Podcast Center
Video Center
Webcasts
Resource Center
Events
February 05, 2013 at 12:17 PM
Congress will likely go over the fiscal cliff come March 1 without taking action to avoid $1.2 trillion in automatic spending cuts, according to an Ivy League professor speaking at an investment conference that concluded on Tuesday.
Presenting at the Investment Management Consultants Association’s 2013 annual meeting in New York City, Harvard Business School Professor Robert Pozen told the assembled IMCA members that Congress will permit $1.2 trillion in sequestration cuts. To be evenly divided between domestic and Department of Defense appropriations, the sequestration cuts are probable because of the lack of political will to reform entitlement programs and slash the DOD budget.
“That Congress will do nothing is a sure bet,” said Pozen. “Republicans and Democrats simply won’t agree on anything.
“Republicans were once appalled by the sequester because of the huge defense cuts it entailed,” he added. “But given the current deadlock, they now realize the only serious chance they have to get substantial cuts to the budget is by doing nothing.”
Pozen said that sequestration may prove to be not as bad as critics warn, but insisted Washington would be wise to consider a more progressive approach to the federal budget deficit and national debt.
Currently at 70 percent, the ratio of the national debt to gross domestic product is projected to grow to 90 percent if current federal spending and revenue continue on their current path. To maintain the current debt to GDP ratio, Pozen said, Congress and the president will need to achieve $3 trillion in cuts over the next 10 years.
The federal tax code, revised on January 1 by enactment of the American Taxpayers Relief Act, will close the budget deficit by about $550 billion. Given $420 billion in defense cuts made in 2011, Pozen estimated that Congress would agree to no more than an additional $300 billion in cuts from the defense budget, or half of the amount called for under sequestration. Greater cuts, he said, would meet with insurmountable opposition on both sides of the aisle, in part because of concerns the nation might otherwise be unprepared for an international crisis; and because such cuts would be politically unpalatable in Congressional districts that benefit from military spending.
Turning to health care, Pozen said the Patient Protection and Affordable Care Act (PPACA) is not, as first touted, revenue-neutral: Increased spending provided by the new health care law will more than offset anticipated health care spending cuts.
PPACA, Pozen said, calls for the states to raise the maximum household income (for a family of four) that would qualify for Medicaid eligibility to $29,000, or 133 percent of the current poverty level of $22,000. Since the U.S. Supreme Court nullified this requirement when it reviewed the legislation, the increase is now optional.
“I predict the only the states that will not agree to raising the Medicaid percentage to 133 percent are those states whose governors will be competing for the GOP nomination in 2016,” Pozen said. “Most states that work through the budget numbers will agree to the revision. Nonetheless, states that are already struggling financially will be struggling even more once the health care law is fully in effect.”
For PPACA to be revenue-neutral, he added, the Congressional Budget Office estimated the administration would need to secure $716 billion in Medicare spending cuts over 10 years.
Cutting doctors’ reimbursement rates, a proposal repeatedly rejected by Congress in recent years, isn’t a viable option because then more doctors would opt out of the system. Increasing the Medicare eligibility age to 67 from 65 would also not yield significant savings, Pozen said, because individuals aged 65-67 who don’t yet qualify for Medicare would qualify for health premium subsidies under PPACA.
