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Way back in the last century, PAYGO rules in the 1990 Budget Enforcement Act (BEA) helped control spending and contributed significantly to four years of budget surplus. Since BEA expired after 2002, looser PAYGO rules have applied and Congress has repeatedly chosen to ignore them. That was easy since violating PAYGO could only trigger a point of order, which was pretty easy to overcome, at least in the House. The Senate requires 60 votes to beat back a point of order but senators got around that by putting tax cuts and spending increases in budget resolutions, which are not subject to points of order.
Last week the House voted to strengthen the rules but the handcuffs still wouldn’t be very tight. Senators will consider the bill after their August recess.
The strength of the new rules is sequestration: if covered legislation would increase the federal deficit—or reduce the surplus, which won’t happen under any realistic scenario—over the subsequent ten years, non-exempt programs would be cut enough to zero out the ten-year net costs. That would be harder to avoid than under current rules. But the list of exempt programs is long: Social Security, all veterans’ programs, refundable tax credits, low-income and economic recovery programs, and many, many smaller programs. CBO’s review of the bill said that “any feasible sequestration would not generate enough reductions in spending to offset the costs of major new spending or revenue initiatives.”
But the proposed rules have two other big problems. First, they start from a current policy baseline that builds in the Bush tax cuts, the AMT patch, current estate tax law, and Medicare rules for paying physicians. PAYGO would not apply to proposals that would extend those laws beyond their scheduled expiration dates. Exempting those tax laws from PAYGO is consistent with President Obama’s 2010 budget baseline, but they still affect the fiscal bottom line to the tune of $3.5 trillion more debt over ten years. And, as Bill Gale and Alan Auerbach have pointed out, pulling expiring tax cuts out of the baseline gives away a huge amount of revenue that Congress could use to help enact needed major tax reform.
The worst problem is that, given the new baseline, we face huge budget deficits stretching as far as the eye can see. If the rules are enforced, they would prevent an untenable situation from getting worse, but that’s not enough. They would do nothing to move the budget back towards balance.
Maybe my pessimism has gotten the best of me. Since January 2008, CBO deficit projections have worsened from a ten-year surplus of $274 billion to a ten-year deficit of nearly $10 trillion (including Obama’s 2010 budget). The current deep recession and this year’s stimulus bill account for a substantial piece of that number, but the red ink worsens year by year after stimulus spending ends. The president promises not to raise taxes on more than 95 percent of Americans and wants to spend lavishly on new programs. And Congress chops away at revenues the president does want—witness plans to give away almost all of the permits under cap-and-trade. None of that will help balance the budget.
Loose handcuffs may be better than no handcuffs but what we really need is a maximum security cell.
Last week the House voted to strengthen the rules but the handcuffs still wouldn’t be very tight. Senators will consider the bill after their August recess.
The strength of the new rules is sequestration: if covered legislation would increase the federal deficit—or reduce the surplus, which won’t happen under any realistic scenario—over the subsequent ten years, non-exempt programs would be cut enough to zero out the ten-year net costs. That would be harder to avoid than under current rules. But the list of exempt programs is long: Social Security, all veterans’ programs, refundable tax credits, low-income and economic recovery programs, and many, many smaller programs. CBO’s review of the bill said that “any feasible sequestration would not generate enough reductions in spending to offset the costs of major new spending or revenue initiatives.”
But the proposed rules have two other big problems. First, they start from a current policy baseline that builds in the Bush tax cuts, the AMT patch, current estate tax law, and Medicare rules for paying physicians. PAYGO would not apply to proposals that would extend those laws beyond their scheduled expiration dates. Exempting those tax laws from PAYGO is consistent with President Obama’s 2010 budget baseline, but they still affect the fiscal bottom line to the tune of $3.5 trillion more debt over ten years. And, as Bill Gale and Alan Auerbach have pointed out, pulling expiring tax cuts out of the baseline gives away a huge amount of revenue that Congress could use to help enact needed major tax reform.
The worst problem is that, given the new baseline, we face huge budget deficits stretching as far as the eye can see. If the rules are enforced, they would prevent an untenable situation from getting worse, but that’s not enough. They would do nothing to move the budget back towards balance.
Maybe my pessimism has gotten the best of me. Since January 2008, CBO deficit projections have worsened from a ten-year surplus of $274 billion to a ten-year deficit of nearly $10 trillion (including Obama’s 2010 budget). The current deep recession and this year’s stimulus bill account for a substantial piece of that number, but the red ink worsens year by year after stimulus spending ends. The president promises not to raise taxes on more than 95 percent of Americans and wants to spend lavishly on new programs. And Congress chops away at revenues the president does want—witness plans to give away almost all of the permits under cap-and-trade. None of that will help balance the budget.
Loose handcuffs may be better than no handcuffs but what we really need is a maximum security cell.
