Budget deficits and agriculture

by Robbin Johnson
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What might budget deficits mean for agriculture? The implications vary, depending upon whether the farm programs involve discretionary spending, entitlements or tax expenditures. Each deserves some review.

Broadly speaking, agricultural programs that require annual appropriations to fund them involve discretionary spending. There are a number of such programs authorized in the 2007 farm act, including initiatives around environmental stewardship, research and extension and market development.

Because of the two-stage aspect of such programs — authorization and appropriation — these types of federal spending are typically the most vulnerable to budget-deficit pressures. Many programs authorized in legislation go unfunded or under-funded. Moreover, the need for annual appropriations makes such programs susceptible to recurring cutbacks. Either a changing political environment — such as the recession-driven growth in the deficit — or a different political alignment — because of both differences in make-up of the Appropriations and Agriculture committees and the 2010 election outcome — may become a stumbling block to support.

Entitlement programs

Entitlement programs work differently. They spell out eligibility criteria, and all those who meet those criteria qualify for the benefits defined under the program. Social Security and Medicare are the most familiar entitlement programs. They were created with special taxes designated to a “trust fund” to finance these commitments, but those trust funds are projected to be “bankrupt” within a generation of beneficiaries. Once that point is past, benefit payments will add to the current account budget deficit.

The farm commodity programs also are an entitlement program, as is the Supplemental Nutritional Assistance Program (SNAP), the largest of the domestic feeding programs. Under each, anyone who meets the program criteria is eligible for the program’s benefits. Those benefits vary among recipients: SNAP benefits are “means-tested”; commodity program benefits are largely a function of past or current production levels (past production for “direct payments” and current production for “marketing loan” and “countercyclical” payments).

Though the entitlement nature of commodity and SNAP programs insulates their benefit streams from annual budget pressures, they are not immune from the deficit-reduction debate. When such programs are re-authorized (as will happen in the 2012 farm bill), the size of the overall benefit pot for the life of such programs will be debated.

The process for doing this can be very complex. The 2012 farm bill, for example, is likely to have a “budget baseline” established that will be based on a projection of continuing current levels of program entitlements. This baseline itself will be subject to scrutiny and debate, and budget “offsets” (additional revenues or reduced spending elsewhere) may be required to maintain or increase the projected budget exposure. Because commodity programs are not means-tested, there will be strong pressure to reduce their benefits or the caps on individual entitlements.

In many ways, this budget debate will be the real farm bill debate, since it will determine how much funding Congress is prepared to direct to farm and feeding programs. In this setting, the currently dormant Doha Development Round may get a breath of life. As the United States, the European Community, Japan and others wrestle with budget-deficit pressures, a coordinated reform of farm policies, combined with increased market access, may gain renewed appeal.

Tax expenditures

Discretionary and entitlement spending involve budget outlays. Tax expenditures involve foregone tax receipts, which also contribute to budget deficits. Famous among individual tax expenditures is the home-mortgage-interest deduction, but the tax code is riddled with individual and corporate tax expenditures. Many argue that “closing these loopholes” would enable the United States to have lower tax rates without reduced tax revenues by broadening the base of activities taxed. Such “tax simplification” may get a serious look in coming years.

Agriculture benefits from a number of measures that may be characterized as tax expenditures, including cash-basis accounting, accelerated depreciation and excise tax forgiveness on ethanol and biodiesel. The latter item was extended to the end of 2011 by the recent “lame duck” session of Congress. One may expect, however, that such tax expenditures will be pulled into the budget-deficit debate, both in any broad look at simplification and in discussion of the merits of individual tax breaks.

Budget-deficit reduction

There is general agreement that current budget deficit levels are unsustainable over the long haul. The disagreements center around three areas: how long to maintain a fiscal stimulus to the economy; the appropriate size of government, and whether governmental policy should reward consumption or investment. Each of these “themes” of the budget-deficit debate also has implications for agriculture.

• How long? Even the most ardent advocates of fiscal stimulus would not extend this rationale over the life of the next farm bill. This suggests that the farm bill (and other long-term measures, like those in the tax expenditures heading) will be debated in a more tight-fisted budget climate than the 2002 and 2007 acts.

• Appropriate size? Agricultural and feeding programs constitute a small portion of the federal budget. But they redistribute wealth domestically rather than serve the common good (like defense) or broad societal segments (like Social Security and Medicare). As a result, they may be in the crosshairs of the “size” debate.

• Appropriate rewards? In the big picture, shifting from consumption to investment incentives is about more money for education, infrastructure and research. Within agriculture, the shift would be away from commodity programs and usage subsidies to research, training and marketing programs.

Where all of this will end up is anyone’s guess.

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