Over on Capital Gains and Games (a favorite blog of the Budget Brigade), budget guru Stan Collender and Pete Davis muse, in a couple of posts, on the presidential candidates' budget plans. They emphasize the point that, as much as they may want to implement deficit-increasing tax and/or expenditure plans, the market may have other plans.

First, Collender reminds us that in the post-Reagan world, economic policy options were limited.

The bond market "vigilantes" -- the same people who forced the Clinton administration to propose and push for deficit reduction -- are starting to say that the moon, stars, and planets may line up again in 2009 to force the next president to do the same thing.

In a follow-up post, Davis explains how large, persistent deficits impact the economy. This may give the next president pause (Davis hopes) and put the kibosh on his plans.

High real interest rates choked off recovery from the 1980 recession until early 1983, and real growth turned down again in 1986, but stopped short of a recession. The first chart [shown] also shows the "neutral real rate" required to keep the economy at full production. With the credit crisis, it has moved negative, where it remains today. It will take us at least another year or two to come out of our economic "slowdown," and rising interest rates could easily choke that recovery off.

The OMB Watch Fiscal Policy Program is looking for an intern for the fall of 2008. Yup, that's right. This is your chance to get in on the ground floor at one of the most dynamic nonprofit watchdog groups in Washington, DC. We're looking for energetic undergraduate or graduate students who have excellent writing, critical thinking, and communications skills, and who are dedicated to public policy and government accountability (see current intern Josh at right for example).

The internship is unpaid, but you'll have the chance to gain first hand experiences and take on significant responsibilities related to a number of different aspects of policy analysis in DC. Plus, you'll get a chance to write for the BudgetBlog - what could be better?

Interested? Learn more about the position and how to apply.

The Congressional Budget Office (CBO) released their monthly budget review this morning. CBO Director Peter Orszag blogged on the release of the review on the CBO Director's Blog:

CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.

CBO: Monthly Budget Review

The fiscal health of states around the country is continuing to deteriorate, according to an updated report from the Center on Budget and Policy Priorities. CBPP has issued updates to this report, initially released on January 15 this year, as state legislatures have attempted to deal with their budget shortfalls during the FY 2009 state budget process. This will be the last update of this report as only two states are left without an enacted FY 2009 budget.

The latest update from CBPP notes that 29 states and the District of Columbia had to deal with budget gaps this year, totaling $48 billion. The CBPP report summarizes their research findings:

• Over half of the states have faced problems with their FY2009 budgets.
• The 29 states in which revenues were expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arkansas, Arizona, California, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia closed a shortfall in fiscal year 2009. The budget gaps totaled $47.6 to $49.2 billion, averaging 9.3 percent to 9.7 percent of these states' general fund budgets. (See Table 1.) California — the nation's largest state — faced the largest budget gap. The shortfalls that states other than California faced averaged 6.2 percent to 6.7 percent of these states' general fund budgets.
• Analysts in three other states — Missouri, Texas, and Washington — are projecting budget gaps a little further down the road, in FY2010 and beyond.

This brings the total number of states identified as facing budget gaps to 32 — close to two-thirds of all states. Most states have addressed the FY2009 budget gaps identified here. However, new budget gaps in these and other states are likely to develop as state revenue forecasts are updated during the year.

Yesterday, the Senate voted once again against beginning debate on a package of tax cuts called the "extenders" for the fourth time this year. The vote was 51-43, and will put off any consideration of the legislation until Congress returns from their August recess on September 8.

The two main holdups are a deadlock between Democrats and Republicans over whether and how to address high gas prices (which is unrelated to the extenders bill), and the continuing debate over whether to pass fiscally responsible legislation. As I wrote yesterday, the first appears to be just election-year shenanigans typical these days in Washington. The second issue, however, is central to the debate over the future of the U.S. government's fiscal health and the economic health of our country.

In the wake of the continuing deterioration of both short and long-term budget deficit projections, yet another increase in the country's credit limit, sustained, disturbingly-large military expenditures with no end in sight, and continued woeful economic performance, it is long past time for Congress and the president to wake up to some fiscal realities.

Despite what the president and some Republicans in Congress would have us believe, the U.S. Treasury is not a bottomless money pit. It's time Congress and the president stop passing fiscal policies like they are on spring break with Mom and Dad's credit card and prioritize policies in a fiscally responsible way. We elect our leaders to make difficult decisions - that's part of the job. But the fiscal policies of the last eight years skirt those choices by pretending we can have our cake and eat it too.

Yet the Bush administration continues to care very little about the impact of current policies on future generations. Once again, they released a Statement of Administration Policy (SAP) opposing the extenders bill because it attempts to comply with pay-as-you-go (PAYGO) rules - because it offsets extension of some tax cuts with different tax increases. And the Republicans in the Senate continue to bury their heads in the sand and fall in line with that ideology. Even the usually respectable and sometimes responsible Sen. Charles Grassley (R-IA), ranking member on the Senate Finance committee, cannot find a compromise that is fiscally responsible (i.e. he won't accept any tax increases). Does Grassley honestly believe we can keep running up debt in the current fiscal environment with no consequences? Does he understand the larger context of the decisions he is making - or more accurately, the ones he is not making?

The Democrats aren't much better. They've talked a good game on fiscal responsibility since taking back Congress in 2006, but when the going gets tough during policy debates or votes on high-priority issues, they lose their gumption. Witness how the Democrats caved last year over the Alternative Minimum Tax debate or the passage this year of the expansion of the G.I. Bill as just a couple of examples. Unfortunately, despite their tough talk, there is little evidence to point to a change this time around.

So, in the end, our nation's fiscal policy comes down to a battle between those willing to look the other way and those who don't know which way to look. Awesome.

OMB released the FY 2009 Mid Session Review (MSR) today, and the headlines are blaring that the document revises the White House's projected deficit for FY 2009 upward to $482 billion from February's projection of $407.4 billion. Headline worthy indeed, but a little context here is essential in understanding how OMB reached this figure.

Seemingly miniscule changes to assumptions about the economy, Congress, interest rates, etc. can swing the bottom line figure quite a bit, and administrations are prone to jigger these one way or the other for political reasons. The game is usually played such that White House budget forecasters inflate projected deficits so that when the actual number materializes, it will likely be lower than estimated, and the administration can pat itself on the back for being a better-than-expected steward of the budget.

We'd like you to forget for a second the headlines and focus instead on what the MSR said about FY 2008's likely deficit. In February, the White House projected a deficit of $410 billion for the current fiscal year (FY 2008). Now, it projects that number to be $389 billion. Although today's FY 2009 projection is drowning out any adulation for the administration's deft ability to beat budget projections, we suspect we'll be hearing a round of applause in October when the final FY 2008 deficit figure is released.

Those wacky legislators in Congress are at it again. Democrats have added language to once again increase the national debt ceiling, or debt limit, which is the maximum amount of debt the federal government can issue. Democrats added language to a housing relief bill increasing the limit by another $800 billion to an astounding $10.615 trillion (that's trillion with a "t"). While the current national debt stands at $9.456 trillion, about $400 billion below the current debt limit according the Treasury Department, their projections show that limit might be reached before the year is over and after Congress has ajourned for the year. It seems the Dems are taking this action mostly as a precautionary move.

This will mark the sixth time in the last seven years that Congress has increased the debt limit (see chart below). Most of those increases came during Republican control of Congress, although the last two increases have been while Democrats control both chambers.

Unfortunately, it is unlikely the trend will change anytime soon as Congress has only given lip-service to issues of fiscal responsibility. Congress' current committment to pay-as-you-go (PAYGO) rules is tenuous at best, and Craig posted last week about a Congressional Budget Office report showing some pretty dire consequences for the national debt if Congress does not adopt more responsible tax policies than they are currently considering.

The Center on Budget and Policy Priorities has released a new report discussing the oft-cited, and completely false claim that tax cuts pay for themselves. Even though this statement has been refuted many times, by CBPP, by outside academics, and even by President Bush's own Treasury Department, the claim continues to float around.

CBPP does a nice job hammering home the facts again about the impact of tax cuts in a very digestible brief:

The claim that tax cuts "pay for themselves" — i.e., cause so much economic growth that revenues rise faster than they would have without the tax cut — has been made repeatedly in recent years and is one of the many tax policy issues that is likely to receive renewed attention in light of the upcoming election. As explained briefly below, this claim is false. The evidence shows clearly that tax cuts lose revenue.

CBPP: EVIDENCE SHOWS THAT TAX CUTS LOSE REVENUE

The CBO has released a report detailing the effects of indexing the the AMT to inflation (i.e. "patching" it so that fewer households would pay it than otherwise anticipated) and extending the 2001-2003 Bush tax cuts without offsetting the revenue loss.

If the Bush tax cuts are allowed to expire and if the AMT continues its ever-deepening reach into the middle class, the federal debt held by the public will increase from today's 37 percent of GDP to 115 percent in 2050. If AMT is indexed for inflation to limit its impact on the middle class, that debt figure becomes 115 percent in 2050. If the AMT is indexed for inflation and the Bush tax cuts are extended, federal debt held by the public jumps to 190 percent in 2050.

Deficit financing of these tax cuts has a pernicious effect, reducing per capita income by 13 percent in 2050. But, "[b]eyond 2073, projected deficits under those tax policies would become so large and unsustainable that CBO's model cannot calculate their effects."

(click to enlarge)

CBO: Long-Term Effects of Indexing the Alternative Minimum Tax and Extending the Tax Reductions of 2001 and 2003

The Center on Budget and Policy Priorities has released a report from leading economists and budget experts criticing a recent paper from the Brookings Institute and the Heritage Foundation called "Taking Back Our Fiscal Future." From the CBPP press release:

Sixteen leading economists and budget experts issued a major critique today of a recent proposal to address future federal budget deficits through radical changes in budget procedures for Social Security, Medicare, and Medicaid.

These experts, who include a Nobel Laureate in economics, two former Office of Management and Budget Directors, and a former Deputy Director of the Congressional Budget Office, agree that the nation faces large, persistent budget deficits that would ultimately risk significant damage to the economy. They also concur that policymakers should begin now to make the tough choices needed to avert such deficits.

But they believe the methods set forth in "Taking Back Our Fiscal Future" (TBOFF), a recent proposal by some analysts at the Brookings Institution, the Heritage Foundation, and other groups, are misguided. Instead, they believe policymakers should begin the hard work of building consensus on specific spending and tax measures that would start reducing longterm deficits, and they recommend a series of such measures.

So, the Brookings/Heritage paper was signed by 16 "longtime federal budget and policy experts" and now CBPP has released their own report from another 16 prominent and expert folks. Seems like the right-of-centrists and left-of-centrists are gearing up for what could be major reforms to fundamental federal government supports and programs in 2009. Should be quite a fight - stay tuned.

Reports:
CBPP: A Balanced Approach to Restoring Fiscal Responsibility
Brookings/Heritage: Taking Back Our Fiscal Future

Commentary:
Matthew Yglesias (The Atlantic): Fiscal Sanity How?
Matthew Yglesias (The Atlantic): Leninism's Return
Robert Kuttner (The American Prospect): Sensible Budget Wonks Strike Back Against Conservatives
Mark Schmidt (The American Prospect): "Leninist Strategy" 2.0
Matt Lewis (Inclusionist): A Better Way on Long-Term Deficits
Diane Lim Rogers (EconomistMom): But Really, Fiscal Responsibility Is Easier Under a Benevolent Dictatorship

CBO has released its Monthly Budget Review for June. It finds that while the stimulus payments accounted for a $21 billion decline in monthly revenue (compared to last June), June's surplus would still have been lower than last year's when the rebates are accounted for. Details below.

The federal government incurred a deficit of $268 billion for the first nine months of fiscal year 2008, CBO estimates, $148 billion more than the shortfall recorded during the same period in 2007. About $79 billion of that change is due to the distribution to individuals of the tax rebates enacted in the Economic Stimulus Act of 2008. Compared with their level in 2007, outlays have risen by more than 6 percent, whereas revenues have declined by about 1 percent.

[...]

The surplus for the month this year was about $51 billion, CBO estimates, $23 billion more than the corresponding figure last year. The increase in the June surplus is largely attributable to certain one-time receipts and to differences in the timing of some payments. Adjusted for those factors, the surplus would have been lower than it was last June, even in the absence of rebate payments, which totaled $28 billion this June.

CBO estimates that net receipts were about $21 billion (or 8 percent) lower this June than they were in June 2007. Nearly all of the decline—$19 billion—can be attributed to payments to individuals of the tax rebates (in addition, an estimated $9 billion of those rebates was recorded as outlays).

CBO: Monthly Budget Review

The Fiscal Policy Team and Congress both return to action this week with a number of fiscal policy issues to be tackled during the next five weeks. Below is a rundown of issues coming up soon, with most of the action happening in the Senate:

• Debate continues between Senate Democrats and Republicans over whether to offset the cost of a popular package of tax breaks called the "extenders." The latest development is that Senate Republicans are now challenging Democrats to offset the cost of the package with spending cuts rather than other tax increases. BNA ($)
• The Senate will also resume work on a bill to stave off a cut in payments to Medicare physicians by giving them the same reimbursement levels they had during the first six months of this year. Senate Republicans, who blocked legislation before the July 4 recess by one vote, have agreed to take up the legislation again this week after intense pressure from outside groups, particularly the American Medical Association. AMA Statement, AMA Television Ads
• Legislation to help people hurt by the mortgage crisis was also blocked before the holiday recess by Sen. John Ensign (R-NV), who wanted to have an amendment added to the bill to give tax cuts to encourage the production of renewable energy. The Senate plans to take another crack at that bill this afternoon.
• The appropriations season is well under way in Washington, but not much has been accomplished. With only about 10 weeks left until the start of the new fiscal year, neither the House nor Senate has approved any appropriations bills yet. After a old-fashioned temper-tantrum in the House appropriations committee before the July 4 holiday, prospects for completion of even one appropriations bill by Congress this year seems less and less likely.
• Finally, the Government Accountability Office has a new report out showing the weapons systems currently being developed by the Department of Defense will cost an astronomical $1.6 trillion to complete, of which $335 billion will be needed in the next five years. Yikes! Washington Post