Tag: CBO

More Stimulus Spending Than Originally Projected

Lots of budget news this morning, with the release of the newest projections from the Office of Management and Budget and the Congressional Budget Office.

One headline is that spending on the stimulus will be higher than expected. As reported by Lori Montgomery at the Washington Post (ht EconomistMom):

The $787 billion economic stimulus package President Obama signed earlier this year is likely to cost “tens of billions of dollars” more than expected, helping to drive projections for next year’s budget deficit to $1.5 trillion, White House budget director Peter Orszag told reporters.

With unemployment climbing, costs for a variety of stimulus programs are running higher than anticipated, Orszag said, including expanded unemployment benefits, food stamps and energy grants. In an interview embargoed for release Tuesday morning, Orszag said he could not estimate the overall cost of the package, but he called Republican estimates of $900 billion “slightly high.”

The $900 billion estimate that Peter mentions is reported in this letter from former CBO Director Doug Holtz-Eakin to Republican House Leader John Boehner.

The CBO also addresses this issue in its report (box on pp. 10-11). The box discusses lots of pesky nuances about budget accounting and the timing of payments. Perhaps the most interesting observation, consistent with the OMB quote above, is that:

The higher-than-expected unemployment rate has led CBO to raise its estimates of spending in 2009 for ARRA [i.e., stimulus] provisions that affect unemployment compensation (by $7 billion) and Medicaid (by $1 billion).

In other words, the weaker economy has added $8 billion to stimulus spending in fiscal 2009 alone with, presumably, more to come in fiscal 2010.

These developments further complicate the challenging task of tracking the stimulus.

$9 Trillion in Deficits for 2010 – 2019

If you have bad news to report in our nation’s capital, Friday afternoon in August is a good time.

So what did we learn this afternoon? Well, according to various news services (e.g., Bloomberg and Reuters) the Obama administration is projecting that budget deficits will total about $9 trillion from 2010 – 2019. That figure was released by an unnamed official (the usual practice) in advance of the release of new administration forecasts next Tuesday

That projected ten-year deficit is up about $2 trillion from the administration’s previous forecast, reportedly because of weaker economic assumptions. The new figure is in line with earlier estimates by the Congressional Budget Office, which will release new estimates on Tuesday as well.

As I discussed a few days ago, the administration estimates that the budget deficit this year will total about $1.58 trillion; that figure is not included in the $9 trillion figure, which covers the next ten years.

2009 Budget Deficit: $1.58 Trillion

Next Tuesday is a big day for budget watchers. The Congressional Budget Office will release its updated budget and economic projections in the morning, and the Office of Management and Budget will release its projections later in the day.

CBO isn’t a fan of leaks, so we probably won’t know much about its updated projections until Tuesday. The Obama administration, on the other hand, will likely allow select tidbits out early, as have previous administrations.

Indeed, Bloomberg is already reporting that an administration official told them that this year’s deficit will come in at “$1.58 trillion, about $262 billion less than forecast in May.”

There are several things you should know about this estimate:

  • The $262 billion difference is largely explained by a single factor: no TARP II. The administration’s original budget included a $250 billion placeholder for additional financial stabilization efforts. Happily, that never happened.
  • A second big factor, as reported by Bloomberg, is that spending on bank failures has come in $78 billion lower than originally forecast.
  • That good news is partly offset by the fact that tax revenues are projected to be about $83 billion less than originally forecast (presumably because of the weak economy). All other spending is forecast to be about $17 billion less than originally projected.

In short, the cost of fighting the financial crisis has been much lower than forecast in May, while the rest of the budget has done slightly worse than forecast.

This being Washington, there will be some debate about whether the $1.84 trillion figure from May is the right benchmark for evaluating whether the deficit is lower than forecast. That figure (the “policy deficit”) reflected not only the administration’s expectations about how the economy was affecting the budget, but also the budget impacts of its policy proposals, including the potential TARP II. At the time, the administration also made a second forecast that did not include any policy changes. That “baseline deficit” was $1.62 trillion, almost identical to the new estimate. Folks who use the baseline as a benchmark will thus conclude that the deficit is essentially in line with earlier expectations.

Note: The estimates of this year’s budget deficit will get lots of press (and blog) attention, but they are by no means the most important information in the new projections. The real question is what 2010, 2011, and subsequent years look like. We know the deficits will be scary-looking, but we will have to wait until Tuesday to find out just how scary.

Prevention, Health Costs, and Value

Cost has played a leading role in the policy debate over health care / health insurance. That’s appropriate since private health costs put such a burden on workers and families, and public health costs place such a burden on state and federal budgets.

I worry, however, that the focus on costs and spending sometimes overshadows what ought to be the real goal: getting as much value as possible from our health care system.

A case in point is the debate over preventative care.

Policymakers are desperate for painless ways to pay for expanded health care coverage. Many of them have therefore become enamored of the idea that increased spending on preventative care could reduce overall health spending. As I noted yesterday, however, there’s a problem with that idea: it generally isn’t true.

If your only goal is paying for expanded health care, that finding is both unwelcome and fatal – the search for painless pay-fors will have to look elsewhere.

If your goal is increasing the value we get from our health system, however, your inquiry isn’t done. Instead, you should say “That’s too bad; I was hoping it would save money. But while we’re talking about it, do the benefits of preventative care justify the higher spending?”

Good question.

Continue reading “Prevention, Health Costs, and Value”

Does Prevention Reduce Costs?

One of the common memes in the health debate is the claim that increased spending on preventative medical care (e.g., cancer screening) can reduce overall health spending.

That idea is very attractive, since it seems to offer a free lunch: greater health at lower cost. It has just one small problem, though: it isn’t true.

As the Congressional Budget Office describes in an analysis released on Friday:

Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending—for that individual. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Even when the unit cost of a particular preventive service is low, costs can accumulate quickly when a large number of patients are treated preventively. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs for the many who would make greater use of preventive care.

In short, an ounce of prevention may save a pound of cure for the patients it helps. But those ounces of prevention can add up to tons of costs when spread over millions of patients.

And that’s not all.

Continue reading “Does Prevention Reduce Costs?”

Federal Deficit Up to $1.3 trillion

On Thursday, the Congressional Budget Office released its latest snapshot on the federal budget. The headlines:

  • The budget deficit was almost $1.3 trillion during the first ten months of the fiscal year (through July). That’s up from $389 billion at this point last year.
  • Spending has risen 21% over last year, while tax revenues have fallen by 17%.
  • CBO estimates that $125 billion of the increased spending and decreased revenues are the result of this year’s stimulus act.

The chart shows the main drivers of the exploding deficit:

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The Budget Battle Over Student Loans

Summary: President Obama and congressional Democrats have good reasons for wanting to eliminate federal guarantees for private student loans. They should keep in mind, however, that the resulting budget savings will likely be much smaller than official estimates suggest.

Health care and defense spending have grabbed most of the budget headlines lately, but they aren’t the only budget battles in Washington.

The latest tussle? Student loans.

The federal government supports college loans in two ways: by making loans directly to students and by guaranteeing loans made by private lenders. The current budget battle has arisen because President Obama and many congressional Democrats want to kill the guarantee program in favor of the direct program. Many Republicans, on the other hand, support private lenders, and thus want the guarantee program to continue.

There are three things you should know about this debate:

1. The guarantee program has experienced two crises in recent years. In 2007, the problem was kickbacks. Private lenders were being overpaid by the program, and some of them started competing for business by giving goodies to student loan officers. President Bush and Congress put an end to that by reducing payments to private lenders. Then the financial crisis hit, and we had the reverse problem: private lenders stopped lending. So President Bush and Congress stepped in with some duct tape and paperclips to keep the guaranteed loan market working. (Actually they gave private lenders a put option — the right to sell the loans back to the government — which many lenders used; in essence, the lenders got paid for originating loans, but didn’t hold them very long.)

In short, the guarantee program has been a headache for policymakers in recent years.

2. Guaranteed loans cost the government more than direct loans. There’s no law of nature that says that has to be the case. In principle, one can imagine a guarantee program that would cost less than direct loans. That could happen, for example, if the private sector is more efficient than the government in making the loans or if the private sector is willing to use student loans as a loss leader to promote other financial products (e.g., credit cards). In practice, however, the government has never been able to calibrate guarantees to the private lenders so that (a) lenders are willing to make the loans and (b) the guarantees cost less than direct loans.

When you put points 1 and 2 together, you can understand why many budget analysts and lawmakers want to kill the guarantee program and have the government make all the loans directly. That’s certainly the way that I am leaning. (If readers have any compelling arguments in favor of the guarantee program, however, I’m all ears.)

In fairness, though, opponents of the guarantee program should acknowledge one complication to their position:

3. Congressional budget procedures are biased in favor of direct student loans over guaranteed loans. As a result, the budget case against guaranteed loans is overstated. It isn’t wrong — we are still talking tens of billions of dollars over the next ten years — but it isn’t as strong as the official numbers suggest. One implication is that eliminating the guarantee program may not save as much money as lawmakers think. That’s important, particularly if lawmakers want to spend those savings on other programs.

This third point is the key to current budget brouhaha over student loans. To understand it fully, we need to delve into a bit of budget arcana.

Continue reading “The Budget Battle Over Student Loans”

Good and Bad News for the House Health Bill

In my recent paper about how the Congressional Budget Office analyzes health proposals, I noted that one of the most important things that CBO does is to provide additional information about its cost estimates. Cost estimates often can’t speak for themselves, so it’s important that members of Congress and other interested observers ask for additional clarification about key issues.

Well, four leading House Republicans recently took this step, and CBO’s response is a doozy. It contains too much to summarize here, so let me focus on the two most important points:

  • CBO reiterated its conclusion that the introduction of a public plan (as specified in the bill) would not undermine private health insurance markets. Most Americans would continue to get their health insurance through employers.
  • CBO confirmed that the bill would worsen future deficits.

Supporters of the bill will emphasize the first finding as evidence that the public plan won’t gut private insurance markets. Opponents of the bill will emphasize the second finding as evidence that the bill is fiscally reckless.

Neither of these conclusions should be a surprise to anyone, since the basic facts were reported in CBO’s original cost estimate. However, the new letter does provide useful context.

Continue reading “Good and Bad News for the House Health Bill”

Another Budget Blow to Health Reform

Policymakers are discovering that the road to health care reform in anything but smooth. The latest speed bump involves the Administration’s proposal to rein in future Medicare costs by empowering a new panel (the Independent Medicare Advisory Council) to recommend future spending reductions. If accepted by future Presidents, the commission’s recommendations would take effect unless Congress intervened.

As I mentioned the other day, there is some logic to this approach. Politics sometimes play an unseemly — and costly role — in decisions about Medicare payment rates. Limiting Congress’s role in setting those rates might therefore by a money-saver.

The devil is in the details, however, and earlier today the Congressional Budget Office concluded that the details don’t add up to much.

CBO estimates that the proposed legislation would save a paltry $2 billion over the next ten years, less than 1/500 of the 10-year cost of health reform. That estimate reflects CBO’s assessment of various possible outcomes:

[T]he probability is high that no savings would be realized, …, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

Advocates of the IMAC approach will clearly have to go back to the drawing board if they want to get larger savings in the first 10 years. The good news for them is that CBO explains why the estimated savings over the next ten years are so low and provides some guidance on what might be necessary to increase them.

Continue reading “Another Budget Blow to Health Reform”

House Bill Fails Budget Tests

Lawmakers face more work if they want to pay for health reform. According to the latest analysis by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation, the House health bill fails two key budget tests:

  • New spending isn’t fully paid for. House committees haven’t identified enough spending reductions or tax increases to offset the spending. As a result, the bill would increase the deficit by $239 billion over the next ten years.
  • The bill would widen the structural deficit. CBO estimates, for example, that the program would increase the deficit by $65 billion in 2019, the final year of the budget window.

These budget challenges stem from the fact that the House bill would increase spending in two major ways:

  • First, the House bill would increase health insurance coverage. As noted in a previous CBO analysis (and summarized in a recent post), that effort would have a net budget impact of $1.04 trillion over the next ten years; spending would increase by almost $1.3 trillion, while tax revenues would increase by about $240 billion.
  • Second, the bill would change the formula that determines how much Medicare pays physicians. Those payment rates are scheduled to be cut 21% next year under an arcane formula (the sustainable growth rate mechanism). The House bill would replace those cuts with increases in coming years, at a cost of $245 billion over the next ten years.

As I’ve noted in previous posts (e.g., here), a key risk is that health reform would put the U.S. on an even worse fiscal trajectory. As shown in the following graph, that’s exactly what would happen under the current House bill:

Continue reading “House Bill Fails Budget Tests”

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