Client Note: The Deficit Commission: Close But Miles Away
By Steve McMillin, December 1st, 2010:
In an attempt to build consensus among members of President Obama’s deficit commission ahead of a Friday vote on the commission’s deficit reduction recommendations, a new draft report released today offers several compromises relative to the proposal offered three weeks ago by commission co-chairmen former Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles. However, it remains highly unlikely that any proposal will get the necessary 14 votes to become an official recommendation, and the commission has not yet begun the process of converting their proposals into legislative language. This reduces to zero the already-slim chance of seeing any congressional action on this proposal in the foreseeable future.
In the aggregate, the new draft report has a less aggressive deficit reduction path early on (prior to 2018), and a more aggressive path later. At 2.4% of GDP, the deficit would be 0.1 percentage point higher in 2015, though still below the 3% target set by President Obama. Longer term, debt as a share of GDP would drop below 40% about 2 years earlier, 2035 vs. 2037.
The new draft adopts the same long-term targets for revenue and spending, 21% of GDP, as was proposed in the preliminary co-chairman’s draft released last month. For spending, that is a full percentage point above the post-WWII historical average of about 20%. That leaves spending below the 2009 level (TARP/Obama stimulus), but above the 2008 level (early financial crisis/Bush stimulus).
For revenues, an average federal tax burden of 21% of GDP would be three percentage points higher than the historical average of about 18%. In fact, the average federal tax burden would be higher than the previous historical record for any one year set in 1944, the year of the Normandy invasion.
While there is arguably a balanced level of effort devoted to spending cuts and revenue increases, the targets chosen would enshrine a larger federal government; largely because the proposal’s starting point is the unusually high level of Federal spending that exists today.
The sources of deficit reduction have also shifted in the new draft. The new proposal restores $177 billion (over 10 years) in mandatory entitlement spending cut in the prior draft, though it still reduces mandatory spending relative to the baseline by $556 billion. Higher mandatory spending relative to the co-chairs’ proposal is more than offset, with $34 billion in higher revenues, and $197 billion in additional discretionary spending cuts.
This change is significant, because mandatory spending reduction is a much more reliable form of deficit reduction than projected savings from discretionary programs. This is because mandatory savings are achieved automatically with the enactment of a single law at the beginning of the process. The budget process already allows for fast-track passage of mandatory savings through the budget reconciliation process, which limits amendments and blocks any filibuster in the Senate. (Tax increases also enjoy this same procedural privilege.)
By contrast, discretionary savings must be achieved annually, through the enactment of up to 12 appropriations bills each year. New discretionary targets and any enforcement mechanism to defend them would have to be enacted in yet another law, and these rule changes would not benefit from any fast-track legislative process. So while fiscal conservatives will applaud discretionary spending restraint (and perhaps will seek further reductions), they may be reluctant to negotiate a deal that locks in tax increases upfront in exchange for discretionary savings that may never come to pass.
While it is laudable that the commission provides specific proposals for discretionary spending savings, their “illustrative” list is just that. Congress determines the specific allocation of discretionary spending annually in up to 12 appropriations acts per year, so each savings proposal would have to run the gauntlet of special interest resistance every year. Proposed changes to the tax code and entitlements are where the deficit reduction debate will have to get very specific, very soon, if it is to have any meaningful impact.
The last time discretionary spending limits were enacted into law was the Balanced Budget Act of 1997, which was negotiated by then-White House Chief of Staff Erskine Bowles, among others. The discretionary targets set in that law held for two years before Congress began to waive the limits. Discretionary spending in 2002 exceeded the initial target by 33%. The enforcement mechanisms proposed in the commission’s draft report, which require super majority votes and other hurdles to break spending limits, are virtually the same rules Congress breached in the past.
Steve McMillin is a partner in Hamilton Place Strategies and former Deputy Director of the White House Office of Management and Budget.