“I’m Shocked, Shocked To Find That Gambling Is Going On In Here”

The Congressional Budget Office (CBO) has updated its January “The Budget and Economic Outlook: 2019 to 2029,” and to what should be no great surprise, the U.S.’s projected fiscal condition is, well, not good. To anyone monitoring the CBO’s economic and budget updates, this is really not news. Nor is the insistence of some that the projected annual near trillion dollar on-budget deficits means it’s time to cut Democratic priorities. I suppose this sort of predictability among those who supported the “Tax Cuts and Jobs Act of 2017” (P.L. 115-97) is reassuring in a world where one struggles to find things on which to depend. So, cue up the calls among Republicans for fiscal responsibility that will become cacophonous should a Democrat retake the White House. Anyway on to specifics.

Here’s the CBO summary of the update:

  • Deficits. In CBO’s projections, the federal budget deficit is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029. Over the coming decade, deficits (after adjustments to exclude the effects of shifts in the timing of certain payments) fluctuate between 4.4 percent and 4.8 percent of gross domestic product (GDP), well above the average over the past 50 years. Although both revenues and outlays grow faster than GDP over the next 10 years in CBO’s baseline projections, the gap between the two persists.
  • Debt. As a result of those deficits, federal debt held by the public is projected to grow steadily, from 79 percent of GDP in 2019 to 95 percent in 2029—its highest level since just after World War II (see Chapter 1).
  • The Economy. Real (inflation-adjusted) GDP is projected to grow by 2.3 percent in 2019, supporting strong labor market conditions that feature low unemployment and rising wages. This year, real output is projected to exceed CBO’s estimate of its potential (maximum sustainable) level. After 2019, consumer spending and purchases of goods and services by federal, state, and local governments are projected to grow at a slower pace, and annual output growth is projected to slow—averaging 1.8 percent over the 2020–2023 period—as real output returns to its historical relationship with potential output. From 2024 to 2029, both output and potential output are projected to grow at an average pace of 1.8 percent per year, which is less than the long-term historical average. at slowdown occurs primarily because the labor force is expected to grow more slowly than it has in the past (see Chapter 2).
  • Changes in CBO’s Projections Since May 2019. CBO’s estimate of the deficit for 2019 is now $63 billion more—and its projection of the cumulative deficit over the 2020–2029 period, $809 billion more—than it was in May 2019. The agency’s baseline projections of primary deficits (that is, deficits excluding net outlays for interest) for that period increased by a total of $1.9 trillion. Recently enacted legislation accounts for most of that change. In particular, incorporating the higher discretionary funding limits for 2020 and 2021 that were established in the Bipartisan Budget Act of 2019 increased CBO’s projections of primary deficits for the 2020–2029 period by $1.5 trillion. (Those projections reflect the assumption—required by law—that future discretionary funding will grow at the rate of inflation after those limits expire.)

The CBO continues:

Partly offsetting the increase in projected primary deficits is a net reduction of $1.1 trillion in the agency’s projections of interest costs over that same period. The largest factor contributing to that change is that CBO revised its forecast of interest rates downward, which lowered its projections of net interest outlays by $1.4 trillion (including interest savings from the resulting reductions in deficits and debt). Taken together, other changes to the budget projections increased projected debt-service costs by nearly $0.3 trillion; $0.2 trillion of that amount is associated with the increase in projected spending stemming from the Bipartisan Budget Act.

To contextualize this update, that shows FY 2019 will see a $980 billion deficit, in June 2017, CBO estimated that 2017 deficit would be $693 billion, “$109 billion more than the $585 billion deficit posted in 2016.” So, the deficit has been going in the wrong direction from a nominal dollars point of view. At that time, CBO explained the bases for this projection:

The projected rise in deficits would be the result of rapid growth in spending for federal retirement and health care programs targeted to older people and to rising interest payments on the government’s debt, accompanied by only moderate growth in revenue collections.

The waive in retirements does appear to be happening and there will undoubtedly be a surge in spending on Medicare. However, the CBO has been consistently wrong on its projections of interest rates on federal debt. In January 2006, CBO claimed

Interest rates are expected to move upward during the next two years, as the economy grows and the Federal Reserve continues to move toward a more neutral monetary policy. CBO forecasts that the three-month Treasury bill rate will rise to about 2.8 percent in 2005 and 4 percent in 2006; thereafter, it will average 4.6 percent, which is relatively low by historical standards. In the forecast, the rise in the rate for the 10-year Treasury note is somewhat smaller; it averages 4.8 percent in 2005 and 5.4 percent in 2006, then inches up to average 5.5 percent from 2007 to 2015.

However, in 2013, in the middle of the band CBO said would see interest rates averaging 5.5%, CBO said

CBO’s baseline economic forecast anticipates that the interest rate on 3-month Treasury bills—which has hovered near zero for the past several years—will climb to 4 percent by the end of 2017; by that point, the rate on 10-year Treasury notes is also projected to rise from its current level of around 2 percent. (Emphasis added.)

Perhaps CBO’s crystal ball on projected interest rates on federal debt is a bit cloudy?

As for other drivers behind this explosion in deficits and ultimately debt, in April 2018, CBO explained

Projected deficits over the 2018–2027 period have increased markedly since June 2017, when CBO issued its previous projections. The increase stems primarily from tax and spending legislation enacted since then—especially Public Law 115- 97 (originally called the Tax Cuts and Jobs Act and called the 2017 tax act in this report), the Bipartisan Budget Act of 2018 (P.L. 115- 123), and the Consolidated Appropriations Act, 2018 (P.L. 115-141). The legislation has significantly reduced revenues and increased outlays anticipated under current law.

However, the Bipartisan Budget deal and FY 2018 Omnibus pale in comparison to the size of the impact of the tax cut bill on the federal balance sheet. In 2018, CBO explained the package “increases the total projected deficit over the 2018–2028 period by about $1.9 trillion,” but, to be fair, $600 billion of that is increased service on federal debt on account of increased interest rates. But, the CBO used modeling that sounds very much like “dynamic scoring,” which takes into effect economic changes downstream from the change in federal spending that may mitigate or worsen the federal outlook. In this case, CBO claims increased economic activity will reduce the size of the total bill from $1.8 trillion in primary deficit to $1.3 trillion.

Consequently, there will be many Republicans, including the White House, to call for cuts in virtually all non-defense spending save for Social Security and Medicare, which are sacrosanct so long as seniors vote. It will be interesting to see how Democrats respond. My guess is that candidates for the Democratic nomination for president will call for rolling back the 2017 tax bill and for raising rates even further on the wealthy and corporations to pay for new ambitious social programs like Medicare for America or Medicare for All.

What’s PAYGO; And, First Cracks In Budget Deal Kumbaya

For those afflicted individuals like me who actually read legislation, one may have stumbled upon some intriguing language in the “Bipartisan Budget Act of 2019” (P.L. 116-37):

Effective on the date of the enactment of this Act, the balances on the PAYGO scorecards established pursuant to paragraphs (4) and (5) of section 4(d) of the Statutory Pay-As-You-Go Act of 2010 (2 U.S.C. 933(d)) shall be zero.

Consequently, as of August 2, the PAYGO scorecards are now set at zero, which is easy enough to understand on one level. But, what does this actually mean? Well, let’s find out.

First of all, there are actually three PAYGOs that are related but distinctly different: the House’s, the Senate’s, and the U.S. Code section. They are similar but have significant differences that bear some discussion. But, as a threshold matter, it’s fair but perhaps simplistic to say that PAYGO is to mandatory funding and revenue as spending caps are to discretionary funding. It’s a means by which the White House and Congress aren’t able to blow up the country’s finances by increasing mandatory funding or by cutting revenues. If this happens, then a sequester kicks in to cut many mandatory funding accounts by the amount mandatory funding has been increased or revenue has been cut.

In the House, earlier this year, Democrats revived a dormant PAYGO rule that had lapsed during Republican rule in favor of their CUTGO rule. See Rule XXI, Clause 10. Simply put the PAYGO rule provides that mandatory funding cannot be increased and/or revenues cannot be cut without corresponding changes to ensure that such legislation is budget-neutral (i.e. does not decrease the amount of money the government will take in on a net-basis and does not increase the amount of money also on a net-basis.) Moreover, unlike the previous PAYGO rule that was scrapped after the 111th Congress, the new PAYGO rule covers off-budget mandatory spending, the most notable program of which falls under the classification being Social Security. And yet, PAYGO does not apply to discretionary funding, and, yet, like almost all House rules, it can be waived by a majority vote, allowing the party controlling the chamber to break this rule as they please. Additionally, PAYGO does not apply to legislation designated as “emergency,” and there is an exception that allows the House to circumvent the rule if a bill is added to a House-passed bill upon engrossment of the legislation at which point only the PAYGO assessment of the latter bill is used for the two combined bills.

In the Senate, the chamber’s PAYGO rule has been in existence since the early 1990’s and has undergone a number of changes, the most recent in 2017. Section 4106 of H.Con.Res. 71, Budget Resolution for FY 2018. The Senate’s PAYGO rule also bars the consideration of legislation that increases mandatory spending or decreases revenue during the budget window. Their version provides:

It shall not be in order in the Senate to consider any direct spending or revenue legislation that would increase the on-budget deficit or cause an on-budget deficit for [periods of 6 and 11 years]

Again, this only pertains to on-budget funding, and so any off-budget accounts are exempt. The Senate may also waive or suspend PAYGO, but it requires 3/5 majority of all duly chosen and sworn Senators to do so (usually 60.)

The statutory PAYGO came into being in 2010 as part of the deal to lift the debt ceiling in P.L. 111-139 and was enacted per Title I of the bill (aka the “Statutory Pay-As-You-Go Act of 2010”). Looking back to 2010, the Obama White House and Congressional Democrats were looking at a federal balance sheet hemorrhaging cash because of the Great Recession and sought to return the government’s finances to the constraints implemented in the early 1990’s when PAYGO was first instituted. Arguably, PAYGO was part of the solution in helping the U.S. realize budget surpluses at the end of the 20th Century. And, Democrats (and, let’s face facts, it was almost only Democrats voting for the bill) were upfront about their intentions with Title I: “The purpose of this title is to reestablish a statutory procedure to enforce a rule of budget neutrality on new revenue and direct spending legislation.”

The statute provides ““PAYGO legislation” or a “PAYGO Act” refers to a bill or joint resolution that affects direct spending or revenue relative to the baseline.” It can also refer to discretionary spending that has a net negative effect on mandatory spending “if such provisions make outyear modifications to substantive law, except that provisions for which the outlay effects net to zero over a period consisting of the current year, the budget year, and the 4 subsequent years shall not be considered budgetary effects.” In any event, if legislation is enacted that violates PAYGO, OMB is required to issue a dreaded sequestration order to institute across-the-board cuts to all non-exempt mandatory funding (e.g. Medicaid, farm subsidies, SNAP, etc.) Since the statutory PAYGO doesn’t cover off-budget funding, Social Security and other programs wouldn’t be effected by a sequester.

In a section-by-section the chairs of the House and Senate Budget Committees inserted into the Congressional Record during debate, they provided the following explanation:

Budgetary effects are defined as the amount by which PAYGO legislation changes mandatory outlays or revenues relative to the baseline. The budgetary effects of changes in tax or mandatory spending law are measured relative to what revenues or mandatory spending would otherwise have been if not for the legislation, as measured by the baseline (as defined in section 257 of BBEDCA). Off-budget effects (i.e., Social Security trust funds and the Postal Service fund) and debt service are not counted as budgetary effects.

The chairs made another interesting point regarding changes in mandatory funding as part of appropriations bills possibly being subject to PAYGO:

Legislation subject to PAYGO also includes provisions in annual appropriations bills that change revenue or mandatory spending law in appropriations bills. Changes in mandatory spending law are considered discretionary in the current and budget years because the Appropriations Committees can offset the costs or use the savings by adjusting funding levels for discretionary programs in those years. But mandatory spending provisions in appropriations bills having outyear budget authority effects–that is, effects in those years after the budget year–are considered PAYGO legislation.

OMB is to maintain two publicly available PAYGO scorecards based on Congressional Budget Office (CBO) estimates of the effect of legislation subject to PAYGO. These CBO estimates are supposed to be entered into the Congressional Record by the chairs of the Budget Committees, but this doesn’t always happen, and if it doesn’t, OMB performs the calculations of whether legislation has resulted in an increase in mandatory funding or a reduction in revenues. For example, the most recent PAYGO scorecard was based on OMB’s estimates.

OMB explained the process:

Within 14 business days after a congressional session ends, OMB issues an annual PAYGO report and determines whether a violation of the PAYGO requirement has occurred. If either the 5- or 10-year scorecard shows net costs in the budget year column, the President is required to issue a sequestration order implementing across-the-board cuts to nonexempt mandatory pro-grams by an amount sufficient to offset those net costs.

Coming forward to the current Congress, OMB has posted the June 2019 scorecard showing a possible sequester of $3.218 billion, mainly because of scorecard balances carried over from the 115th Congress. But, of course, when OMB updates the PAYGO scorecard, per the “Bipartisan Budget Act of 2019,” the balance will be set to zero for both the five and ten year budget windows, which wipes the slate clean for the current Congress. Consequently, the balances shown on the most recent PAYGO scorecard have just been wiped clean as well as any potential PAYGO effects from the budget deal that lifted the FY 2020 and 2021 caps. It seems obvious that when Congress resets the PAYGO scorecards, they are not honoring the spirit of PAYGO. If I can change my scale, then weight gains would disappear, in a sense, right?

In the same vein, it must be mentioned that PAYGO didn’t stop Congress from adding more than $1.5 trillion in debt with the 2017 tax bill Republicans and the White House herald as their most significant legislative achievement. And, this was not the only time PAYGO Has been waived. Likewise, PAYGO was allowed to lapse when the George W. Bush Administration and Republicans pushed through their tax cut package and Medicare Part D drug prescription plan.

So, not surprisingly, PAYGO is only as good as Congress and the White House’s honoring of the rules in the House and Senate and on OMB’s scorecard.

On a different note, the budget ceasefire between the White House and Congress seems to be ending. The White House is proposing to begin the process to rescind a reported $4.3 billion in FY 2019 foreign aid funding appropriated to the Department of State and United States Agency for International Development (USAID). Normally, the funds are impounded, or set aside, for 45 days until either Congress passes legislation agreeing to rescind funds or fails to do so at which point the funds are released and are to be spent per the intent of Congress. The White House knows it cannot get a rescission bill through the Congress, but instead they are hoping to have the funds impounded through the end of the fiscal year, which ends on September 30, and then State and USAID will not be able to spend the funds. Correction: On August 3, the White House told State and USAID to essentially not use the funds in question until they provide an accounting in this letter. While this is not a rescission or impoundment request, this reapportionment of FY 2019 functions to freeze these funds.

This proposal has not been submitted to Congress, but Democrats and Republicans have already sent a number of letters urging the White House not to do this not least of which because the Government Accountability Office (GAO) issued a legal opinion in December 2018 finding asserting that the agencies in this situation would still receive the funding. The GAO determined that

the statutory text and legislative history of the Impoundment Control Act of 1974 (ICA), Supreme Court case law, and the overarching constitutional framework of legislative and executive powers provide no basis to construe the ICA as a mechanism by which the President may, in effect, unilaterally shorten the availability of budget authority by transmitting rescission proposals shortly before amounts are due to expire.

Here are the letters:

It is quite possible this will result in more litigation as the Administration pays little heed to norms and laws when they impede their policy goals. Besides, there are likely a million ways to work behind the scenes to keep funds from State and USAID even if the Administration loses the battle.

Of course, this is the White House looking to set the terms of political debate through driving the news cycle in ways they think favorable to Trump’s reelection. His base hates foreign aid, which is considered a giveaway to other countries, and regardless of whether this moves succeeds, it has the benefit of drawing a distinction between Trump on the side of his base in trying to stop foreign aid “welfare” and be fiscally responsible, and the Democrats who care more about foreigners than they do “average” Americans. Whether this spills over in the larger FY 2020 appropriations debate remains to be seen.

FY 2020 Appropriations Starting

It’s a been a while.

In any event, it’s a big week. The House Appropriations Committee begins work on FY 2020 appropriations bills even though top-line numbers haven’t entirely been decided in the Democratic Caucus, and the Congressional Budget Office (CBO) releases its revised baseline on this coming Thursday, May 2.

This week’s House Appropriations Committee markup schedule is

Over in the Senate, the Appropriations Committee will hold these hearings:

Subcommittee Hearing: Review of the FY2020 Budget Request for the Department of Homeland Security   05/02/19 10:00AM
Subcommittee Hearing: Review of the FY2020 Budget Request for Department of Labor   05/02/19 10:00AM
Subcommittee Hearing: Review of the FY2020 Budget Request for the U.S. Nuclear Regulatory Commission   05/01/19 02:30PM
Subcommittee Hearing: Review of the FY2020 Budget Request for NASA   05/01/19 02:30PM
Subcommittee Hearing: Review of the FY2020 Budget Request for the Navy and Marine Corps   05/01/19 10:00AM
Subcommittee Hearing: Review of the FY2020 Budget Request for the Indian Health Service   05/01/19 09:30AM
Subcommittee Hearing: Review of the FY2020 and FY2021 Budget Request for the VA   04/30/19 02:30PM
Subcommittee Hearing: Review of the FY2020 Budget Request for USAID   04/30/19 02:30PM

Also, Senate Appropriations Committee Chair Richard Shelby (R-AL) said yesterday that his committee will not work on their appropriations bills until there is a deal in place on the caps. He remarked that “[t]hat’s what we’d like to do because we’d have more certainty.”

Of course, where the caps are ultimately set is a major stumbling block in enacting FY 2020 appropriations. At present, the caps for defense funding would be $576 billion (without uncapped Overseas Contingency Operations (OCO) funding) and non-defense $542 billion (without OCO, Disaster relief, and other adjustments). House Democrats are split on how much to raise the caps, but House Appropriations Committee Chair Nita Lowey (D-NY) seems to be willing to work with the cap adjustments in the “Investing for the People Act of 2019” (H.R. 2021) of $664 billion for defense (plus $69 billion for defense OCO for a total of $733 billion) and $631 billion for non-defense (plus add ons pushing the cap up to $662 billion.) Consequently, House appropriations bills will likely meet those top lines as reported out of committee.

The Senate Budget Committee, however, opted to remain with the current cap levels for FY 2020 with the hopes that a deal will soon be reached for both FY 2020 and FY 2021. Their budget resolution, S.Con.Res.12, would keep the FY 2020 caps of $576 billion for defense and $542 for non-defense.

There’s still a supplemental appropriations bill floating that Congress hasn’t passed, which seems to be held up on whether Puerto Rico would receive more funding to recover from Hurricane Maria. However, the White House opposes more funds, and Democrats are insisting on it. Hence, an impasse even though a number of the states waiting on relief via supplemental appropriations for FY 2019 include states Trump will need to carry in 2020, including Florida, Georgia, and Iowa.