Federal budget plans should comply with pay-as-you-go rules

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From: Concord Coalition

Concord Coalition Says New CBO Numbers Show Why Candidates' Budget Plans Should Comply With PAYGO

Washington -- With today’s release of new projections by the Congressional Budget Office (CBO) showing deficits for as far as the eye can see -- even under very optimistic assumptions -- The Concord Coalition strongly urged enforcement of congressional pay-as-you-go rules (paygo) as a critical first step in restoring fiscal discipline. Waiving paygo for popular items such as extension of expiring tax cuts and relief from the Alternative Minimum Tax (AMT) would increase the deficit by $5.1 trillion over 10 years, including added debt service costs. Given the high stakes for our nation’s fiscal and economic future, Concord said that the presidential candidates as well as Congress should apply paygo as a starting point for their tax and spending proposals.

“Honoring paygo requires more than rhetoric about tough choices. It requires that tough choices are actually made and enacted into law. This is not a mere bookkeeping exercise. It has real world consequences for our economic future. Deficit financing of new initiatives, including legislation to extend expiring tax cuts, would run up the national debt and its associated interest costs, drain national savings, increase our reliance on foreign lenders and reduce future incomes,” said Robert L. Bixby, executive director of The Concord Coalition.

“There is no such thing as a free tax cut or a free spending program, and deficit financing only postpones and multiplies the bill when it is eventually paid by younger generations. This is a real and critical economic issue. The adverse effects of larger deficits on economic growth often outweigh the positive effects of lower tax rates or higher government spending. And choosing instead to pay now for tax cuts, even through offsetting increases in revenues, does not have to involve trading off economic growth, if done in the spirit of tax reform,” said Diane Lim Rogers, chief economist of The Concord Coalition.

For many years, The Concord Coalition has produced a “plausible” scenario using CBO numbers to show what the budget outlook would look like if spending and tax policies are adjusted to reflect recent trends rather than the official baseline. These adjustments:

• Assume a phase-down, but not a phase-out, of funding for Iraq and Afghanistan.
• Assume that regular appropriations grow at the same rate as the economy.
• Assume that all expiring tax cuts are extended.
• Assume continuing relief from the AMT by adjusting it for inflation.
• Include debt service cost on the above changes due to added borrowing.

Under that scenario, deficits would total $7.8 trillion over the 10-year period from 2009 to 2018. As a percentage of the gross domestic product (GDP), deficits would steadily rise from 2.9 percent to 5.1 percent by 2018 and average 4.2 percent over the 10-year period. The government's debt held by its outside creditors (debt held by the public) would rise from 38 percent of GDP to 60 percent by 2018. Interest on this debt, which is an expense borne by taxpayers, would climb from about $240 billion this year to $638 billion by 2018.

This exercise is meant to warn against the dire consequences of failing to change course. It is not meant to establish an acceptable standard against which policy proposals should be measured. Unfortunately, in a race to the bottom, that is exactly what the presidential candidates are doing. Instead of measuring the budgetary impact of their respective budget plans against the official baseline, they argue that their plans should instead be measured against the much less favorable outlook shown in Concord’s plausible scenario or similar projections.

The political logic behind this baseline switch is obvious. Measured against current law (i.e., the official CBO baseline) the candidates’ plans would significantly expand the deficit. Measured against a much worse scenario such as Concord’s plausible baseline, their plans show improvement. They can thus claim to be “lowering” the deficit when, in fact, it might remain exactly where it is now or even go up.

“The deficit status quo is unacceptable. Not only should policymakers strictly enforce paygo, they must also begin taking steps to close the long-term unsustainable gap between revenues and promised benefits for Medicare and Social Security. The fact that we've had higher deficits before as a percentage of the economy and managed to dig our way out offers no reason for complacency. Circumstances are very different from the late 1980’s and early 1990’s. The end of the Cold War allowed us to shrink defense expenditures from 6 percent of GDP in 1985 to 3 percent by 2000. While defense spending has not gone back to Cold War proportions, it has risen back to over 4 percent of GDP. Our national savings rate has plummeted from over 8 percent to essentially zero and, as a result, the portion of our debt held by foreign lenders has shot up from less than 20 percent to nearly 50 percent. More fundamentally, the boomers' retirement in those days was a generation away. Now, the first boomers have already begun to qualify for Social Security. In total, we face a much more urgent and difficult situation than we did 20 years ago,” Bixby said.

Concord Coalition Plausible Baseline: http://www.concordcoalition.org/learn/budget/concord-coalition-plausible...

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The Concord Coalition is a nonpartisan, grassroots organization dedicated to balanced federal budgets and generationally responsible fiscal policy. Former U.S. Senators Warren Rudman (R-NH) and Bob Kerrey (D-NE) serve as Concord's co-chairs and former Secretary of Commerce Peter Peterson serves as president.

CONTACT:

Jonathan DeWald

(703) 894-6222

communications@concordcoalition.org

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