Analysis: Budget chicanery could tempt deficit panel

Reuters News
Posted: Oct 31, 2011 5:25 PM
Analysis: Budget chicanery could tempt deficit panel

By Richard Cowan

WASHINGTON (Reuters) - Gimmicks, accounting tricks, smoke and mirrors. Call it what you will, there is a danger lawmakers will turn to a dubious concoction as they seek to reduce the nation's budget deficit.

There is plenty of precedent for Congress to employ the dark arts of budgeting if efforts to get a sound deal fail. It is a time-tested fallback when the hard work cannot get done.

For the congressional "super committee" charged with producing a deficit reduction plan, agreeing on spending cuts and revenue increases that are based more on chicanery than sustainable budget changes may get some positive headlines.

But it will not be long before there is a reckoning, likely to come from the Congressional Budget Office, the credit rating agencies and the financial markets.

The CBO, the nonpartisan federal agency that assesses the numbers in proposals such as budget plans, would likely call out the lawmakers on any sleight of hand and cut their estimates of any reductions in the budget gap.

And in turn, the ratings agencies might decide Congress has failed to address the deficit problem forcefully and take a further toll on the U.S. credit rating.

So far, only Standard & Poor's has slashed the top-notch AAA rating of the United States -- with the other agencies Fitch Ratings and Moody's Investors Service waiting to see how the budget deficit is handled.

Shortly after the S&P downgrade, Moody's analyst Steven Hess said if the deficit-reduction efforts in Congress "are not really credible, that combined with the economic performance could potentially cause an early move on the rating."

It is easy to identify where the big, genuine government savings can be made: By cutting government healthcare and retirement benefit programs that are exploding in size and by raising revenues, now at their lowest in decades.

But touching either area is politically dangerous, especially with an election coming in November 2012. Democrats and Republicans are deeply divided on both, leaving the door open for less sustainable methods.

There is still time -- until November 23 under a self-imposed deadline -- for a deal with real savings to be accomplished. If that is impossible, the super committee could resort to some less-than-orthodox maneuvers, some based on past playbooks.

In the 1980s, President Ronald Reagan, a Republican, was famous for his "rosy scenario" budgets that relied on overly optimistic economic forecasts to help make deficits look less worrisome.

And just last spring, Republicans felt burned when they initially agreed to what they were told was a $38 billion spending-cut deal with the White House that the CBO ultimately found would save only around $20 billion to $25 billion.

Here are some of the possible proposals that should raise red flags this time around as the super committee seeks to reduce the deficit by at least $1.2 trillion:


"I think in the universe of gimmicks, the Iraq war is the mother of all gimmicks that could be used," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group pushing fiscal reforms.

Bixby was referring to ideas floated by congressional Democrats and President Barack Obama to count savings from the planned withdrawal of U.S. troops from Iraq by the end of this year and from Afghanistan in 2014.

Pulling out the troops will save the U.S. government money -- around $700 billion over 10 years according to some estimates. Republicans argue those savings already have been counted.

Winding down the wars does nothing to tackle structural budget problems over the long run, Bixby said.


Republicans want to use "dynamic scoring" in budget-cutting exercises. The idea is that future rising revenues stemming from economic growth should be counted against deficits. And what would help fuel that growth? Tax cuts, they argue.

Maya MacGuineas, head of the Committee for a Responsible Federal Budget, said while cutting taxes as part of comprehensive reforms can help the economy grow, as Republicans argue, that does not mean tax cuts pay for themselves.

"That is nonsense," she said.


Another "classic gimmick" of past budget wars, Bixby said, was to play with the so-called budget window.

The super committee is working to find savings over a 10-year period or "window." There are ways to show progress, at least on paper, Bixby said.

If there is some revenue already due to be collected in the 11th year, for example, just speed it up by a year. Or delay some planned spending to push it outside the "window."

Either move could help the super committee get to its $1.2 trillion savings goal but, in the long run, neither would help shrink budget deficits.

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"If they engage in any of that stuff, it will detract from their credibility," Bixby said.


MacGuineas warned the super committee also could tinker with the basic rules of the game. Known in budget parlance as "baselines," these are the benchmarks any deficit reduction would be measured against.

For example, a baseline assuming expiration of all of the Bush-era tax cuts, which lowered rates across-the-board, could cut deficits by more than $2 trillion over 10 years.

The problem is everybody in Washington knows, at the very least, the middle class will have its tax cuts extended beyond their 2012 expiration date.

Similarly, if the panel embraces budget rules that assume no more annual "fix" of problems associated with the Alternative Minimum Tax and Medicare doctor payments, hundreds of billions of dollars in lower deficits would be achieved.

But that would put middle-class taxpayers in jeopardy of paying higher taxes and also prompt many doctors to drop out of the Medicare program -- outcomes few members of Congress are likely to embrace.


Some eyebrows already are raised by speculation that if the super committee cannot agree on a minimum of $1.2 trillion in savings, it would resort to a "kick-the-can" trick.

That could involve instructing the tax-writing committees of Congress to write legislation next year revamping the tax code and thus generating more revenues to lower deficits.

For this scheme to fly with the CBO, the super committee would have to impose an enforcement mechanism to make sure the panels actually follow the instructions.

But the super committee itself already is operating under a similar "trigger" of automatic spending cuts if it does not find at least $1.2 trillion in savings. Some private analysts wonder about creating a trigger within a trigger.

(Additional reporting by Rachelle Younglai)