Fiscal Commission Aims for Balance at 21% of GDP

President Obama is expected to lay out a vision today for his preferred next steps to achieve a long term balanced budget. Many believe that he will endorse or embrace at least some aspects of the Fiscal Commission final recommendations. Yesterday, I outlined the health policy aspects of the Commission report that provide additional policies beyond those enacted by the Affordable Care Act to address health care costs. Addressing health care costs is a necessary, but not a sufficient condition to ever having a balanced budget. At the 50,000 foot level, the Fiscal Commission charts a path to a balanced budget in 2035 with taxes and spending at 21% of GDP (Table 4 from the Commission Report, p. 16).

Seeking balance at 21% of GDP around 25 years from now means that spending will have to decrease over current levels (and particularly as compared to auto-pilot health care cost inflation levels) and taxes will have to rise. The table below that I put together from CBO sources provides some historical context about the goal of balancing taxes and spending at 21% of GDP.

At 21% of GDP, taxes would be the highest amount since I have been alive (max 20.6% in 2000).  However, spending was higher than 21% of GDP in 1975, 1980, 1985 and 1990, and the baby boomers were working and paying payroll taxes in those years, not collecting Social Security and Medicare. Of course, this is merely another way of restating the fact that we have had a balanced budget in only 4 of the 43 years that I have been alive. While it is mathematically possible to balance the budget at a lower percentage of GDP, it seems non-controversial to me that it will take something like the 21% of GDP target specified by the Fiscal Commission to achieve a balanced budget given the demographic and health care realities of our nation.


Fiscal Commission on Health Policy

Word is that the President will endorse the Fiscal Commission approach in a speech tomorrow. It is not clear what that means exactly, but I guess we will have to read the speech. A quick overview of some of the key (and most concrete) health policy attributes of the report.

  • It assumes the implementation of the Affordable Care Act.
  • It moves to accelerate several aspects of the ACA that could slow health care cost inflation. It addresses the tax preference of employer paid health insurance in 2014, instead of waiting until 2018 to do so via the excise tax on high cost health insurance plans. It expands the focus of the Independent Payment Advisory Board (IPAB), most notably by ending the hospital exemption of the board’s work from 2014-2021.
  • Suggests ~$400 Billion in Medicare and Medicaid cuts beyond those in the ACA over the next 10 years (see pg. 37-40). Some of these offset other spending suggested by the Commission. I think it is a ~$200 Billion net cut in Medicare and Medicaid over 10 years over current law (but complicated to determine exactly until it is put into legislative form).
  • It calls for repeal or significant reform of the CLASS provisions.
  • Proposes medical malpractice reform along the lines outlined in the October, 2009 CBO letter to Senator Orrin Hatch (reduce the deficit by $54 Billion over 10 years).
  • Mandates moving dual eligibles (Medicare and Medicaid) into Medicaid manage care.
  • Directs CMS to develop new physician payment system by 2015; suggests physician pay freeze through 2013 and 1% cut in 2014 in interim. A list of specific Medicare cuts are noted to offset the cost of this ‘doc fix fix.’
  • Sets a federal cap target for health care growth starting in 2020 of GDP growth + 1% (but there are numerous details of how this would work that need to be sketched out). Note, this includes all federal spending on health care: Medicare, Medicaid, the Children’s Health Insurance Program, FEHB, TRICARE, the exchange subsidies, and the cost of the tax exclusion for health care – starting in 2020, with the target of holding growth to GDP plus 1.

A comprehensive set of proposals. 4 of the 6 members of the bipartisan gang of six in the Senate have already voted for this as members of the Fiscal Commission. If the President gets behind the Commission report full speed ahead, who knows what might happen.

Update: added Medicaid to clarify proposed cuts.

Was the Fiscal Commission a Failure?

Several folks wrote me about my post on tax reform and health care costs saying that the Fiscal Commission was a waste of time since its report has not been completely embraced by the President, nor has it been introduced as legislation into Congress. So, was it a failure?

I think not, for two main reasons. First, the document is a comprehensive list of policies that could put our country on a long term path to a sustainable budget that has already received some bipartisan support. In that sense, it serves as a sort of benchmark against which to measure alternative plans. Of course it is viewed as imperfect by each member of the Commission who voted in favor; it is a compromise document, and that is the nature of the beast.

Second, and perhaps most importantly, if we have an economic crisis at some point in the near future that necessitates quick action, the deficit commission report will likely be that plan, more or less. It would probably be better to debate policy outside of a crisis. However, there is a sense in which the long term budget problems are so large and inter-connected that we may only be able to address them in the midst of a yet unknown financial crisis. If one comes any time soon, the Fiscal Commission report will likely provide the framework of the deal that will be passed quickly. That is something.

Update: or maybe the President will endorse the Fiscal Commission approach wholeheartedly tomorrow.