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How budget baselines affect claims of deficit savings

at 06:02 AM ET, 02/04/2013


(JUSTIN LANE/EPA)

“The bipartisan deals we made in 2011 have cut discretionary spending by almost $1.5 trillion for fiscal years 2013 to 2022”

memo to her colleagues from Sen. Patty Murray (D-Wash.), chair of the Senate Budget Committee, Jan. 24, 2013

“Over the past two years, I’ve signed into law about $1.4 trillion in spending cuts.”

—President Obama, remarks at news conference, Jan. 14, 2013

As Washington begins another round of torturous budget talks, much of the discussion will be on how much deficit reduction has already been achieved—and how much is needed in the years going forward.

In order to even begin that discussion, all sides need to agree on the “baseline,” or the starting point. Amazingly, just adding or subtracting a few months from the baseline will result in a difference of hundreds of billions of dollars.

Democrats like to start the clock in August 2010, but Republicans argue that is a high point for discretionary spending, thus inflating the actual savings.

In a report last week, the nonpartisan Committee for a Responsible Federal Budget (CFRB) used the August 2010 yardstick, since that’s when the “deficit reduction conversation” began. But it pointedly noted that this “is by no means the only way to measure past savings” and “there is no simple answer to the question of how much deficit reduction has been enacted so far.” As the report put it:

It is worth noting that the discretionary savings in this number are in fact calculated from the high point of discretionary spending. Measuring either from a year later or from a year earlier would result in a smaller savings number because base discretionary spending (excluding the effects of the stimulus) actually increased between 2009 and 2010 due to larger-than-projected appropriations.

Some readers may regard this discussion as a bunch of Washington funny numbers, but stakes are high. The more lawmakers believe they have already cut spending, the less compelled they will be to cut more in the future. Politically, the level of spending cuts achieved is also important when calculating the balance of cuts and revenue increases needed for further deficit reduction. (As always, we take no position on whether more or fewer cuts are needed.)

The CRFB, in its report, argued that $2.35 trillion in deficit reduction over 10 years has been enacted so far, including tax increases, but that another $2.2 trillion was needed to reduce ratio of debt-to-gross-domestic-product to 70 percent by the end of decade. The left-leaning Center on Budget and Policy Priorities makes the case instead that $1.4 trillion is needed to achieve a 73-percent ratio. The difference in those numbers could have real world consequences for government programs.

The Congressional Budget Office this week will release a new economic and budgetary forecast, which will result in a new set of spending and debt projections that could upend all of these calculations, particularly if it forecasts higher economic growth.

To further educate readers, we will take a look at the arguments for and against using the August 2010 baseline—and then what happens when we use a different yardstick. We have consulted with various budget experts around town, on both sides of the issue, and thus summarize the argument below.

Why the August 2010 baseline?

Arguments for

■The deficit reduction commission headed by Erskine Bowles and Alan Simpson relied on the August 2010 baseline, with adjustments, in crafting their report and thus this is a logical starting point for measuring progress since the release of their report in December 2010.

■Later baselines include substantial cuts in discretionary spending demanded by Republicans, starting in December 2010, and thus minimize the savings that began to be achieved with the election of a Republican-controlled House. (Senate Republicans, for instance, threatened to filibuster appropriations in December 2010 unless they were frozen in a continuing resolution.)

■The 2010 actual level of non-defense discretionary funding, excluding war costs, was 3.84 percent of the gross domestic product, virtually identical historical average from 1976 through 2010. Thus it is not a high point but close to the norm—and the baseline projected a decline by 2022 to the lowest percentage on record.

Arguments against

■This baseline picks the high point of spending in all possible recent baselines, thus making it easier to show progress. For instance, the one-year surge in spending for the 2010 Census adds, over the course of 10 years, some $80 billion in spending. (That’s because CBO takes that year’s spending numbers and assumes they continue at that level, adjusted for inflation.) Moreover, four supplemental appropriations bills were passed between March and August, such as disaster relief for Haiti and more money for customs and border agents.

■The baseline emphasizes the discretionary side of the ledger, and ignores increases in spending that have occurred in other areas, such as extending unemployment insurance ($69 billion) and emergency relief for Hurricane Sandy ($55 billion). So it allows lawmakers to pat themselves on the back without looking at the broader picture of government spending.

What difference does the baseline make?

It is worth remembering that these 10-year baselines are only crude estimates into the future. Lawmakers have a tendency to describe savings as money in the bank, when in fact just about anything can be changed according to the whim of Congress.

The infamous $5.6 trillion surplus that George W. Bush inherited in 2001, was just a long-term prediction (which included the misguided assumption that capital gains revenue would continue to flow into government coffers), but that did not stop Congress for passing a massive tax cut.

The CFRB report makes this point in arguing for greater budget savings. The group says that just focusing on supposed deficit savings, not on reducing the level of debt to gross domestic product, could result in not enough deficit savings. “Settling for a stable debt path this decade would leave no margin for error in the case that economic or technical budget projections are off or policymakers enact future deficit-increasing policies,” the report says.

A GOP staff member for the Senate Budget Committee produced the following numbers at our request. For budget wonks, we have embedded the full year-by-year numbers below, along with a description of how 2010 Census funding affects the baseline over 10 years. Essentially this shows the difference in claimed deficit reduction depending on the budget baseline; the August 2010 figure is highlighted.

Reduction in non-war discretionary budget authority

March 2010 baseline: $1.029 trillion

August 2010 baseline: $1.472 trillion

January 2011 baseline: $1.055 trillion

May 2011 baseline: $812 billion

Comparison of budget baselines by Glenn Kessler

The Bottom Line

As the CFRB put it, there is “no simple answer” to how to calculate deficit savings, which is why we will not offer a Pinocchio rating. We respect the different, and often passionate, views of the budget experts we consulted.

For better or worse, the August 2010 baseline has become the metric of choice for determining recent budget savings. It certainly has been a useful comparison for comparing recent budget progress with the goals outlined in the Simpson-Bowles report. (Simpson-Bowles, however, was a 9-year plan, and some experts argue that it is a misnomer to claim that Simpson-Bowles used CBO’s August 2010 baseline because its claimed deficit savings are compared to Obama’s budget request. We understand the case each side has made but decided ultimately it is a bit in the weeds.)

As the debate unfolds, readers should be aware that different politicians will draw their numbers from the source that makes their policy position look the most attractive. Moreover, the 10-year window makes the numbers sound more impressive then they probably are.

Just as lawmakers a decade ago were wrong to assume the government had a surplus in the bank, it is also wrong to assume spending cuts are banked for the next 10 years. It will take diligence and patience in the coming years to shrink the ratio of debt to the size of the nation’s economy.

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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