustments to be made much more gradually, and to be distributed more evenly across age cohorts. Finally, it is worth noting that average Social Security lifetime benefits exceed average Social Security lifetime contributions (Table A 1) by more than twofold, adjusted for inflation with the birth year 1945 cohort projected to receive 214 percent of what they contributed, and the birth year 1965 cohort receiving 207 percent. Due to progressive benefits formulas, the ratio of lifetime benefits to lifetime contributions of lower income earners is greater than these averages. The situation for Medicare is analogous to that of Social Security, with substantial differences in scale. The majority of Medicare spending is explicitly covered by the general fund, not the Medicare trust fund. The Medicare trust fund is comparatively very small, and it is projected to run empty years before the Social Security trust fund empties. And lifetime Medicare benefits come in at an even higher percentage of inflation adjusted lifetime Medicare taxes paid, ranging from over 200 percent for an 85th percentile dual income couple retiring today, to over 600 percent for a medianincome single income couple retiring today (Urban Institute). Compared to current policy baselines (not to current law, where for example all 2001/03/10 tax cuts would expire, even for low income earners), over the ten year period , Elizabeth Warren s proposals would reduce deficits by about $900 8

10 billion, with another $130 billion in reduced interest costs on the federal debt, for total ten year debt reduction of $1.03 trillion, leaving the federal debt in September 2022 at 80.2 percent of GDP, or 4.9 percent less than under the most likely current policy scenario in CRFB s Realistic Baseline. *** 9