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The Secret Assumptions Behind Federal Budgets

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The Secret Assumptions Behind Federal Budgets

April 9, 2014

Our national dialogue over federal policy suffers from a huge information gap when it comes to understanding the federal budget. This information gap afflicts not only the general public as well as press, but much of Washington’s policy insider community. From the very start of my eleven years as Senate

staff, I quickly learned that if one can master Congress’s arcane budget rules, one will command knowledge that even many legislators lack. To put it bluntly, far too few people understand how the federal budget works, how budget-related legislative procedures work, and how scorekeeping works. This article represents an effort to fill in some of that information gap.

Often one will read sentences such as the following in in published commentary, reflecting both a) incomplete understanding of the budget, and; b) ongoing political spin: “We have enacted about $2.5 trillion in deficit reduction with about three-quarters coming from spending cuts.” Or: “In February, the President released the Fiscal Year 2013 Budget, which does the following. . . . Cuts $2.50 for every $1 of additional revenue.”

Such statements are usually misleading because they do not illuminate the absolute levels of spending and revenues implicitly being referenced. They only describe spending, revenues and deficits relative to an alternative scenario known in wonk parlance as a “baseline.” This is a problem for a number of reasons, including:

1) The baseline is a purely hypothetical, counterfactual scenario;

2) It has limited utility and meaning;

3) It represents neither current law, nor the continuation of current policy, nor what would happen in the absence of further legislation; and

4) It is constructed in ways that exaggerate the fiscal prudence of lawmakers and, specifically, the amount of deficit reduction achieved under proposed changes in law.

What we ought to do whenever public officials put forth budget proposals is to discuss the total amount of spending and taxation involved, and whether that represents a sensible policy. Instead we often compare those budget proposals to spending and taxes assumed in the so-called baseline. Why is this done? Ideally, it is so that policymakers have a sense of the course we are on now, and of how a specific proposal would redirect that course.

Importantly, however, this scorekeeping baseline deviates from current law as well as from a “no action” scenario in several key ways. For example, under law, appropriations spending must be renewed annually (either via new appropriations bills or a continuing resolution)—or else it terminates, precipitating a so-called government shutdown. But the Congressional Budget Office does not assume that appropriations spending will actually stop upon the expiration of current appropriations authority. Instead CBO projects what are deemed to be realistic spending levels going forward. These spending levels may indeed be plausible but they are not current law, nor are they what would happen under a “no action” scenario. These assumptions have greatly influential effects in that they are the levels to which legislative proposals are compared.

Similar issues are even more significant with respect to the largest federal entitlement programs, Social Security and Medicare. Congress’s scorekeeping rules require CBO to assume a high rate of growth for spending in these areas—and specifically, that certain cost-constraint mechanisms in both programs will be overridden in future legislation. These assumed changes in law to increase future Social Security and Medicare spending have no historical precedent. Accordingly, when one hears of proposed “cuts” in these programs, these are not being quantified in comparison with actual law but with a hypothetical baseline at considerable variance with law and historical practice.

CBO is always diligent about disclosing that its baseline projections for Social Security and Medicare do not reflect the dictates of actual law. For example, in its recent Budget and Economic Outlook, CBO notes:

“In keeping with the rules in section 257 of the Deficit Control Act of 1985, CBO’s baseline incorporates the assumption that payments will continue to be made after the trust fund has been exhausted, although there is no legal authority to make such payments.” 

This is more than a minor footnote. It means that CBO is directed to assume in its baseline that Social Security and Medicare payments will be trillions higher than they would be under existing law. The assumption that legislators will enact legislative changes allowing for trillions in additional spending has a huge effect on the evaluation of any legislation affecting Social Security and Medicare.

Misunderstanding of these conventions is at the root of common misperceptions, among those unfamiliar with Congressional scorekeeping practices, that CBO found that the Affordable Care Act (ACA) would reduce federal deficits. CBO actually found that the ACA would reduce federal deficits only relative to other Medicare spending increases assumed in its baseline. Relative to previous law, the ACA unambiguously increases deficits because it authorizes more additional spending than it would generate in additional taxes. The illusion that the ACA would reduce deficits arises solely because of the scorekeeping convention in which CBO is directed to assume that some of those spending increases would have happened anyway. 

Similar misperceptions are at the root of occasional representations that the federal government has been practicing “austerity” in recent years. By any objective standard, federal spending and deficits have been at historic highs. It is only in comparison with baseline projections made on the basis of even higher recent deficits that it appears that lawmakers have been practicing fiscal prudence.

Accordingly, readers who wish to understand competing budget presentations would do well to discount any claims made in relation to these baselines, be they claims about ratios of proposed spending cuts to tax revenues, or claims of net amounts of deficit reduction. The only way to really understand the federal budget is to look at absolute spending and revenue levels.

Below are depictions of spending and revenues under President Obama’s and House Budget Committee Chairman Paul Ryan’s proposed budgets. Ryan’s budget estimates are based on CBO projections; CBO has not yet scored the President’s budget, so here I will use Office of Management and Budget projections (which employ different economic assumptions). This is thus not a strictly apples-to-apples comparison but it is the one we have readily available.  

President Obama proposes to continue to spend more than historical averages as a share of the economy, Chairman Ryan somewhat less.

 

Past/Projected Fed. Spending as a % of GDP

 

The projected tax picture is interesting. Under either budget, Americans will carry higher tax burdens going forward than has historically been the case. The main difference is that under President Obama’s proposal, the tax burden would be a lot higher.

 

Past/Projected Fed. Revenues as a % of GDP

 

The two approaches differ with respect to deficit spending. Congressman Ryan’s proposal to balance the budget by 2024 would put public debt on a path back toward historical norms. President Obama’s would keep it at permanently elevated levels.

 

Past/Projected Public Debt as a % of GDP 

 

The next time you hear political advocates making claims about how much deficit reduction and spending cuts are being enacted, remember that these claims are being made in comparison to fictitious, somewhat arbitrary baselines. Ask them how much total spending and taxation would occur under their plans, and compare the answers. It is the only way to really understand the budget debate.

 

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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