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Thursday, February 2, 2017
Capitulation before the First Shots Are Fired
Barry W. Poulson
For a half-century, conservatives have watched Congress incur deficits and accumulate debt, making ours one of the most indebted countries in the world. There is little doubt this debt is unsustainable or that the federal government must enact reforms to constrain spending, especially entitlement spending, which is one of the major sources of U.S. debt today.
Republicans in Congress promised to address our fiscal crisis with fundamental reform of entitlements and other programs. They promised to constrain spending, balance the budget, and reduce debt over the next decade. So far, they have not been able to do this, at first because of gridlock with Democrats in the Senate and then because of President Barack Obama's promise to veto any legislation introducing real reform. But with the election of Donald Trump and control of both houses of Congress, Republicans can finally break through the budget gridlock.
The most recent salvo in this budget battle is a continuing resolution for fiscal year 2017. This resolution proposes to repeal and replace the Affordable Care Act (ACA) with no change in other parts of the budget. The resolution "exempts future health care legislation replacing the ACA from certain budget rules meant to impose fiscal discipline."
It also requires committees with jurisdiction over spending and revenue in the ACA to craft new legislation achieving $1 billion in deficit reduction over the next 10 years and to report that to Congress. The expectation is these committees will repeal parts of the ACA with budgetary effects, which will allow the repeal legislation to be considered under special reconciliation procedures in Congress. This tactic will allow Republicans to enact the legislation with a majority vote, rather than the 60 votes required to prevent a filibuster.
The resolution also provides for two reserve funds to accommodate new legislation repealing ACA. Replacement legislation could use all but $2 billion of the net savings from ACA repeal for new spending or tax breaks for health care coverage. This is quite a shift from previous Republican proposals promising more than $2 trillion in savings, which was promised to go toward deficit reduction, from an ACA repeal. An analysis by the Congressional Budget Office (CBO) identifies a number of reforms in health care that could be enacted with significant cost savings. The savings proposed in this resolution to repeal ACA are a drop in the bucket compared to CBO's analysis of potential savings.
Replacement legislation that costs no more than the savings from ACA repeal, minus $2 billion, would be exempt from the Senate PAYGO rules and also from Senate point-of-order rules. The inclusion of these exemptions suggests the replacement legislation could exceed the savings from repeal by more than $10 billion in some years over the next decade and beyond.
With government expenditures for health care absorbing a larger share of the federal budget, this carve-out means less spending will be constrained by the statutory rules in place. Setting aside reserve funds to finance new health care legislation means more federal money will be "off-budget" and earmarked for specific spending programs. We should expect less congressional oversight for these funds, and if the new health care legislation is given special funding status, this will erode the opportunities for priority budgeting.
We will not know the full impact of policies to reform and replace ACA until Congress passes a resolution bill repealing ACA and additional legislation implementing replacement policies. But the first salvo in this budget battle is not promising, Republicans seem to have capitulated before the battle has begun. If there is any savings in an ACA repeal, most of those savings would be set aside in reserve funds to finance new spending or tax breaks for health care. The proposed budget reserves just $2 billion of the savings from an ACA repeal for deficit reduction.
Further, in the resolution, discretionary spending for fiscal year 2017 is set at the spending cap level for that year. All other spending and revenue is at baseline levels. Using baseline projections, total spending would increase from $3.2 trillion to $4.9 trillion over the next decade. This increase in spending would be accompanied by a doubling (roughly) of annual deficits to more than $1 trillion by the end of the decade.
Republicans can claim victory in this first budget battle in fiscal year 2017, without the Democrats firing a shot, but what a pyrrhic victory. Not only will this legislation fail to significantly reduce the growth in health care spending, it could lead to a higher trajectory of spending over the next decade and beyond. This legislation reveals Congress has no desire to fundamentally reform health care or other entitlements that would significantly reduce spending or debt linked to these programs.
Capitulation by Republicans in this budget battle reflects a more fundamental flaw in federal fiscal policies. Congress continues to pursue expansionary fiscal policies to stimulate output and employment in the short run, allowing deficits and debt to accumulate in the long run. For a half-century Congress has pursued Keynesian fiscal policies and abandoned the unwritten balanced budget rule that governed fiscal policy for two centuries.
With this most recent failure, conservatives must look to alternative solutions to the federal fiscal crisis. The most promising approach is to enact new fiscal rules, like those enacted in some other OECD countries, combining a balanced budget rule with expenditure limits.
We certainly can't sit back and watch the debt increase from $20 trillion to $29 trillion over the next decade -- the debt projected under this continuing resolution.
Barry W. Poulson (email@example.com) is a professor emeritus of economics at the University of Colorado-Boulder.