WASHINGTON (Reuters) - A slew of challenging choices confronts a special deficit-reduction committee in Congress, but one of the most significant yet least understood question is what is the starting point.
In budget parlance, it is a matter of which “baseline” or measuring stick the 12-member “super committee” will use to assess just how much deficit reduction it is achieving.
The question may be a bit arcane for the average person but the answer does not just matter to bean counters. It could significantly alter the amount of spending cuts or tax increases required for any deal.
“It’s certainly going to matter because that’s the framework for analyzing all of the options that are coming forward,” said Alex Brill, a research fellow at the conservative-leaning American Enterprise Institute.
The bipartisan super committee is just starting its search for at least $1.2 trillion in government savings over 10 years. If a majority of the panel cannot agree on a plan by November 23, deep spending cuts to domestic and military programs would be triggered, beginning in 2013.
The outcome will have far-reaching implications for global financial markets as a lackluster result could contribute to another downgrade of the U.S. credit rating. That would be on the heels of Standard and Poor’s decision last month to end America’s top-notch AAA rating following a long battle in Washington over the U.S. borrowing limit.
In the run-up to S&P’s move in early August, budget baselines were fleetingly in the spotlight when the credit-rating agency quizzed government budget analysts over the baseline that was used to certify the $917 billion in deficit cuts that were part of a debt limit increase bill.
When talking about deficit reduction, the question always revolves around savings from what? Is it savings compared to current law? Or, is it savings that also take into account the policies that have not yet been enacted law but everyone knows will be and will change the bottom line?
At the first super committee hearing on Tuesday, Republican Senator Rob Portman, a former White House budget director, highlighted his concerns over scorekeeping rules, saying “these are going to matter greatly in our work.”
Some congressional aides have suggested that establishing a baseline might be one of the early decisions the super committee makes. Others worry that an early fight over it could poison the atmosphere for the rest of the negotiations.
James Horney, a fiscal policy expert with the Center on Budget and Policy Priorities, said, “The baseline is a very charged thing.” While super committee talks could be easier if the baseline is set at the start of the process, “it might be that’s something that gets decided along the way,” he said.
Why does it matter? Here are some examples:
The Alternative Minimum Tax, originally aimed at ensuring the wealthiest pay taxes, now theoretically affects higher earners in the middle class because the law provides no inflation adjustment.
No member of Congress wants to nail 30 million middle-class voters with a steeper tax, so they have been passing short-term AMT exemptions.
Current law rightly assumes those temporary exemptions will expire, so analysts in turn must assume that billions of dollars in additional revenues will be collected once that happens. But the rub is that they know Congress is not likely to let that happen.
So if the super committee wants to accept reality and assume the middle class will continue to dodge the AMT bullet, that means there are tens of billions of dollars in lost revenues that they have to take into account in their $1.2 trillion deficit-reduction effort.
If they don’t acknowledge the political reality, they have in effect achieved those billions in savings without breaking a sweat -- and would be in keeping with current law.
Similarly, current law calls for 30 percent cuts soon in payments to doctors participating in the Medicare healthcare program for the elderly, Horney noted. James Horney, a fiscal policy expert with the Center on Budget and Policy Priorities.
But fearing that those doctors would just drop out of the program rather than suffer the pay cuts, Congress has been doing regular fixes to stave off the cuts.
Again, should the super committee use current law and assume around $300 billion in deficit savings over 10 years from the lower payments to doctors, or should it face up to political realities, assuming the $300 billion will never materialize, thus making for a tougher spending-cut path.
And the same goes for how to count ongoing war costs, Horney said. Should the super committee use a baseline that looks at annual spending in Iraq and Afghanistan, or should it use one that assumes combat troops will withdraw, as President Barack Obama intends, making for less Pentagon spending.
Democrats’ embrace of the lower spending during the budget debate this summer drew criticisms from Republicans, who accused them of claiming false savings.
Editing by Jackie Frank