The Budget Deal: The Good, The Grab, and the Muddle

Much false drama has characterized coverage of the recent budget deal. A particular favorite begins: “Just 12 days before a catastrophic debt default threatened to drop like a hammer on the U.S. economy…”  This expression is not only embarrassingly overwrought, but is also misleading. The country was not nearly so close to default as it states, much less a catastrophic one. Instead of drama, what the nation got was vintage Washington: immediate spending increases, payment postponed, and many gimmicks in the accomplishment. And it was bipartisan, too. Who says the government is dysfunctional?

The Good

For markets, investors, and business planners, this deal has some noteworthy virtues. By suspending questions of debt ceilings for the next two years, it relieves all of the periodic uncertainties connected with those times when actual debt numbers approach the limit. (Incidentally, it also offers two years of relief from silly media drama, at least on this one particular question.) It also buys time presumably for the White House and Congress to tackle other pressing issues, such as corporate tax reform, entitlements reform, and the nation’s need to refurbish its infrastructure, though the record hardly suggests a strong likelihood of progress on these fronts.

The deal also suspends the sequester for two years. The virtue here is not that more spending is better but rather that it will allow for a more considered and less arbitrary apportioning of Washington’s financial resources. This sequester relief will accrue equally to defense and non-defense discretionary spending. The spending caps of the sequester never applied to entitlements spending, by far the biggest single chunk of the budget.

Spending now can rise $50 billion above where the caps would have permitted in fiscal 2016 and $30 billion above them in fiscal 2017. Though the monies are evenly shared between defense and non-defense discretionary spending, defense gets an extra $57.4 billion through off-budget monies allocated to it under the Overseas Contingency Operations (OCO) fund. This fund, originally conceived to pay for the unforeseen demands of military emergencies, has turned into something of a slush fund. And not just for the Pentagon, either. OCO will also give the State Department an extra $15 billion this fiscal year, double what it requested. The budgetary agreement offers one additional and especially well-conceived spending consideration. It forbids the Treasury during this time of sequester relief from building its own slush fund to use should the sequester caps return in two years.

The Grab

In deference to concepts of budget restraint, the deal identifies a grab bag of ways to pay for the additional spending, much of it dubious and less than immediate. Here, in no particular hierarchy, are ten major items in that bag:

  1. The plan calls for a renegotiation of the Standard Reinsurance Agreement for crop insurance. This is the subsidized arrangement in which the taxpayer insures farmer revenues through private companies. The deal would cut the rate of return for the companies in the program from 14.5 percent to 8.9 percent.
  1. The deal also looks to auction off portions of the government-owned broadcast spectrum.
  1. It plans to sell 58 million of barrels of crude oil from the strategic petroleum reserve. In addition to helping to finance the other spending included in the deal, the funds raised in this way would go to modernize and repair the strategic reserve. It is hard to resist noting that after all the past reluctance Washington has shown about selling these reserves, it has decided to do so now at a time of global crude surpluses. In response to queries about this decision, the Energy Department claims that the government will turn a profit on the sale, announcing that on average it paid only $29.70 a barrel for the oil, though adjusted for inflation the purchase price in today’s dollars comes closer to $74 a barrel. (It is a good thing for the deal that the federal government does not operate under the jaundiced eye of the SEC, much less the Consumer Protection Agency.)
  1. The plan expects to improve federal debt collection substantively by amending the original 1934 law to permit “the use of automated telephone equipment to call cellular telephones.”
  1. The plan also calls for single-payer pension plans to pay increased premiums to the Pension Benefit Guaranty Corporation. At present the premium equals $64 a year for each beneficiary and $30 for each $1,000 of underfunding. The first of these rates will rise respectively to $68 in fiscal 2017, $73 in 2018, and $78 in 2019, when it will be re-indexed to inflation. The latter rate will remain indexed to inflation but with and additional payment of $2 in 2017, and $3 in each year 2018 and 2019.
  1. Henceforth, according to the plan, generic drug producers will pay Medicare an additional rebate if the drug’s price rises faster than inflation. Brand drugs already do this.
  1. The plan will end the ability of Social Security beneficiaries to “file and suspend.” This practice allowed couples to file for Social Security so that one could collect spousal benefits but the other could defer payments for a later date when the system will pay at a higher rate. The legislation grandfathers those already involved.
  1. The deal will update all civil monetary penalties for inflation and, with certain exceptions, continue to do so in the future.
  1. The agreement claims that it will cut back substantially on disability fraud by excluding evidence submitted by sanctioned and unlicensed physicians and health-care providers and by imposing new and stronger penalties on those found guilty of fraud.
  1. The deal also makes it easier for the IRS to audit hedge funds and private equity firms. Previous arrangements made it laborious to conduct such audits. Streamlining procedures, the government estimates, will ultimately exact $11 billion from these firms to pay for the spending increase.

The Muddle

The legislation makes no attempt at genuine entitlements reform, but it does manage some quick fixes. On the most immediate front, it deals with a shortfall in the disability part of the Social Security trust fund. Because disability claims have grown far beyond expectations and it will take time for the new efforts at fraud detection to have effect, the part of the Social Security Trust fund earmarked for these benefits would, in the absence of additional action, run out of money next year, threatening to cut benefits for some 11 million people some 20 percent. To forestall such an event, the recent budget agreement will for a time direct more than the usual part of payroll taxes to the disability fund. Though this will deny the general retirement portion of Social Security monies it would otherwise receive, that fund can sustain the shortfall for a while, since it is not scheduled to run out of money until 2034. The material accompanying the budget deal estimates that the new diversion of revenues will keep the disability portion of Social Security solvent until 2022. It makes no estimate of how much sooner than 2034 the diversion of funds from Social Security’s retirement fund will bring it to insolvency.

The deal takes action to stop a premium increase in Medicare Part B. The various algorithms used to calculate costs in this insurance had called for a 52 percent premium hike in 2016 for some 8 million Part B enrollees, about 30 percent of the total. The deal holds those premium hikes to 15 percent and would pay for the lost revenue by allowing the Medicare Trust Fund to borrow from the Treasury. Those beneficiaries who would have seen the larger premium increase will pay an extra $3 each month until the debt is repaid. Medicare will also save through a 2 percent cut in Medicare provider payments, the additional charge to generic drug makers mentioned above, and strictures against hospitals buying offsite locations in order to increase pricier outpatient services.

Drawing All these Many Threads Together    

Though outlays during the next two years are now planned to rise $111 billion over where they otherwise would have been and revenues, particularly on Medicare premiums, will fall a little shorter than they otherwise would have, the non-partisan Congressional Budget Office estimates that over the next ten years all the various means of paying for this initial largess will shrink the cumulative deficit by $80 billion. This sounds good on the surface, but, it is wise to remember that in this deal, as always with Washington, the expenses are up front and the measures to pay for them come only in the out years. That leaves ample time for Congress and the president, this one or the next, to alter the budget landscape yet again.

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