The Daily Signal

How Does the Senate Budget Measure Up?

Senate Majority Leader Mitch McConnell, R-Ky. (Photo: Jim Lo/SCALZO/EPA/Newscom)

Following the House budget which was released Tuesday, the Senate Budget Committee released its fiscal year 2016 budget blueprint today. 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 the Senate 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 Less? The Senate budget reaches balance in 2025, the last year of the congressional budget window. In total, the Senate budget proposes to cut spending from the Congressional Budget Office baseline by $5.1 trillion over the decade, including $710 billion in savings from lower interest costs as a result of deficit and debt reduction in the budget.

While the budget claims to cut entitlement spending by $4.3 trillion over the decade, the budget is woefully vague on the policies that will bring about those cuts.

Prioritize Defense Spending. The fiscal 2016 Senate Budget Resolution funds defense at the Budget Control Act level of $523 billion, plus funding for the Overseas Contingency account (OCO) at the president’s requested level.

Six years of defense cuts have degraded the U.S. military capabilities while the security situation in many parts of the world has shifted in directions unfavorable to U.S. interests. The results of squeezed defense budgets have been: cancellation of modernization programs, a reduction of end strength to historic lows, and a readiness crisis throughout the military. In short, the Defense Department cannot pay for all of its military requirements while staying within the discretionary caps.

To start the necessary rebuilding of U.S. military capabilities, the fiscal year 2016 base defense budget should be $584 billion, not including OCO. Congress should phase out the OCO account and fund priorities through standard budgetary processes. Identifying initiatives that should transition from OCO into future base budgets may be a complicated endeavor, but it is a necessary one. The U.S. has a responsibility to provide for the common defense and protect the nation. Congress must find a way to fully fund Defense Department requirements without sacrificing the foundation of American strength either militarily or fiscally.

Repeal Obamacare. The Senate’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 nearly $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.

The Senate budget includes reconciliation instructions to repeal Obamacare and advance these reforms, probably the best, near-term option for achieving that goal.

All of these policies are included in the House’s fiscal year 2016 budget resolution as well.

Reform Medicaid. The Senate budget would provide a capped allotment for Medicaid and provide states with greater flexibility in designing benefits and administering the program for beneficiaries. The budget extends funding for Children’s Health Insurance Program (CHIP), currently scheduled to expire on Oct. 1, and recommends reforms to Medicaid, modeled on CHIP, for able-bodied adults and children who are eligible for Medicaid.

Congress should ensure that such an effort does not assume greater federal funding. These changes would only affect able-bodied beneficiaries, leaving the funding of services for the low-income elderly and disabled unchanged.

These changes would be a significant step in the right direction but ultimately, Medicaid needs structural reform that entirely reverses the perverse incentives created by the program’s open-ended funding and allows states to tailor their Medicaid programs to fit the needs of their specific populations. In particular, Congress should enable Medicaid enrollees to use their Medicaid dollars to purchase private coverage of their choice and control decisions over their care.

Reform Medicare. The Senate’s budget does not endorse specific Medicare reforms but instead adopts the same level of Medicare spending as President Obama’s budget proposal, saving about $430 billion in mandatory Medicare spending over the next 10 years.

Though the budget assumes the same savings target, it does not endorse the policies included in the president’s budget. It allows the appropriate committees to develop the reforms needed to meet the savings target. Savings of this magnitude could extend the balance of the Part A Hospital Insurance Trust Fund by about five years assuming the same mix of policies included in the president’s budget. In comparison, the House budget reduces Medicare spending by $148 billion over ten years.

In order to achieve the savings target, the Senate should implement immediate and long-term structural reforms to Medicare. The program should be transformed into a premium support program that uses a defined-contribution model of financing within five years of the budget’s enactment. This would move Medicare in a fiscally responsible and patient-centered direction, benefiting both taxpayers and seniors.

In preparation for premium support implementation, the budget should include smaller structural reforms that ease the transition by making the existing Medicare program more compatible with reform. These reforms include permanent repeal and replacement of the sustainable growth rate formula that governs Medicare physician reimbursement, increasing the age of Medicare eligibility, modernizing the Medicare benefit and means-testing Parts B and D premiums for higher-income enrollees.

Reform Social Security. The Senate budget recognizes Social Security’s severe financial problems, but shies away from offering concrete proposals to address those challenges. The Social Security Disability Insurance 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. Lawmakers could immediately replace the current cost-of-living adjustment with the more accurate chained consumer price index, raise the early and full retirement ages gradually and predictably, and focus Social Security benefits on those who need them most by phasing in greater means testing.

To improve incentives for disabled individuals who are able to work, Congress could adopt a needs-based period of disability and reduce incentives for using Disability Insurance as an early retirement program. The Senate budget includes a reserve fund should Congress adopt changes to the administration of disability benefits, especially as it relates to improving employment among the disabled. It also includes a reserve fund for state Medicaid demonstration programs to promote independent living and integrated work for the disabled.

Reform the Tax Code. By averaging 18.2 percent of GDP, the Senate budget keeps taxes at a current law baseline and near their historical norm of 18 percent. The Senate is slightly higher than the House budget, which averaged 18.1 percent. The budget makes room for tax reform with a reserve fund.

The country badly needs tax reform to revitalize the country. Tax reform improves economic growth by increasing incentives to engage in productive activities such as working, saving, investing and taking risk by lowering marginal tax rates and reducing double taxation. The budget also calls for the Congressional Budget Office and Joint Committee on Taxation (JCT) to dynamically score certain legislation. This is a long overdue step and one that will help Congress make better-informed decisions.

Cap Welfare Spending. The Senate’s budget gives little detail about its plans for means-tested welfare spending. However, the budget would reduce the average annual growth in welfare spending by 6.8 percentage points relative to current law.

Welfare spending has been rapidly rising for decades. In fiscal year 2013, government (federal, state and local) spent a total of $950 billion on means-tested welfare. This is roughly a 16-fold increase since the government War on Poverty began back in the 1960s. Overall, government has spent $22 trillion on welfare over the last five decades.

To get the U.S. welfare system back on track, proper policy must be put into place. Welfare reform should focus on promoting self-sufficiency through work, as well as curbing out-of-control spending. The vast majority of the government’s 80 means-tested welfare programs fail to include a work requirement for able-bodied adults. Programs such as food stamps, should require that able-bodied adults work, prepare for work or look for work in exchange for receiving assistance.

Also, total means-tested welfare spending on the government’s 80 programs should be scaled back and capped at the rate of inflation going forward. This would require policymakers to prioritize spending among the vast array of welfare programs and put welfare spending on a more prudent course.

Transportation. The Senate’s budget does not address transportation issues, aside from establishing two deficit-neutral trust funds for infrastructure and air transportation. These deficit-neutral funds simply allow the budget committee to revise spending and revenue levels later in the process, granted that the changes do not increase the deficit.

Given the fast-approaching depletion of the Highway Trust Fund in May, the Senate should address the long-term unsustainability of current transportation policy. Senate budget makers would do well to follow their counterparts in the House Budget Committee, which took a step to downsize the role of the federal government by seeking to increase state flexibility in transportation spending. Furthermore, the Senate should ensure that no money from the general fund is used to bail out the highway trust fund, which is in need of substantial reforms.

Ideally, however, the Senate should focus on making structural changes to federal transportation policy by eliminating diversions in the Highway Trust Fund that spend money on non-essential programs, such as Transportation Alternatives Program, and ceding as much decision-making as possible to the states. Downsizing the federal role in transportation would empower states and localities—which are most responsive to their citizens’ needs—to meet the nation’s transportation challenges based on their own priorities, not those set by bureaucrats in D.C.

High Levels of Education Spending Continue. The Senate budget does little to stop the federal education spending spree. The proposal includes a reconciliation instruction to the Senate Committee on Health, Education, Labor, and Pensions (HELP) to make changes to the laws over which the committee has jurisdiction in order to reduce the deficit by $1 billion over the next 10 years. However, that instruction should be used to repeal Obamacare. As we have outlined, Congress could trim billions in the education budget in one year alone by eliminating duplicative and ineffective programs. Moreover, allowing states to take control of the ineffective federal Head Start program would save billions more annually.

The Senate budget includes an important requirement to move toward fair value accounting measures for new bill estimates. It is important that policymakers stipulate the use of fair-value accounting for existing loan programs 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. However, as a possible HEA reauthorization looms, additional reforms are needed, including eliminating programs like the PLUS loan program, which has burdened students and their parents with high levels of debt since the 1980s.

Long-Term Deficit Scoring. The Senate budget asks the Congressional Budget Office to score legislation over 40 years if it would increase the deficit by $5 billion during any of the four consecutive 10-year periods. It would also add a procedural barrier against such legislation. Major spending legislation should indeed be scored over a longer time-horizon than 10 years, because 10-year scores are too easily manipulated and can hide the most important fiscal impacts of major policy changes.

Mandatory Scores. The Senate budget would seek to bar the enactment of legislation without a score that had been public for at least 28 hours.

Phasing Out CHIMPs. Changes in mandatory spending or a CHIMP is a common budget gimmick used on appropriations bills to increase spending above the budget caps. Specifically, a CHIMP is a reduction in budget authority for a mandatory program that doesn’t produce any outlay change. It is equivalent to dipping into your household budget for an event that doesn’t come up every year to spend on other items. In the end, you’ll be left without needed resources when you really need them.

The Senate budget would phase out the use of CHIMPs  included in the appropriations bills over a period of five years. This change may improve fiscal discipline.

Preventing Fake Rescissions. The Senate budget seeks to bar the use of fake savings from rescissions (cancellation of previous budget authority) by specifying that rescissions have to have a direct effect outlays to count as savings. This change would improve fiscal discipline.

Fair-Value Accounting. The Senate budget requests fair-value accounting estimates that incorporate market risk in cost estimates for federal loan programs and loan guarantees for any bill, joint, resolution, motion, amendment, etc. H.R. 1872, the Budget and Accountability Transparency Act of 2014, would implement fair-value accounting for the cost of direct loans and loan guarantees across the federal government.

The following Heritage Foundation analysts contributed to this commentary: Alyene Senger (health care), Curtis Dubay (taxes), Rachel Sheffield (welfare), Lindsey Burke (education) and Michael Sargent (transportation).