8/2 Update: The House and Senate have both passed the Bipartisan Budget of 2019, sending it to the President’s desk where he is expected to sign it.
President Trump’s tweet solidified a budget agreement between leadership in both parties that will boost spending by $320 billion over the next two years while suspending the debt ceiling by two years. Let’s run through how we got here and what it means for the future.
First off, what is a budget cap?
The entire conversation about budgeting in Washington has been based on the Budget Control Act of 2011. That law, negotiated between House Republicans and the Obama Administration, put in place a series of annual budget caps that was intended to slow down federal spending growth by a total of $900 billion over 10 years. The law did so by placing limits – known as caps – on the amount that Congress can spend each year.
Oh, so that’s sequestration then, right?
Not exactly. The BCA also set up a Supercommittee that was supposed to find an addition $1.2 trillion in savings. But they failed to do so, which triggered a lower set of budget caps. Those lower spending caps are referred to as the “sequester” levels.
Has Congress stuck to those lower caps?
They have not.
In 2013, the Bipartisan Budget Act raised spending by $62 billion. In 2015, the Bipartisan Budget Act raised spending by $80 billion. Then in 2018, the Bipartisan Budget Act increased spending by $300 billion.
The budget deal agreed to this week will raise the caps by $320 billion.
These last two deals seem a lot bigger. How did we go from $62 billion bumps to $300 billion blow outs?
Great observation. The timing coincided with Republicans taking control of the House, Senate, and White House. There is a large contingent of Republicans who support massive levels of defense spending. The caps were set up to limit defense spending and non-defense discretionary spending (transportation, education, research, etc.) equally.
The defense spending advocates argue that the budget caps have been too low and that the only way to defend the nation is to spend more (we would argue that they need to spend more wisely…the Department of Defense is the only federal agency that has been unable to comply with a federal law passed over two decades ago that requires each agency to pass an audit).
So all of those increases were for defense spending?
Not all of them. Like we said, the caps were set up to limit total defense spending and non-defense discretionary spending. That set up a political situation where the negotiation price for Republicans to increase defense spending was agreeing to the Democrats’ demand for increases in non-defense spending.
It’s not based on needs; it’s based on the politics of “parity.” You can’t get something unless we get something too.
But at least they paid for it, right?
Ha! That would be nice. Instead, Congress used gimmicks to partially offset a quarter of the costs.
What kind of gimmicks?
They included a routine extension of fees and cost containment measures that are set by law to expire in 2027. Now they will expire in 2029. Budget scorekeepers will count those as saving nearly $80 billion in 2028 and 2029.
This kind of backloading is an artful way for Congress to use the 10-year budget window to pretend to care about offsetting spending without actually making any decisions to cut spending or raise revenues. In fact, as the Committee for a Responsible Federal Budget points out, the interest costs of the increased spending will actually cost more than the gimmicky offsets are worth.
Don’t they have to deal with the debt to raise the debt ceiling?
One would think. Once upon a time the debt limit was used as an opportunity to talk about the debt and even include some limitations that would help reduce the debt. Between 1985 and 2014, debt limit increases were combined with budget controls seven times.
Nowadays, they are ramping up the debt while pushing off the debt ceiling until 2021. This makes it more likely that one day we will hit the market’s debt ceiling – where we will no longer be able to fund our nation’s massive and rapidly growing debts.
Is there a better way to do it?
Yes! We have a $4.5 trillion budget.
The Government Accountability Office and Offices of Inspectors General are constantly releasing reports with ways to save billions in tax dollars while increasing efficiency. There are hundreds of billions of dollars’ worth of unresolved government reform recommendations and an untold number of deficit reduction plans that Congress and the White House can pull from.
Instead, our leaders are facing down a $22 trillion national debt and $1 trillion annual deficits by spending even more with little care for the impact that will have on the future.
I’m sorry, did you say $1 trillion deficit?
$1,000,000,000,000. Every single year into the foreseeable future.
The only other time we had a $1 trillion-plus deficit was when we had a massive economic turndown in 2009. This time around, we are hitting these massive deficits with a strong economy and low unemployment. This is unprecedented.
It gets worse. The three fastest growing spending categories are all set on autopilot: interest payments on the debt, major health care programs, and Social Security.
Over the next 30 years, our national debt is projected to reach “the highest [level] in the nation’s history by far, [at which point] it would be on track to increase even more.”
What is causing all of that?
Congress has overextended promises that are rapidly coming due with our aging society.
10,000 Baby Boomers are retiring every day and Medicare and Social Security face a $100 trillion funding shortfall. The costs for those two programs alone are increasing by $140 billion every year – the equivalent of creating a new Pentagon every five years.
But does it really matter?
Absolutely. As the Congressional Budget Office puts it, “the prospect of such high and rising debt poses substantial risks for the nation and presents policymakers with significant challenges.”
Please be more specific.
Sure. Spending on interest payments on the debt will triple. By 2025, we will be spending more on interest payments than on defense. A substantial amount of our bondholders are foreign governments – meaning future taxes will go to pay China and Japan for the inability to control spending today.
Federal debt crowds out savings in the economy – which means there is less investment in the private sector and therefore lower productivity and wages.
Yep. The high levels of debt also leaves us with less wiggle room to handle the next financial crisis. Most economists believe that governments should run deficits during a recession but tighten belts when the economy is good. Congress is running massive deficits when the economy is good – leaving no fiscal space for things like unemployment payments, payroll tax cuts, stimulus spending, and other forms of spending increases and tax relief that occurred in 2009.
The next crisis could be caused by our massive national debt. As CBO says, there “would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.”
Is there anything being done about that right now?
As of now, Washington is only digging the hole deeper. In order to stabilize the debt at our abnormally large levels, CBO estimates that we need $400 billion in deficit reduction every year for the next 30 years. Instead, Congress is passing a bill that will increase spending by $160 billion per year for the next two years which will put us on the path for an extra $1.7 trillion in debt over the next decade.
What happens if we wait?
Then the problem gets even harder to solve. CBO puts real numbers to these warnings – a 10-year delay in deficit reduction would increase the necessary deficit reduction by 50 percent, from 1.8 percent of GDP annually ($400 billion) to 2.7 percent of GDP annually ($600 billion).
Who gets hurt the most by all this?
CBO plainly states that “delaying policy action would reduce the well-being of younger and future generations while improving the well-being of older generations.”
Why is that?
The last of the Baby Boomers will turn 65 in 2029. Which means if Congress delays action on deficit reduction for 10 years – the baby boomers will escape sharing in the burden of saving the fiscal ship that they played the largest role in sinking.
That leaves the burden on young Americans to pay for the runaway entitlements and the interest on the debt. We are talking about a multi-trillion-dollar transfer of wealth from younger generations to the boomers if Congress continues to delay the changes necessary to get our budget in order.
How will that impact millennials 10 years from now?
The Steuerle-Roeper Index of Fiscal Democracy measures the amount of tax dollars remaining after payments on mandatory spending and interest payments on the debt. In 1967, 60 percent of federal receipts remained after mandatory and interest spending. Today, only 20 percent remain. In a decade, that number will approach zero. Eugene Steuerle’s index shows that “future generations will have no additional revenues to finance their own new priorities, and they will actually have to raise new revenues or cut other spending just to finance the expected growth in existing programs.”
Jeez, how can we get Congress to fix this?
Here’s the thing. The Budget Control Act was supposed to spur real debates and solutions on how to deal with these long-term debt problems. By pinching defense and domestic spending, Congress was supposed to tackle the cost growth by reforming entitlements (not cuts, decreases in the increases) and/or bringing in additional revenue sources.
Instead, Congress managed to skate out from under the budget caps without touching any of the drivers of our long-term debt.
Let’s just say hypothetically that Congress does get its act together, are there actually a tenable solution out there?
There are plenty. One example that requires sacrifice from both sides is from the Manhattan Institute’s Brian Riedl. The proposal would stabilize the national debt through spending restraints (i.e. decreases in the increases) and curbing major tax loopholes and would be a great place for Congress to start. The plan holds the poorest segment of Americans harmless while creating a large portion of the savings by paring back government benefits from high-income earners.
Don’t like that plan, pick and choose from these deficit reduction options from CBO.
Is there hope?
We do hope that lawmakers will come to their senses in time. But we’re not going to lie to you, things don’t look great right now. Neither political party is putting the long-term prospects of young Americans ahead of their short-term election cycle narratives. It’s becoming abundantly clear that the governing generation will not look out for the interests of young Americans. That means we are going to have advocate for ourselves.
So what can we do?
Put simply, young Americans need to get more involved in pushing our elected officials to find solutions that put our nation’s finances on a sustainable footing – preserving economic opportunities for ourselves and our kids. If we don’t start soon, then we will be buried under a legacy of debt and poor decisions, like the budget deal struck this week.
So let’s get serious about voting with the budget in mind, advocating for reform, and holding our representatives accountable for how they treat our futures.