Congress needs a fiscal reality check

The federal debt limit went back into effect last month, capping federal borrowing authority at its current level: just over $18.1 trillion. While the Treasury expects to continue using  so-called “extraordinary measures” to stay under the official limit at least through September, lawmakers have unfortunately shown little interest in holding down the debt between now and then.

Congress has often run into a number of budgetary “circuit breakers” that gave lawmakers the opportunity to revisit tax and spending policies. Alas, today’s leaders seem increasingly content to blow through these circuit breakers without bothering to limit the budgetary damage.

{mosads}A clear example is the bill the Senate will vote on next week to repeal Medicare’s Sustainable Growth Rate (SGR) formula. It was developed almost two decades ago to slow the growth of Medicare spending, but Congress repeatedly overrode the formula with annual patches (known as the “Doc Fix”) to avoid cuts in payments to providers.

Even before the House approved SGR repeal by a 355-vote margin two weeks ago, everybody in Washington knew that the scheduled 21 percent cuts to physician reimbursements would never materialize. The only question was whether Congress would replace them with other savings or simply add to projected deficits. In proposing a replacement package only partially offset, leaders in Congress appear to be content with additional debt.

Ideally, their plan would have included healthcare reforms that could produce long-term savings equal to or greater than the SGR formula would have done. Proposals were suggested to fully pay for SGR replacement, and this would have been consistent with the fact that patches have mostly been paid for in the past. But with SGR cuts scheduled to grow larger and increasingly unrealistic, lawmakers were skeptical they and their successors would continue this practice and thus felt little pressure to fully offset them.

To make matters worse, leaders on both sides of the aisle are also threatening to dismantle the sequester-level defense and domestic discretionary spending caps imposed by the Budget Control Act of 2011. The purpose of these caps was to threaten spending cuts so draconian that both parties would agree to cut the deficit through reforms to the government’s inadequate revenue stream and growing mandatory spending programs.

But instead of taking the fiscally responsible approach by replacing the caps with such reforms, the budget resolutions supported by congressional Republicans would finance substantial increases in defense spending with a blatant war-funding gimmick and further cuts in domestic discretionary spending below the cap. This domestic spending is already projected to drop below its historic low, and the fact that these resolutions would postpone these deeper cuts until next year (when the budget resolution is non-binding) suggests members doubt their feasibility.

President Obama has also indicated that he would veto any bill that does not reverse the sequester. If Congress and the President agree to spend above sequester levels without offsets this year, there is a real possibility that the sequester could be dismantled altogether without being replaced by a fiscally responsible alternative.

The important thing to remember is that budget projections still assume savings from the sequester will materialize, as they did with SGR savings. Projected deficits, already on an unsustainable trajectory, will rise even further if lawmakers continue to use the impracticality of current law as the justification for ignoring savings targets. If current budget control mechanisms no longer have credibility, they need to be replaced with something that does.

This brings us back to the debt limit, which is perhaps the least credible budget control mechanism of them all. Unlike any of the previously mentioned policies, it has no direct impact on tax or spending decisions — it only limits the government’s ability to pay bills it has already incurred.

Failure to increase the debt limit would cause the United States to default on some of its obligations and could jeopardize the nation’s creditworthiness. That could lead to a recession and higher borrowing costs, increasing deficits. Moreover, because the limit is a nominal dollar amount not indexed to GDP growth or inflation, it would almost certainly need to be increased even if Congress enacted a plan to bring future deficits to a sustainable level.

The time has come for Congress and the President to work together to build a better debt limit. If Congress fails to meet fiscal targets, an improved debt limit could better enforce fiscal restraint by triggering procedural or policy changes instead of sending the nation towards default. Debt targets would also be more meaningful if they were better incorporated into the regular budget process or linked to an economic indicator (such as percentage of GDP) instead of an arbitrary dollar amount.

We’ve seen in recent years that Washington is perfectly willing to muddle along until an action-forcing event gives it a reality check. Going forward, we need to make sure these events can’t be ignored.

Ritz is the legislative outreach director for The Concord Coalition, a nationwide, non-partisan organization dedicated to fiscal responsibility and reform.