Legislative Outlook—Budget, Legislative Outlook—Budget, WTO, & U.S. Farm PolicyWTO, & U.S. Farm Policy

Presented by Chip ConleyPresented by Chip Conley

Democratic Economist Democratic Economist

House Agriculture CommitteeHouse Agriculture Committee

Budget OutlookBudget Outlook

Budget situation and outlook has Budget situation and outlook has determined outlook for farm policy.determined outlook for farm policy.

Federal deficits from 1981 to 1995 have Federal deficits from 1981 to 1995 have led to cuts in agriculture spending in deficit led to cuts in agriculture spending in deficit reduction legislation.reduction legislation.

Budget OutlookBudget Outlook

Federal surpluses in 1998 through 2001 Federal surpluses in 1998 through 2001 have provided funding for emergency have provided funding for emergency market loss and crop loss assistance and market loss and crop loss assistance and the Agricultural Risk Protection Act.the Agricultural Risk Protection Act.

2001 projected 10-year federal surplus of 2001 projected 10-year federal surplus of $5.6 trillion provided $79 billion additional $5.6 trillion provided $79 billion additional funding to write 2002 Farm Bill, along with funding to write 2002 Farm Bill, along with $1.3 trillion tax cut. $1.3 trillion tax cut.

Congressional Budget ProcessCongressional Budget Process

Annual multi-year budget plan:Annual multi-year budget plan:Current year’s revenue and outlays under Current year’s revenue and outlays under current law.current law.Projections of current law revenue and outlays Projections of current law revenue and outlays over 5-10 years—the CBO Baseline.over 5-10 years—the CBO Baseline.Changes to revenue and spending requiring Changes to revenue and spending requiring changes in law.changes in law.Together become The Budget Resolution.Together become The Budget Resolution.Developed by Budget Committees, passed by Developed by Budget Committees, passed by both Houses.both Houses.

Congressional Budget ProcessCongressional Budget Process

Projected revenues, outlays and changes Projected revenues, outlays and changes are allocated to committees.are allocated to committees.Discretionary to Appropriations Discretionary to Appropriations Committees.Committees.Mandatory to Authorizing Committees.Mandatory to Authorizing Committees.Changes can increase Committee Changes can increase Committee spending (2002 Farm Bill), spending (2002 Farm Bill), Or enforce reduced spending—Or enforce reduced spending—Reconciliation Process.Reconciliation Process.

Budget ReconciliationBudget Reconciliation

Sharing the Pain of Cutting Federal Spending on Sharing the Pain of Cutting Federal Spending on Mandatory Programs to Reduce the Deficit.Mandatory Programs to Reduce the Deficit.

• Mandatory Programs for Agriculture: Mandatory Programs for Agriculture: Cut $173M Cut $173M in 2006, $3B over 2006-10.in 2006, $3B over 2006-10.• Under the jurisdiction of the House Ag Under the jurisdiction of the House Ag

CommitteeCommittee• Typically multi-year programs such as under Typically multi-year programs such as under

the farm billthe farm bill• Food stamps, commodity program, and Food stamps, commodity program, and

conservation program funding are major conservation program funding are major mandatory spending categories.mandatory spending categories.

Budget Reconciliation in Practice:Budget Reconciliation in Practice: What Changes Count as Savings? What Changes Count as Savings?

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• For commodity programs, underlying parameters need to be changed to For commodity programs, underlying parameters need to be changed to achieve savings (e.g. target prices, loan rates.) Remember offsetting achieve savings (e.g. target prices, loan rates.) Remember offsetting interactions between variables.interactions between variables.

• For some conservations programs, savings are achieved by cutting For some conservations programs, savings are achieved by cutting funding levels. funding levels.

• Only legislated changes count. No credit is given for lower-than-Only legislated changes count. No credit is given for lower-than-expected costs from changes in market conditions or USDA expected costs from changes in market conditions or USDA implementation decisions different than expected. implementation decisions different than expected.

• Cuts must be prospective—e.g., fewer future contracts. Current signed Cuts must be prospective—e.g., fewer future contracts. Current signed long-term contracts cannot be cancelled to get savings.long-term contracts cannot be cancelled to get savings.

• CBO generally does not score savings for enforcement activities.CBO generally does not score savings for enforcement activities.

CBO’s March, 2005 Baseline Shows $300 Billion in theCBO’s March, 2005 Baseline Shows $300 Billion in the5-Year Costs of House Ag Committee Mandatory 5-Year Costs of House Ag Committee Mandatory Spending Programs ($60 Billion Annual Average).Spending Programs ($60 Billion Annual Average).

Food Stamps Are 53% of the Total. Food Stamps Are 53% of the Total.

House Agriculture Committee Jurisdiction5-Year Projections: FY 06-10 Budget Authority = $302.8 Billion

CBO Mar 05 Baseline

$0.3

$0.5

$0.7

$1.4

$2.1

$3.0

$3.1

$4.2

$19.5

$24.1

$75.5

$168.4

0 25 50 75 100 125 150 175 200

Transportation

Comm & Rural Dev

Forest Serv

CCC Other

Other House Juris

CCC Export Prog & Guar

Rsch & Inspect.

Other Nutrition

Crop Insurance

Farmer Conservation

CCC Commodity Prog

Food Stamps

$ Billion

Costs of Programs for Different Commodities Vary Costs of Programs for Different Commodities Vary Depending on a Variety of Factors. Depending on a Variety of Factors.

(CBO March 2005 Baseline)(CBO March 2005 Baseline)

CCC (+NRCS Conservation) Outlays, CBO 5-Year ProjectionsFY 06-10 = $104.0 BillionCBO March 05 Baseline

$0.5

$0.5

$1.0

$1.1

$1.3

$1.6

$2.0

$2.9

$4.4

$4.8

$9.9

$10.1

$10.2

$24.2

$29.5

0 5 10 15 20 25 30 35

Sugar

Other Commodities

Net Interest

Dairy

Export Prog & Guar

Peanuts

Other CCC

Minor Feed Grains

Rice

Tobacco (Costs, No Receipts)

Wheat

Upland Cotton

Soybeans

CCC+NRCS Conserv

Corn

$ Billion

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)CBO March 2005 BaselineCBO March 2005 Baseline

-500

-400

-300

-200

-100

0

100

200

$ b

illio

ns

2004 2006 2008 2010 2012 2014

2006 Congressional Budget 2006 Congressional Budget Resolution, $ BillionResolution, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

Tax CutsTax Cuts -18-18 -106-106

Entitlement CutsEntitlement Cuts 11 3030

Iraq Supp 2005 & 2006Iraq Supp 2005 & 2006 -62-62 -99-99

Net Discretionary ChangeNet Discretionary Change -2-2 4444

Additional Debt ServiceAdditional Debt Service -3-3 -36-36

TotalTotal -84-84 -167-167

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/CBRResulting Deficit w/CBR

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Budget Outlook, $ BillionBudget Outlook, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

CBO 2005CBO 2005

March BaselineMarch Baseline

-298-298 -980-980

Cong. BudgetCong. Budget

Resolution 2006-10Resolution 2006-10

-84-84 -167-167

Extend CBR 2011-15Extend CBR 2011-15 00 -1,519-1,519

Resulting DeficitResulting Deficit -383-383 -2,666-2,666

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/ CBR ExtendedResulting Deficit w/ CBR Extended

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Expected Additions to DeficitExpected Additions to Deficit Omitted Items, $ Billion Omitted Items, $ Billion

Fiscal YearFiscal Year 20062006 2006-152006-15

Further Cost of Iraq WarFurther Cost of Iraq War -18-18 -334-334

AMT RepairAMT Repair 00 -612-612

Additional Debt ServiceAdditional Debt Service -0-0 -224-224

Resulting DeficitResulting Deficit -401-401 -3,827-3,827

Magnitude of Future Deficit Magnitude of Future Deficit Reduction, $ BillionReduction, $ Billion

Fiscal YearFiscal Year 20042004 20052005 2004-132004-13

Resulting DeficitResulting Deficit -412-412 -398-398 -3,776-3,776

House-passed House-passed Budget 2003Budget 2003

-324-324 -230-230 -1,021-1,021

ReconciliationReconciliation -88-88 -168-168 -2,775-2,775

Comparison to 2004 House BudgetComparison to 2004 House Budget$ Billion$ Billion

Fiscal YearFiscal Year 20042004 2004-132004-13

ReconciliationReconciliation -88-88 -2,775-2,775

House-passed House-passed Reconciliation ‘03Reconciliation ‘03

-7-7 -259-259

Multiple of Multiple of House-passedHouse-passed

1313 1111

Comparison to 2004 BudgetComparison to 2004 BudgetReduction for Ag, $ BillionReduction for Ag, $ Billion

Fiscal YearFiscal Year 20042004 2004-132004-13

House-passed Ag House-passed Ag Reconciliation ‘03Reconciliation ‘03

-0.6-0.6 -18.6-18.6

Agriculture’s share Agriculture’s share of Reconciliationof Reconciliation

9%9% 7%7%

Future Agriculture Future Agriculture ReconciliationReconciliation

-8-8 -193-193

Projected Surplus/Deficit(-)Projected Surplus/Deficit(-)Resulting Deficit w/Omitted ItemsResulting Deficit w/Omitted Items

-500

-400

-300

-200

-100

0

100

200

$ b

il

2004 2006 2008 2010 2012 2014

Policy ImplicationsPolicy Implications

How to reduce farm program How to reduce farm program spending.spending.

WTO compliance by category WTO compliance by category (Amber, Blue, Green boxes).(Amber, Blue, Green boxes).

Fruit and vegetables, specialty Fruit and vegetables, specialty crops, planting prohibition.crops, planting prohibition.

Policy Implications:Policy Implications:How to Reduce Ag SpendingHow to Reduce Ag Spending

Farm Commodity Programs are now direct Farm Commodity Programs are now direct payment programs.payment programs.Few efficiencies to be gained as in 1990 Few efficiencies to be gained as in 1990 Flex Acres 15% reduction in deficiency Flex Acres 15% reduction in deficiency payments.payments.Reductions likely to be in commodity Reductions likely to be in commodity (A/B/G), conservation direct payments (A/B/G), conservation direct payments (Green), crop insurance premium (Green), crop insurance premium subsidies (de minimis).subsidies (de minimis).

CCC Outlays by Payment TypeCCC Outlays by Payment Type

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

$ m

illio

ns

2005 2007 2009 2011 2013

Total

Payments

Net Lending

Price support

Export

GSM

Policy Implications: Policy Implications: WTO DimensionWTO Dimension

Policymakers must consider trade negotiation Policymakers must consider trade negotiation proposals in deficit reduction.proposals in deficit reduction.

Previous US proposal to reduce AMS to 5% of Previous US proposal to reduce AMS to 5% of value of Ag production implied Amber Box limit value of Ag production implied Amber Box limit of $9.5B, 50% less than $19.1B. of $9.5B, 50% less than $19.1B.

Current “Substantial Reduction” is suggested to Current “Substantial Reduction” is suggested to mean 40-50% reduction. Amount TBN.mean 40-50% reduction. Amount TBN.

Dairy and sugar pose major challenge: small Dairy and sugar pose major challenge: small budget impact, significant AMS impact.budget impact, significant AMS impact.

Commodity Program Costs Commodity Program Costs 1999-01 Avg1999-01 Avg

0

5,000

10,000

15,000

$m

illi

on

BudgetCosts

AMS

Sugar Dairy

All other

Meeting WTO AgreementMeeting WTO Agreement

Dairy and Sugar must be considered in Dairy and Sugar must be considered in AMS reduction, if not budget reduction.AMS reduction, if not budget reduction.

These are not just Market Access issues.These are not just Market Access issues.

Cutting AMS will have disproportionate Cutting AMS will have disproportionate impact on farm income vs. budget cuts.impact on farm income vs. budget cuts.

How reductions are made has broad policy How reductions are made has broad policy implications.implications.

Specialty Crop IssuesSpecialty Crop Issues

WTO panel ruled Direct Payments may WTO panel ruled Direct Payments may not be Green Box because of fruit and not be Green Box because of fruit and vegetable planting prohibition.vegetable planting prohibition.Specialty crop interests seek CCC funds in Specialty crop interests seek CCC funds in Ose-Dooley bill, mostly Green box. Likely Ose-Dooley bill, mostly Green box. Likely accommodation in next farm bill.accommodation in next farm bill.Shifting funds from program crops to Shifting funds from program crops to specialty crops while reducing overall specialty crops while reducing overall spending.spending.

Budget Reconciliation InstructionsBudget Reconciliation InstructionsHave Been FrequentHave Been Frequent

• In 17 of the 25 years since 1980, budget resolutions In 17 of the 25 years since 1980, budget resolutions have included reconciliation instructions to reduce have included reconciliation instructions to reduce spending, increase taxes, increase spending or reduce spending, increase taxes, increase spending or reduce taxes.taxes.

1995: most recent year that agriculture was instructed to 1995: most recent year that agriculture was instructed to cut spending (reconciliation bill was vetoed). Other cut spending (reconciliation bill was vetoed). Other years with reconciliation instructions for agriculture: years with reconciliation instructions for agriculture: 1993, 1990, 1989, 1987, 1985, 1983, 1981. 1993, 1990, 1989, 1987, 1985, 1983, 1981.

• 2003 and 2004 House versions of the Budget 2003 and 2004 House versions of the Budget Resolution included reconciliation cuts for agriculture Resolution included reconciliation cuts for agriculture but cuts were dropped in conference.but cuts were dropped in conference.

Summing UpSumming UpDeficit reduction pressure will likely Deficit reduction pressure will likely continue for several years, continued cuts continue for several years, continued cuts in agriculture programs, similar to 1981 to in agriculture programs, similar to 1981 to 1995.1995.

Policymakers must be mindful of how cuts Policymakers must be mindful of how cuts are effected to reflect current WTO are effected to reflect current WTO commitments and how a new agreement commitments and how a new agreement may reduce domestic supports, perhaps may reduce domestic supports, perhaps 40-50%.40-50%.

Summing UpSumming Up

Price support levels (Amber) likely to be cut Price support levels (Amber) likely to be cut the most, CCP’s (Blue) some, Direct the most, CCP’s (Blue) some, Direct payments (Green) less.payments (Green) less.

Dairy and sugar programs will need to be Dairy and sugar programs will need to be addressed carefully.addressed carefully.

Specialty crops and planting prohibitions Specialty crops and planting prohibitions will likely need to be addressed.will likely need to be addressed.