Today the House Budget Committee released its fiscal year 2016 budget blueprint. Any good budget should balance within 10 years or less, without raising taxes above the average historical level (roughly 18 percent of gross domestic product (GDP)). In addition, Heritage policy experts previously established seven priorities for the congressional budget resolution. Let’s see how this budget measures up against these and other areas in critical need of reforms:
Does It Balance at 18 percent of GDP in 10 Years or Fewer? The House budget balances in less than 10 years, by 2024 at around 18 percent of GDP, when you include the budget’s economic impact on the deficit. The budget would put the debt on a downward path, reducing debt held by the public from 74 percent of GDP this year to 55 percent of GDP by 2025, and further to below the average historical debt level within 20 years.
However, with spending and revenue ticking up slightly in 2025, a budget that seeks to maintain sustainable balance would need to go bolder on entitlement spending reform.
To arrive at balance, the budget proposes to cut $5.5 trillion from spending projected under the Congressional Budget Office baseline, including $800 billion in savings from reduced interest payments. By far, the largest savings come from repealing Obamacare and its $2 trillion in projected gross spending over the next decade.
Prioritize Defense Spending. The House budget increases defense spending in fiscal year 2016, but fails to do so in a responsible way.
Budgeting is about prioritizing. It is about making choices.
The fiscal year 2016 budget will allow for $90 billion in the Overseas Contingency Operations (OCO) fund for defense, an increase of 40 percent from last year. Exploiting the Overseas Contingency Operations loophole to get around the Budget Control Act’s spending cap avoids the politically difficult but very important choices to prioritize defense spending responsibly.
The budget should fund defense spending at the appropriate level based on America’s national security strategy and military capability requirements in the base budget and offset the spending increase for defense with smart cuts in domestic discretionary spending and structural reforms to entitlement programs. While the House budget follows this approach over the decade by increasing defense spending and phasing out Overseas Contingency Operations by 2022 with offsetting savings in domestic spending, fiscal year 2016 will have the greatest impact on budget policy—and here the budget falls short.
Repeal Obamacare. The House’s fiscal year 2016 budget resolution would repeal all of the more than $2 trillion in new Obamacare spending on the Medicaid expansion and exchange subsidies. It eliminates the Independent Payment Advisory Board (IPAB) and ensures that the law’s Medicare payment reductions are retained as Medicare savings, and not spent on entitlements outside of Medicare.
In addition, the budget would repeal all of Obamacare’s harmful taxes, insurance regulations and government mandates, alleviating the burden they impose on Americans and businesses. However, it would assume that the $800 billion in revenues lost through the repeal of these provisions would be made up through tax reform.
Full repeal of Obamacare is an essential first step towards getting the nation’s health care entitlement spending under control. It is also necessary to achieve the goal of market-based and patient-centered health care reform that empowers individuals.
It is unclear whether House leaders would use reconciliation to repeal Obamacare and advance these reforms, probably the best, near term option for achieving that goal.
Reform Medicaid. Beyond repeal, the budget would reform Medicaid financing and provide states with new flexibility in administering the program for beneficiaries. These changes would reverse the perverse incentives created by the program’s open-ended funding and would allow states to tailor their Medicaid programs to fit the needs of their specific populations. As a matter of policy, Congress should enable Medicaid enrollees to use their Medicaid dollars to purchase private coverage of their choice and control decisions over their care.
In addition, the budget would unify Medicaid and the State Children’s Health Insurance Program (SCHIP) into a single program and extend SCHIP funding, currently scheduled to expire on Oct. 1. Congress should ensure that such an effort does not assume greater federal responsibility.
Reform Medicare. Furthermore, the budget would make long-term, and desperately needed, structural changes to Medicare. The budget proposal would transition Medicare to a premium support program: a defined contribution financing model, similar to that used today in Medicare Part D. This would allow seniors to purchase health coverage from competing private insurers or an updated version of traditional Medicare. The government contribution to chosen plans would offset beneficiaries’ premium costs. Implementing premium support would increase choice and empower beneficiaries, while putting Medicare on a sustainable fiscal path, thus saving both taxpayers and seniors money.
Unfortunately, the budget proposal would begin premium support in 2024. Medicare’s fiscal challenges are too severe to wait another eight years—the sooner structural changes are enacted the better.
The House budget would also make some smaller, commonsense structural reforms to the existing Medicare program to ease the transition to premium support. These reforms include combining Medicare Parts A and B into one plan, adding a catastrophic benefit, and consolidating traditional Medicare’s complex payment structure. The budget also includes increased spending on a permanent fix to Medicare’s physician payment system, the sustainable growth rate (SGR). Hopefully, the additional Medicare sustainable growth rate spending, now estimated at about $175 billion over ten years, will be fully offset by fiscally responsible cuts in Medicare spending.
Reform Social Security. While the House budget recognizes Social Security’s severe financial problems, it shies away from offering concrete proposals to address those challenges. The Social Security Disability Insurance (DI) trust fund is projected to be exhausted before the end of 2016, threatening 11 million beneficiaries with drastic and sudden benefit cuts of nearly 20 percent. The Social Security retirement program is also already running cash-flow deficits, thereby increasingly contributing to annual deficits.
Congress should take a stance to protect Social Security’s most vulnerable beneficiaries in the retirement and disability programs from sudden, indiscriminate cuts without burdening younger generations with tax increases or a higher debt burden.
The House budget seeks to recognize this need with a proposed bipartisan commission which would identify specific legislative proposals for Congress and the president to consider. Lawmakers should not shy away from immediately replacing the current cost-of-living adjustment with the more accurate chained consumer price index, raising the early and full retirement ages gradually and predictably, and focusing Social Security benefits on those who need them most by phasing in means testing. To improve incentives for those disabled individuals who are able to work, Congress should adopt a needs-based period of disability and reduce incentives for using Disability Insurance as an early retirement program.
Reform the Tax Code. The budget calls for tax reform that lowers individual and corporate tax rates, broadens the tax base, repeals the alternative minimum tax (AMT) and moves to a more competitive system of international taxation. Reducing marginal tax rates would promote economic growth by improving the incentive to work, save, invest and take entrepreneurial risks. Broadening the tax base by repealing unwarranted tax preferences will improve economic efficiency and fund rate reduction.
Policymakers must take care, however, not to broaden the tax base in ways that worsen the double taxation of savings and investment. The current U.S. tax treatment of U.S. businesses operating abroad places them at a unique competitive disadvantage and encourages firms to sell to or merge with foreign corporations. Repealing the alternative minimum tax would substantially simplify the tax system.
Cap Welfare Spending. The House budget fails to address the means-tested welfare system as a whole. It’s a nearly $1 trillion system that consists of 80 programs that provide cash, food, housing, medical care and social services to poor and lower-income Americans. Total welfare spending should be scaled back and then capped at the rate of inflation going forward. A cap would require policymakers to prioritize funding and help manage out-of-control welfare spending.
The House budget takes a step in the right direction by restoring the work requirement in the Temporary Assistance for Needy Families (TANF) program. It eliminates the TANF work requirement waivers put into place by the Obama administration in 2012.
The next steps should be to strengthen the TANF work requirement, which has been watered down over the years, and then to extend work requirements to other of the government’s 80 means-tested welfare programs. The food stamps program, which has rapidly expanded over the past decade, is a good place to start.
Unfortunately, the House budget simply turns the food stamps program into a block grant. (It also introduces funding reductions to start taking place in fiscal year 2021.) But the block grant approach is not a successful way to reform welfare.
What food stamps needs is a strong work requirement for able-bodied adults that makes it mandatory for them to work, prepare for work or at least look for work in exchange for receiving benefits. This type of work requirement is what successfully reformed TANF in 1996 and is the model to follow for reforming food stamps. A food stamp work requirement was included in welfare reform legislation introduced by Sen. Mike Lee, R-Utah, and Rep. Jim Jordan, R-Ohio, last year.
Education. The budget released today begins an important conversation on the impact of federal education spending on both college costs and our K-12 education system.
As the House Budget Committee proposal notes, the federal Pell Grant program, which was designed to provide grants to students from low-income families to defray the cost of college, has experienced considerable mission creep in recent years. Specifically, the Department of Education attributes “14 percent of the growth in the program between 2008 and 2011 to expansions that were made to the needs-analysis formula.” As the budget authors note, “increasing eligibility to those with higher incomes drains resources from those who need the most help.”
Expanded eligibility has meant that the Pell Grant program has increased to the point that it covers twice as many students as it did 10 years ago, and as such, no longer allocates funding to the students who need it most.
The House Budget Committee proposal seeks to better target Pell Grants to the low-income student the program was originally intended to help by freezing the maximum Pell award at current levels, in order to put the program on a sustainable path. In addition to limiting growth in the program, Pell funding should be shifted from mandatory funding to discretionary funding to enable Congress to have more oversight of program spending from year to year.
In addition to limiting Pell Grant spending, the proposal also calls for important reforms to student lending, including measures that account “for student loans in a way that reflects their true cost.” To achieve that goal, policymakers should stipulate the use of fair-value accounting in order to ensure that any federal loan program uses a non-subsidizing interest rate. As the Congressional Budget Office has explained, “the government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower.” Absent fair-value accounting, it is impossible to determine the extent to which the student loan programs are providing a subsidy to borrowers.
Ultimately, however, policymakers need to turn-off the open spigot of federal financial aid that has been driving college costs for the past three decades. They should begin by eliminating the PLUS loan program.
On the elementary and secondary education front, the budget proposes to eliminate unsuccessful and duplicative federal K-12 programs—a laudable step. Since the 1970s, inflation-adjusted federal per-pupil federal education spending has nearly tripled. In order to ensure that state and local school leaders’ focus is oriented toward meeting the needs of students and parents—not toward satisfying federal bureaucrats—program count and associated federal spending should be curtailed.
To that end, all federal competitive grant programs authorized under the Elementary and Secondary Education Act should be eliminated, along with associated spending, starting with those programs that are duplicative and ineffective. At the same time, policymakers should reduce spending on formula grant programs managed by the Department of Education by 10 percent.
Transportation. The House’s transportation budget proposals—while mostly vague—are encouraging. Most importantly, the proposal would seek to downsize the Washington-centric approach that has plagued the transportation system by giving “states more flexibility to fund the highway projects they feel are most critical.” Allowing states—not Washington politicians—to set their transportation priorities would increase much-needed accountability by placing decisions closer to the people who best know their transportation needs.
The proposal also places a limitation on general fund bailouts of the troubled Highway Trust Fund, which has received $62 billion from the general fund since 2008. The proposal would count any transfers from the general fund to the Highway Trust Fund as new budget authority, which triggers certain budget rules and places a hurdle in front of any effort to simply throw more money at the problem. Limiting Congress’s ability to prolong the Highway Trust Fund’s financial problems with bailouts will hopefully encourage them to implement long-term solutions, such as devolving spending and taxing decisions to the states. Also encouraging is the budget’s call to target “inefficiencies and duplication” in transportation programs, the elimination of which should always be a priority.
Overall, the budget takes a step in the right direction by giving states more flexibility and acknowledging the fiscal problems afflicting federal transportation policy. Congress should continue by minimizing the spending decisions that are made in Washington and should instead put transportation decisions in the hands of the states, which can most effectively meet their citizens’ needs.
Fannie and Freddie. The budget proposal “envisions the eventual elimination of Fannie Mae and Freddie Mac and ending their taxpayer guarantee.” As long as these firms remain under direct government control, the $5 trillion in guarantees taxpayers already face will only rise. Completely shutting down Fannie and Freddie is a long overdue step toward getting the government out of the housing market, but the details of how this goal is accomplished will be critical. If, for instance, the Senate’s 2014 approach to housing finance reform were adopted, taxpayers would continue to guarantee private investments in the mortgage market. Also, importantly, the budget would account for Fannie and Freddie’s budgetary impact using a fair-value approach, revealing to taxpayers that the government-sponsored enterprise’s impose a real cost on taxpayers.
Title II of Dodd-Frank: Orderly Liquidation Authority. The budget proposal acknowledges that “although the proponents of Dodd-Frank went to great lengths to denounce bailouts, the law only perpetuates them.” Title II of Dodd Frank perpetuates bailouts via what’s known as orderly liquidation authority, whereby federal regulators are allowed to seize troubled financial firms and close down their affairs. Title II also authorizes the Federal Deposit Insurance Corporation (FDIC) to hold taxpayers responsible for the most worthless assets on a company’s books. The time-tested bankruptcy system, with its legal protections and judicial supervision, is a far better system that leaves financial responsibility where it belongs: with a firm’s creditors and shareholders. Eliminating the FDIC’s orderly liquidation authority would protect taxpayers from trillions of dollars in potential financial obligations.
The following Heritage Foundation analysts contributed to this commentary: Alyene Senger (health care), David Burton (taxes), Rachel Sheffield (welfare), Lindsey Burke (education), Norbert Michel (Fannie and Freddie, Dodd-Frank), and Michael Sargent (transportation).