February 18, 2014

Friedman: 5 U.S. Budget Battles Yet to Fight

Tax entenders bill likely later in the year, not broad tax reform, Friedman says

Andy Friedman of The Washington Update. Andy Friedman of The Washington Update.

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While Congress recently avoided a government shutdown by allowing the federal government to keep borrowing until March 15, 2015, five looming fundamental fiscal issues still remain unresolved, says Andy Friedman of The Washington Update.

In his Tuesday commentary, Friedman says that while Congress hastily passed legislation before leaving for the Presidents Day holiday allowing the government to borrow funds through March 15, 2015, coupled with the agreement reached last December to fund the government through Sept. 30, 2015, these actions failed to address other fiscal areas of concern.

“Some believe that the Republican agreement to extend the borrowing authority without a corresponding concession from the Democrats marks the end of the budget battles going forward,” Friedman said. “That is not my view, however.”

Although the fiscal battles “will be quiescent this year, by the time next year that the debt ceiling has to be raised and the government funded again, a new class of House Republicans – likely fortified by new Tea Party members – presumably will want to take up the cudgel again to fight for fiscal restraint.”

Friedman says the first unresolved fiscal issue is bringing in additional tax revenue or closing tax loopholes through comprehensive tax reform.

But Friedman doesn’t see tax reform moving ahead this year. “Tax reform remains on the [congressional] agenda, but there has been no groundswell in Congress or encouragement from the administration to move forward in a serious way.”

While the Senate seems to agree with this notion, the House is reluctant to acknowledge the lack of momentum surrounding tax reform, Friedman says. Once the House embraces the idea of no comprehensive tax reform, Congress is likely to move a tax extenders bill later this year, he adds.

Indeed, the new chairman of the Senate Finance Committee, Sen. Ron Wyden, D-Ore., told Bloomberg that his priority as chairman was to get tax credits and deductions extended, as he believes there is little chance of broad tax reform in the near future.

One of the extenders is the IRA/charitable contribution provision that permits qualifying individuals to make tax-free annual contributions of up to $100,000 from their IRA to charity. Friedman notes that individuals who hope to take advantage of the IRA/charitable contribution provision in 2014 “should hold off taking required minimum distributions until later in the year when we know whether the extenders bill will pass.”

The second fiscal issue left untouched is the growth of entitlement spending. Friedman cites a new Congressional Budget Office report from February, The Budget and Economic Outlook: Fiscal Years 2014 to 2024, which he says makes clear that mandatory spending on entitlements such as Social Security, Medicare and Medicaid as well as interest payments on the federal debt continue to compose almost two-thirds of all U.S. spending.

And that percentage will increase as the baby boomers age, the costs of Obamacare begin to accrue, and (at some point) interest rates rise,” Friedman said. “Indeed, the rate of increase is a considerable concern; the CBO estimates mandatory spending to grow at a rate in excess of 7% annually – double the projected growth rate of the economy.”

Friedman also cites three other areas that the debt limit compromise failed to address:

Meaningfully reduce the deficit: The compromise did not reduce the near- or intermediate-term federal deficit beyond the sequestration spending cuts approved in 2011.

Change the trajectory or amount of outstanding federal debt: Outstanding debt continues to climb inexorably as the United States borrows more money each year to cover that year’s deficit. Debt as a percent of GDP does fall for a few years due to the sequestration cuts, but then that measure too rises as the increased entitlement costs kick in.

Replace the bulk of the sequester cuts: The indiscriminate across-the-board cuts to discretionary spending are unpopular with both parties, yet the compromise does little to replace them.

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