WEEKLY REPORT: APRIL 14, 2008 For the latest economic and other stats, visit RealTimeNumbers.com. BUDGET PROCESS: Step-by-Step Last month, the House of Representatives and the Senate adopted their respective versions of the FY 2008 Budget Resolution. The House measure, H Con Res 312, passed 212-207; and the Senate resolution, S Con Res 70, passed 51-44. The House-Senate conference is continuing this week. (The Budget Resolution is an internal congressional framework requiring concurrence of the House and Senate, but is not a law and does not require the President's signature.) House Committee Report SENATE APPROPRIATIONS hearing schedule for Week of April 14 April 15: Deadline for adoption of the Conference Report on the FY 2009 Budget Resolution. (Congress often misses the deadline; last year's Budget Resolution conference report was adopted May 17, 2007.) Late April: House Appropriations Subcommittees begin marking up FY 2009 appropriations bills June 10: Deadline for House Appropriations Committee to report last of the 12 regular appropriations bills June 30: Deadline for House to complete action on annual appropriations bills
UPDATED: Last fall Congress provided partial funding--$70 billion--for FY'08 military operations in Iraq and Afghanistan. For the remainder of FY '08, the Administration has requested $108 billion in emergency spending--$102.5 billion of which is for the Defense Department. As "must pass" emergency legislation, the FY'08 Supplemental could also be the vehicle for numerous non-defense items. Among the more likely non-defense items to be considered are additional economic stimulus measures, such as an extension of unemployment insurance benefits. However, last week President Bush promised to veto any measure sent to him that exceeds his $108 billion request or "ties the hands of our commanders or impose[s] artificial timelines for withdrawal." President's speech. Last year's consideration of the war supplemental consumed more than 3 months, with Congress and the President fighting over timelines and domestic add-ons to the President's supplemental request. The President vetoed HR 1591 during last year's consideration of supplemental and other emergency funding. Search WBR's Archives [keyword: supplemental] for complete details on last year's Supplemental Appropriations legislation. Despite the President's veto threat, major issues likely to be debated during consideration of the supplemental will include Senator Jim Webb's (D-VA) amendment to mandate rest time for troops equal to their deployments, and his amendment to increase education benefits for veterans similar to the WWII era GI Bill. Another likely amendment to be considered is a proposal by Senator Ben Nelson (D-Neb) to require than any further aid for Iraq's reconstruction be given in the form of loans rather than grants, in light of Iraq's recovering oil revenues.
On April 10th, the Senate passed 84-12 a bill (HR 3221) that would provide tax incentives to encourage the purchase of homes now in foreclosure and to provide relief to homebuilders. To stimulate the purchase of homes in foreclosure, Individuals buying homes in the foreclosure process would receive a $7000 tax credit over two years. The bill would authorize an additional $10 billion in mortgage revenue bonds to refinance subprime loans. And the legislation would attempt to shore up the ailing homebuilding industry by allowing companies to apply current losses to past profits and claim refunds (called a net operating loss carryback). Statement from Budget Committee ranking Republican Judd Gregg (R-NH) opposing passage. On April 9th, the House Ways and Means Committee passed 35-5 a housing relief bill (HR 5720).
A central provision of the House bill is a zero-interest, 15-year loan
for first-time homebuyers, providing them up to $7500 for a home
purchase over the next year. Unlike the Senate's tax credit, the loan
would have to be repaid. The Ways & Means bill wold also temporarily
increase the volume cap for the low-income housing tax credit. In related action, next week the House Financial Services Committee is expected to mark-up its own housing legislation that would allow the Federal Housing Administration to insure refinanced mortgages if lenders agree to reduce the outstanding principal on loans to reflect reduced property values. The proposal, by House Financial Services Chairman Barney Frank, is similar to, but broader in scope, than a recent White House refinancing plan. CBO RELEASES REPORT ON OPTIONS TO ADDRESS CRISIS IN HOUSING AND FINANCIAL MARKETS Last week, the nonpartisan Congressional Budget Office released a report on the crisis in the housing and financial markets explaining the crisis and potential policy options in clear, straightforward terms. Following is an excerpt from the report: "Problems in the housing and mortgage markets have now spread to a broader array of financial markets. At this point, the nation faces a serious disruption to the functioning of its financial markets that could substantially impair economic activity in the near term. Since the end of the unusual housing boom from 2003 to early 2006, delinquencies and foreclosures on mortgages have risen, particularly on subprime adjustable-rate mortgage loans (ARMs), reflecting a retreat of house prices from unsustainable levels, the use of lax credit standards to make the loans, weak local economies, and in some cases, higher interest rates on ARMs whose interest rates had reset as scheduled in their loan contracts. (Subprime loans are made to borrowers with low credit scores or other impairments to their credit histories.) The problems are not limited to subprime ARMs, however. Delinquencies have also risen for prime ARMs and on so-called alt-A mortgage loans, which are often made on the basis of little or no documentation of the borrower’s income and may include low-downpayment loans, loans that are not for the owner’s principal residence, interest-only loans, and loans whose balances rise over time. Because most mortgages are resold as mortgage-backed securities (MBSs), the rise in delinquencies has caused the value of MBSs to decline, in some cases quite sharply. "The problems in mortgage markets have spread to the wider financial markets for several reasons. Although highly uncertain, the number of bad mortgages and, consequently, losses on MBSs are expected to be large. The use of complex instruments to fund subprime lending, such as collateralized debt obligations (CDOs), also has made it difficult for participants in financial markets to identify the magnitude of the exposure of other participants to losses. Moreover, a number of financial institutions borrowed heavily to finance their mortgage holdings, further increasing their risk exposure. "Those losses on mortgage assets, and the resulting contraction of the availability of credit to businesses and households, pose a significant threat to the pace of economic activity. Given the elevated uncertainty about their exposure to risk, financial institutions have tightened their lending standards and pulled back from all types of risky lending, preferring to conserve capital to guard against potential losses. Following a period in which the risk premium (the higher return required to compensate investors for assuming the risk of default) had been unusually low, the price of risk has risen, in some cases significantly. That pullback has extended to short-term lending between banks. In response, the Federal Reserve and some foreign central banks have intervened to provide large infusions of liquidity (that is, short-term financing) to keep financial markets from freezing up. Moreover, large numbers of foreclosures could trigger a downward spiral of house prices that could take them below what would be justified on the basis of normal relationships to income and production costs. Such a downward spiral would exacerbate the problems in the financial markets and could reduce consumption spending by reducing household wealth, increasing the likelihood and severity of a recession. "Policymakers have already taken steps to help the housing and financial markets cope with the aftereffects of the housing boom. In the wake of continuing weakness in those markets, though, additional actions have been proposed. Some of those actions would involve lenders (seeking to promote the modification of troubled mortgages), while others would expand the role of the federal government (providing or guaranteeing credit to mortgage markets). Such actions could help reduce the number of foreclosures, attenuating one source of downward pressure on house prices—although they would not address more important influences on prices. Many policy options, moreover, would significantly shift the risk involved in mortgage losses from current lenders and investors to taxpayers. (Policymakers are also considering new supervisory guidelines and regulations for financial institutions to address weaknesses that contributed to the problems in financial markets; this paper does not address those potential changes.) "Whether additional policy interventions in the housing and mortgage markets are advisable depends in part on their objective: "If the objective is to assist homeowners in distress, some of the policies seem likely to succeed, at least to some degree. Many policies intended to help homeowners may produce significant benefits for lenders as well. Avoiding some unintended effects will be virtually impossible because it is difficult to distinguish among homeowners who were victims of their poor judgment or of predatory lenders, those who overstretched their finances for purchasing investment properties, and those who exploited poor underwriting standards. "If the objective is to avoid foreclosure and abandonment of properties, intervention might break a downward spiral in which foreclosures put houses on the market, pushing down house prices and producing more foreclosures. Although many analysts believe that house prices remain too high relative to people’s incomes, such a spiral, without intervention, could reduce prices even below their long-run ratio to incomes and production costs. "If the objective is to arrest the decline house prices, however, the policies are less likely to succeed. Perhaps the most important short-term influence on house prices is the elevated number of unoccupied houses for sale (the inventory overhang). That overhang is likely to remain until house prices fall enough to stimulate additional home sales. Put simply, none of the policies can (or presumably should) guarantee that house prices will stabilize in the near term. Furthermore, attempting to avoid (as opposed to attenuating) the market’s necessary adjustments may not only be unrealistic, but even if it were to succeed, might ultimately serve only to delay the recovery of financial markets and impair the pace of economic activity. "Finally, if the objective is to stabilize the overall economy, the policies under discussion will probably have only a limited effect because most of them are likely to exert only a modest influence directly on the housing market.... They might affect the economy indirectly, through their effects on consumer and investor confidence, though that is harder to predict." NEGOTIATIONS CONTINUE ON FY '09 BUDGET RESOLUTION Non-Defense Discretionary Spending Levels Already Face Veto Threats In order to show a balanced budget by 2012, the President's FY 2009 Budget assumes declining non-defense discretionary spending over the next 5 years, i.e., no inflation adjustments and an actual dollar reduction from year-to-year. According to CBO's March 2008 Analysis of the President's Budget, nondefense discretionary budget authority would decline from $464 billion in FY 2008 to $460 billion in FY 2009. (By the year 2013, the President's Budget calls for nondefense discretionary spending to be $68 billion below the "current services baseline," which projects current government programs continuing into the future with inflation-adjustments.) In contrast to these deep cuts in nondefense spending, the House Budget Resolution calls for approximately $25 billion more than the President in FY 2009 non-defense discretionary spending, and the Senate calls for about $22 billion more than the President's Budget. This sets the stage for another intense conflict between congressional appropriators and the White House. On March 3, before Budget Chairmen John Spratt (D-SC) and Conrad (D-ND) had even released their respective Budget Resolutions, OMB Director Nussle had already issued a blanket veto threat: "I want to reiterate that appropriations bills that exceed the President's reasonable and responsible spending levels will be met with a veto." In addition to threatening vetoes over spending levels, Nussle added that the President "will veto any appropriations bill that does not reduce the number and cost of earmarks in half from its FY 2008 level." Nussle also added a veto threat against "any attempt to increase taxes," making the prospective use of the "reserve funds" (listed below) highly unlikely. FY '09 War Funding for Iraq and Afghanistan The Administration's FY 2009 Budget includes only partial, short-term war funding ($70 billion for FY 2009 and nothing thereafter) -- one reason why their balanced budget projections for 2012 and 2013 are illusory (since the Administration is anticipating a substantial and continuing troop presence beyond 2009). The Administration's practice of under-funding war requests in the February Budget, and then seeking enormous supplemental appropriations, has caused significant friction with Congress--on both sides of the aisle. The effect of the Administration's practice is to radically underestimate projected deficits in the President's February Budget. (The House and Senate Budget Resolutions use the President's requested level.) "Reserve Funds" In order to project a balanced budget by 2012, while still showing support for specific policy priorities, the House- and Senate-passed Budget Resolutions again include numerous "reserve funds." WBR Backgrounder: What is a Reserve Fund? A typical Budget Resolution reserve fund provides that spending ceilings and committee allocations will be adjusted to allow for congressional consideration of specified new initiatives, but only if the new spending (or the new tax relief) is fully offset (by unspecified tax increases or spending cuts). In short, reserve funds do not provide any funding; they are a promise to provide funding if, and only if, taxes are raised or spending is reduced to pay for the specified initiative. (Therefore, the Administration's threat to veto any revenue raisers casts doubt on the viability of reserve funds that would allow new spending, paid for by new revenues.) The House-passed Budget Resolution contains reserve funds for: SCHIP expansion (vetoed last year by the President); expanded veterans' benefits; infrastructure investment; renewable energy; middle-income tax relief; AMT (Alternative Minimum Tax) reform; higher education; affordable housing; Medicare improvements; health care; Medicaid; Trade Adjustment Assistance; county payments; water rights settlements; national parks; and child support enforcement. The Senate Budget Resolution, as reported by the Budget Committee, contained reserve funds for: SCHIP expansion; tax relief; tax incentives for manufacturing; affordable housing; trade-related programs; relief for families; flood insurance; initiatives authorized by the new Farm Bill (currently in conference); Secure Rural Schools; improving education; infrastructure investments; investments in energy and the environment; veterans benefits; Medicare improvements; health care improvement; FDA product regulation; Medicaid's transitional medical assistance program; and judicial pay. During the Senate's vote-a-rama, the Senate added dozens of additional reserve funds which are summarized in the Congressional Record digest for March 13, 2008. Tax Increases, or Not? Similar to last year's debate on the Budget Resolution, much of the debate during House and Senate Floor action last month focused on whether the budget plans increase taxes. Context: Under current law, many of the 2001 and 2003 tax cuts expire at the end of 2010 (due to the Senate's "Byrd Rule" that prevented making the tax cuts permanent when they were originally enacted). Tax cuts scheduled to expire include: reduced tax rates on ordinary income, dividends, and capital gains; an expanded child tax credit; phase-out of the estate tax; and tax relief for married couples (expanded standard deduction and 15% tax bracket). (Expiration of the estate tax phase-out would cause the pre-2001 estate tax levels to spring back in 2011.) In general, Democrats assert that letting the tax cuts expire in 2010 would not constitute a tax increase because it would not change current law. Republicans counter that in 2011, if tax rates automatically return to pre-2001 levels, the effect would be equivalent to a tax increase. This debate will continue throughout consideration of the conference report and into the fall presidential and congressional election campaigns. Senate Democrats, while rejecting permanent extension of all 2001 and 2003 tax cuts, would extend some of them. During Floor consideration, the Senate adopted, by a vote of 99-1, an amendment offered by Finance Committee Chairman Max Baucus (D-MT) that assumes extension of middle income tax relief beyond the current expiration date of 2010 (marriage penalty relief, the child tax credit, and the 10 percent bracket). However, no one is actually anticipating legislative action until the next Congress. (Also, bear in mind that the current Senate and House PAYGO rules require that such extensions be fully offset by other tax increases or spending cuts.) The Estate Tax Under current law, estate taxes in 2009 are to be rolled back to a 45% tax rate and a $3.5 million exemption ($7 million for joint estates), with a full repeal of estate taxes the following year (2010). However, because the Bush tax cuts expire in 2010, the pre-2001 estate tax is scheduled to "spring back" in 2011. The President's Budget would permanently repeal the estate tax. The House-passed Budget Resolution assumes the pre-2001 Estate Tax will spring back in 2011. The Senate-passed Budget Resolution assumes permanent extension of the 2009 estate tax rates (45% and $3.5 million exemption). The House-Senate conference will need to resolve this difference between the House and Senate Resolutions. Backgrounder: Estate and Gift Taxes -- Myths and Facts The Looming Entitlement Crisis There is broad based agreement across the political spectrum that the U.S. is on an unsustainable fiscal path. The total federal debt has increased from $5.6 trillion at the end of FY 2000 to nearly $9.4 trillion today. In January 2008, the Congressional Budget Office reported to Congress that "the United States continues to face severe long-term budgetary challenges....Ongoing increases in health care costs, along with the aging of the population, are expected to put substantial pressure on the budget in coming decades....Economic growth alone will be insufficient to alleviate that pressure, as Medicare and Medicaid and, to a lesser extent, Social Security require ever greater resources under current law." The President's Budget proposes significant Medicare and Medicaid reforms to cut spending by $540 billion over 10 years, but at the same time proposes to make the 2001 and 2003 tax cuts permanent at a cost of $2.3 trillion over 10 years. (Moreover, Democrats assert that the deep cuts in Medicare and Medicaid "would shift costs and reduce access to health care, while doing little to address the underlying causes of the rising cost of health care.") The President also proposes a partial privatization of Social Security--which would increase the public debt by $287 billion by 2018. This would occur because the President's privatization plan would divert Social Security revenues from payment of current benefits, into individual accounts of future retirees. On the congressional side, House leaders oppose permanent extension of the 2001 and 2003 tax cuts (and Senate leaders would extend only some of the tax cuts) due to their enormous cost. However, the draft Budget Resolutions do not propose significant actions to rein in Medicare and Medicaid. Nor are there any proposals in the FY 2009 Budget Resolutions addressing Social Security, which will begin paying out more than it takes in by 2017. Balanced Budget Projections are Illusory Each of the three budget plans -- the President's Budget, the House Resolution, and the Senate Resolution -- project a balanced budget or budget surplus by 2012. None of the projections are realistic for the following reasons: (1) All three budgets continue to use Social Security surpluses to mask ongoing structural deficits - a reckless practice since the Social Security surpluses will disappear by 2017; (2) All three budgets fail to include Iraq and Afghanistan war funding beyond mid-2009 - which is highly unrealistic even assuming that a withdrawal from Iraq begins next year; and (3) All three budgets assume only a one-year "patch" for the Alternative Minimum Tax, despite widespread agreement that AMT relief is likely to be provided in each of the next 5 years. In addition, the President's Budget proposes sharply declining spending for nondefense discretionary programs which would necessitate unrealistic, draconian cuts. Earmarks: A Continuing Distraction During last month's Floor debate, observers heard a lot of rhetoric regarding appropriations earmarks. Although efforts to impose an earmarks moratorium via the Budget Resolution failed, this "hot-button issue" is not going away, and is certain to be debated repeatedly as the November elections approach. Earlier this month, a Senate Republican task force proposed that all earmarks be included in bill text rather than report language (purportedly to improve transparency), as well as requiring that earmarks stripped from bills reduce the overall spending in the bill rather than simply releasing funds for allocation by the administering agency. The Task Force includes Senators Thad Cochran of Mississippi, Tom Coburn of Oklahoma, Michael Crapo of Idaho, and Johnny Isakson of Georgia. Four points should be kept in mind regarding earmarks: (1) The lofty rhetoric against earmarks, on Capitol Hill and at the White House, is essentially a red herring intended to distract voters' attention away from the fiscal irresponsibility of the last 7 years, during which time the Federal debt has increased from $5.6 trillion to nearly $9.4 trillion; (2) earmarks in FY 2008 totaled about one-half of one percent of the Federal Budget; (3) The level of earmarks approved by Congress for FY 2008 was $12-$17 billion, depending on who is doing the counting*; and (4) while everyone would agree that wasteful earmarks should be eliminated, some earmarks, such as Senator Pete Domenici's (R-NM) earmark to begin NIH's human genome project, have been invaluable. *The higher figure is from Citizens Against Government Waste 2008 "Pig Book." RECENT BUDGET DOCS CBO: Cost Estimate for S. 2191 , America's Climate Security Act of 2007 GAO: The Nation's Long-Term Fiscal Outlook (Update) GAO: Making Tough Budget Choices to Create a Better Future America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year, by Charles S. Konigsberg, Editor and Publisher of Washington Budget Report. |