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Former CBO Directors Say Spending-Cut Trigger May Fire Blanks

Congress may undermine the deal that raised the U.S. debt ceiling by failing to agree on a plan to curb the deficit and then softening the impact of automatic spending cuts that would kick in to achieve the budget targets.

That’s the view of five former directors of the Congressional Budget Office. Lawmakers on a new committee charged with deciding on a budget plan will struggle to reach an accord, even as the Standard & Poor’s decision to downgrade U.S. debt heightens pressure on the panel, some of the ex-CBO chiefs say. And while the backup mechanism for across-the-board cuts may be the best compromise for a divided Congress, it’s a flawed device with a history of failure, they say.

As part of the debt-ceiling law President Barack Obama signed on Aug. 2, the trigger will be activated if the panel of 12 lawmakers can’t agree on at least $1.2 trillion in savings by Nov. 23 or if Congress rejects a plan they propose. All five ex- CBO chiefs said there are ways for Congress to circumvent the trigger, which wouldn’t go into effect until 2013.

“Even if it fires, the question is ‘how many of the bullets actually hit your body,’” said Peter Orszag, a onetime director of the nonpartisan CBO, which reviews congressional legislation and budgets.

Orszag, who also headed Obama’s budget office, was skeptical the committee will strike a grand compromise to curb entitlement spending and rewrite the tax code even after S&P said on Aug. 5 it was lowering the nation’s AAA credit rating.

Increasing the Pressure

Robert Reischauer, a Democrat who was in charge of the budget office from 1989 to 1995, said after S&P’s announcement that the downgrade will “put a great deal of pressure” on the new joint committee to report out a significant package.

Donald Marron, who was acting CBO chief in 2006, when George W. Bush was president, agreed, saying the downgrade is “another wake-up call” for Obama and lawmakers to address deficit issues. Still, he said, “it’s not obvious to me that we have compromise bursting out all over the next six months.”

Alice Rivlin, a Democrat who was the CBO’s founding director in 1975, said she’s holding out hope the six Democratic and six Republican lawmakers on the so-called super committee will reach a deal to head off the automatic cuts. None of the lawmakers, who will come from the House and Senate, have been named yet.

‘Destined for Failure’

Former Republican Senator Alan Simpson, co-chairman of the president’s fiscal commission, said leaders should appoint members of a separate panel of senators called the Gang of Six, which recommended a combination of spending cuts and revenue increases. If they’re not represented “very well on that super committee, you will know that it has been destined for failure,” Simpson said on Bloomberg Television.

The trigger mechanism, which would split spending reductions equally between U.S. defense and domestic programs, is the product of months of unsuccessful negotiations among congressional Republicans, Democrats and the White House to strike a broader deal to rein in entitlement programs like Medicare and to overhaul the tax code.

While the cuts are supposed to be automatic, Congress can delay or override them if they prove too painful -- defense spending would be reduced by 9.1 percent over a decade while non-defense programs would be cut 7.9 percent. That’s what lawmakers did with the 1985 Gramm-Rudman-Hollings Balanced Budget Act, the template for the trigger.

Not Touching Benefits

The trigger mechanism also won’t include the entitlement- benefit cuts that rankle Democrats or call for tax increases reviled by Republicans, both of which may be necessary to pose a credible threat of mutual pain on the two parties that would motivate the super committee to reach a compromise.

The legislation calls for the committee to find savings through spending reductions and tax increases, beyond the $917 billion in cuts that lawmakers agreed to on Aug. 2. If the panel agrees on a plan, Congress has until Dec. 23 to hold an up-or- down vote on it or the trigger will be set off, prompting $1.2 trillion in automatic, across-the-board spending cuts over nine years, beginning in 2013, after the presidential election.

One target would be Medicare, though the spending reduction would be capped at 2 percent and aimed at health-care providers, not benefits. Funding would also be threatened for the National Institutes of Health, alternative energy programs and hundreds more government agencies.

Easy to Finesse

The former budget officials say there are various options for lessening the trigger’s impact, particularly since there would be a year-long period before it kicks in. “If they want to finesse it, it’s not hard,” said Rivlin.

The automatic cuts would be spread equally over the remaining nine-year window of the legislation, based on a formula drawn up by the White House Office of Management and Budget. Congress and its committees would then have to hit those spending targets through the annual appropriations process, which allocates federal dollars to specific programs.

Congress could delay some of the most politically unpopular cuts, such as reductions in reimbursement rates to health-care providers under Medicare, until the final years of the law, the ex-budget directors said.

Rudy Penner, a Republican who directed the CBO from 1983 to 1987, said he’s “very dubious about the Medicare trigger.” Marron added that “Long budget windows give you flexibility to put stuff off.”

‘Emergency’ Outlet

Lawmakers could also designate new federal spending as “emergency” funding that falls outside the caps. While the new law narrowly defines such spending, it’s the same language from previous budget-restraint agreements, said Orszag, who directed CBO from 2007 to 2009, and is now a vice chairman of Citigroup Inc. (C) and a contributor to Bloomberg View.

“It was just ignored,” he said. “You can always get Orwellian and call anything an unanticipated event.”

Marron, who now heads the Urban Institute’s Tax Policy Center in Washington, cited spending on the 2000 Census, which Congress designated as an emergency. “You have this classic arms race issue, and people become more and more creative about identifying things as emergencies,” he said.

Finally, lawmakers have no way of preventing future Congresses from overturning the cutbacks, which was the case with the 1985 agreement. In the five years the Gramm Rudman law was in effect, the triggers were activated twice -- one of which was reduced by Congress and the other overridden by a subsequent budget agreement.

Still, Rivlin and Reischauer say the law fostered new spending restraint.

Curbing ‘Spending Appetites’

“It did curb the spending appetites of lawmakers” and “that certainly will be the case” with the new law, said Reischauer, now president of the Urban Institute in Washington. He said the trigger’s success also hinges on the outcome of the 2012 elections.

The new trigger is better designed because it’s based on definable spending caps, said Rivlin, who also led President Bill Clinton’s White House budget office. Gramm Rudman was pegged to deficit targets that depended on economic fluctuations that Congress can do little to control, she said.

Rivlin, now a senior fellow at the Brookings Institution in Washington, said she’s also more optimistic the trigger will exert pressure on lawmakers because the debt has reached crisis proportions unlike previous budget battles.

Reischauer said while he thinks it’s unlikely the trigger will be strictly upheld, “Were Congress to waive the rules, evade the discipline, financial markets would mete out discipline fairly quickly.”

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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