October 6, 1999
Would Congressional Spending Plans Avert
a non-Social Security Deficit?
What the CBO Letter Does and Does Not Mean
by James Horney
Considerable confusion has developed following the release on September 30 of a letter to House Speaker Dennis Hastert from Congressional Budget Office Director Dan Crippen. The House Leadership has cited the CBO letter as supporting its contention that it is balancing the non-Social Security part of the budget and thereby averting a "raid" on the Social Security trust funds.
The CBO letter, however, has been misunderstood. The letter does not state that the appropriation bills the Leadership is fashioning would balance the non-Social Security budget. To the contrary, estimates that CBO has issued (which are not discussed in the September 30 letter) show these bills would result in a non-Social Security deficit of approximately $16 billion in 2000.
Such a deficit would not constitute a raid on Social Security. Neither Social Security benefits nor the assets of the Social Security trust funds would be directly affected by a modest non-Social Security deficit of this nature in fiscal year 2000.(1)
What the CBO Letter Says
The CBO letter simply states that a budget plan that produces net discretionary outlays of $592.1 billion (and presumably includes no changes in taxes or entitlement spending) would not use any of the projected Social Security surplus in fiscal year 2000. In other words, under such a budget plan, the non-Social Security part of the budget would be balanced. Given the question to which the Leadership asked CBO to respond what is the projected non-Social Security surplus if discretionary spending totals $592.1 billion in fiscal year 2000? CBO's conclusion was straightforward.
- The current CBO baseline, issued in July, projects there will be a non-Social Security surplus of $14.4 billion in fiscal year 2000, assuming that total discretionary outlays equal $579.8 billion as a result of strict compliance with the discretionary spending caps and that no changes are made in policies governing taxes or entitlement spending. (CBO also projects a surplus of $147.0 billion in the Social Security trust funds, resulting in a projected total budget surplus of $161.4 billion.)
- If discretionary spending were at the $592.1 billion level the Leadership specified in its letter to CBO rather than at the $579.8 billion level the CBO baseline assumes, total spending would be $12.6 billion above the baseline. There would be a $12.3 billion increase in discretionary spending plus a $0.3 billion increase in interest payments as a result of the additional discretionary spending.
- An increase in spending above CBO's baseline projection of $12.6 would leave a small projected non-Social Security surplus, equaling $1.8 billion.
What CBO's Letter Did Not Say about the Congressional Plan and What CBO's Estimates Indicate about the Plan
The CBO letter does not say the appropriation bills the House Leadership has been moving would hold discretionary outlays in 2000 to $592.1 billion. In fact, CBO estimates those bills would produce outlays totaling $609.5 billion $17.4 billion more than the $592.1 billion level the Leadership assumed and $29.7 billion more than CBO's baseline level of $579.8 billion. Moreover, this $609.5 billion estimate reflects $8.8 billion in savings from a provision included in the Labor-HHS-Education appropriation bill the House Appropriations Committee approved last week that would delay earned-income tax credit (EITC) refunds.(2) Without those savings, CBO estimates the House versions of appropriation bills would result in $618.2 billion in discretionary spending in fiscal year 2000. If the savings from the EITC delay are included, the House appropriation bills would produce a projected non-Social Security deficit of $16.0 billion under CBO's estimates.
To understand how Congressional actions have turned the projected $14.4 billion non-Social Security surplus into a $16.0 billion non-Social Security deficit, consider the following (see table):
The Non-Social Security Surplus/Deficit for Fiscal Year 2000(in billions of dollars)
Under the House Republican Bills and CBO Estimates
CBO July 1 Baseline Non-Social Security Surplus
Changes in outlays based on House action Discretionary spending Emergency appropriations
Directives to lower CBOs estimate of discretionary outlays
Directive to count spectrum auction savings
Appropriations over CBOs baseline
Total increase in discretionary spending
Earned-income tax credit cut
Increased interest costs due to a higher level of spending than in the CBO baseline
Net increase in outlays
Non-Social Security Deficit Under House Action, as Estimated by CBO
- CBO's projection of a $14.4 billion non-Social Security surplus in fiscal year 2000 is based on the assumption that Congress would strictly comply with the caps and enact no emergency appropriations. That would result in total outlays of $579.8 billion for discretionary programs.
- The House, however, has approved emergency appropriations for aid to farmers, the 2000 census, the Low-income Home Energy Assistance Program, and other purposes that would result in an additional $14.0 billion in discretionary outlays.
- In addition, in judging whether the levels of non-emergency spending that the appropriations bills provide are consistent with the budget resolution and with CBO's baseline the Chairmen of the House and Senate Budget Committees have used estimates in which they directed CBO:
To subtract $14.4 billion in outlays from CBO's estimates of the level of expenditures the appropriations bills will generate in fiscal year 2000;(3) and
To credit the appropriations committees with having achieved $2.6 billion in savings in fiscal year 2000 as a result of inclusion in the defense appropriation bill of a provision to accelerate a planned 2001 Federal Communications Commission auction of a portion of the electromagnetic spectrum. CBO estimates, however, that this provision will produce no savings in 2000.
As a result of this so-called "directed scorekeeping," appropriation bills that the Budget Committee chairmen present as providing non-emergency spending exactly equal to the CBO baseline would, in fact, exceed that baseline level by $17.0 billion, according to CBO's estimates.
- Even after subtracting $17.0 billion from CBO's estimates, the level of non-emergency expenditures in fiscal year 2000 that would result from the House versions of the appropriation bills excluding the $8.8 billion in savings from the EITC provision still is $7.4 billion higher than CBO assumed in its baseline.
- Thus, according to CBO's estimates, total discretionary spending in fiscal year 2000 under the appropriation bills the House Leadership is moving would be $618.2 billion, some $38.4 billion above the $579.8 billion CBO assumed in its July baseline. (This calculation excludes the effects of the proposed EITC refund delay.)
- The delay of EITC refunds to low-income working families included in the Labor-HHS-Education appropriation bill the House Appropriations Committee approved would offset $8.8 billion of the $38.4 billion overage. The resulting $29.6 billion net increase in spending attributable to the appropriation bills, together with $0.8 billion in increased interest costs stemming from this higher level of discretionary spending, would produce total outlays which exceed the expenditure level that CBO projected in July by $30.4 billion. (News reports suggest the EITC provision may be dropped and replaced by an across-the-board cut in all discretionary spending or some other provision that would generate an equivalent amount of savings.)
- As a result of this $30.4 billion increase in spending, the $14.4 billion non-Social Security surplus that CBO projected in July turns into a $16.0 billion non-Social Security deficit. Since CBO projects there will be a Social Security surplus of $147.0 billion, there still would be a sizable total budget surplus, equaling a little over $130 billion.
- These calculations do not include the costs of any further emergency appropriations during the next 12 months. It is unlikely, however, that Congress will fail to provide any emergency funding to assist the victims of Hurricane Floyd, to help implement the next stages of the Wye Memorandum on the Middle East peace process, or to pay for the U.S. share of the cost of peacekeeping operations in Kosovo and East Timor. The Leadership's figures also do not reflect the costs of any non-appropriations legislation, such as legislation to extend expiring tax credits, add new tax breaks as part of minimum wage legislation, or roll back some of the Medicare savings provisions of the 1997 Balanced Budget Act.
Misunderstanding Social Security
A modest non-Social Security deficit now seems inevitable. But despite the statements of Members of both parties, such a deficit would not constitute a "raid" on Social Security. Nor would it weaken Social Security's financial position. The Social Security trust funds are not directly affected by the level of the surplus or deficit in the non-Social Security part of the budget. This matter is widely misunderstood.
When the Social Security trust funds take in more revenues in a year than the trust funds need to pay Social Security benefits and administrative costs in that year, the Treasury borrows the surplus funds and provides the trust funds with Treasury bonds. If there is no deficit in the non-Social Security budget, the Treasury uses the surplus Social Security revenues to pay down debt. If there is a deficit in the rest of the budget, the surplus Social Security revenues are used to cover that deficit, with the remaining surplus revenues going to pay down debt. The Social Security trust funds receive the same amount of Treasury bonds and thus have the same amount of assets regardless of whether the Treasury uses the surplus funds to help fund other government programs or to pay down debt. Deficits in the non-Social Security budget consequently do not diminish the assets the Social Security trust funds hold.
This is not a defense of substantial non-Social Security deficits. Using the Social Security surpluses to pay down debt is a sound idea; it is helpful both to the long-term prospects of the economy and to the nation's long-term fiscal health. Doing so increases national saving, which in turn should result in modest increases in the long-term economic growth rate. And a larger economy can more readily afford to provide the resources to finance Social Security, Medicare, and other needs in the future.
Paying down debt also reduces the interest payments the federal government must make on the debt, thereby creating more room in the budget to help finance spending for other programs or tax cuts. Furthermore, paying down debt would give the government more flexibility to borrow in the future to help address the fiscal crunch expected to occur when the baby boomers retire without amassing a level of national debt that could seriously injure the economy.
Paying down debt thus is an important goal to pursue. A $20 billion or $30 billion non-Social Security deficit in fiscal year 2000 is too small, however, to have much effect on long-term economic growth, particularly if such a deficit is a temporary phenomenon.
The CBO letter the House Leadership has touted does not affirm that the Leadership has produced a budget and appropriations plan that would achieve balance in the non-Social Security budget. Nor does it contradict analyses indicating that Congressional action on appropriation bills so far this year would produce a non-Social Security deficit in 2000 under CBO's assumptions. Finally, Social Security is not directly affected by whether the rest of the budget is in balance, although achieving a cumulative balance in the non-Social Security part of the budget over the next 10 years is a desirable goal because of the effect that would have on paying down the federal debt.
1. See James Horney and Robert Greenstein, "A Small Non-Social Security Deficit In Fiscal Year 2000 Would Not Adversely Affect Social Security," Center on Budget and Policy Priorities., September 17, 1999 (https://www.cbpp.org/archiveSite/9-17-99socsec.htm).
2. See Robert Greenstein, "The House Leadership's Proposal to Delay EITC Payments," Center on Budget and Policy Priorities, September 29, 1999 (https://www.cbpp.org/archiveSite/9-29-99bud.htm).
3. The budget committees justify the decision to "lowball" these expenditure estimates by noting that the Administration's estimate of the amount of discretionary program expenditures that would occur in fiscal year 2000 under the President's budget is $14 billion lower than CBO's estimate of the level of discretionary expenditures that budget would produce. This does not mean, however, that the CBO estimate is $14 billion too high.
The bulk of the estimating difference between OMB and CBO regarding the level of FY 2000 expenditures for discretionary programs under the President's budget some $10 billion of the $14 billion difference occurs in defense spending. To assume the Administration's lower estimate of defense expenditures will prove more accurate than CBO's is, however, to fly in the face of the historical record. Each year from 1994 through 1998, the Administration's estimate of the level of defense expenditures that would result from enacted appropriations bills was lower than CBO's. And each year, actual discretionary outlays ended up exceeding CBO's estimate. The amount by which actual defense expenditures have exceeded the CBO estimates has averaged $4 billion a year.