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

1. Legislative Outlook—Budget, WTO, & U.S. Farm Policy Presented by Chip Conley Democratic Economist House Agriculture Committee

2. Budget Outlook • Budget situation and outlook has determined outlook for farm policy. • Federal deficits from 1981 to 1995 have led to cuts in agriculture spending in deficit reduction legislation.

3. Budget Outlook • Federal surpluses in 1998 through 2001 have provided funding for emergency market loss and crop loss assistance and the Agricultural Risk Protection Act. • 2001 projected 10-year federal surplus of $5.6 trillion provided $79 billion additional funding to write 2002 Farm Bill, along with $1.3 trillion tax cut.

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

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

6. Budget ReconciliationSharing the Pain of Cutting Federal Spending on Mandatory Programs to Reduce the Deficit. • Mandatory Programs for Agriculture: Cut $173M in 2006, $3B over 2006-10. • Under the jurisdiction of the House Ag Committee • Typically multi-year programs such as under the farm bill • Food stamps, commodity program, and conservation program funding are major mandatory spending categories.

7. Budget Reconciliation in Practice: What Changes Count as Savings? n • For commodity programs, underlying parameters need to be changed to achieve savings (e.g. target prices, loan rates.) Remember offsetting interactions between variables. • For some conservations programs, savings are achieved by cutting funding levels. • Only legislated changes count. No credit is given for lower-than-expected costs from changes in market conditions or USDA implementation decisions different than expected. • Cuts must be prospective—e.g., fewer future contracts. Current signed long-term contracts cannot be cancelled to get savings. • CBO generally does not score savings for enforcement activities.

8. CBO’s March, 2005 Baseline Shows $300 Billion in the5-Year Costs of House Ag Committee Mandatory Spending Programs ($60 Billion Annual Average). Food Stamps Are 53% of the Total.

9. Costs of Programs for Different Commodities Vary Depending on a Variety of Factors. (CBO March 2005 Baseline)

10. Projected Surplus/Deficit(-)CBO March 2005 Baseline

11. 2006 Congressional Budget Resolution, $ Billion

12. Projected Surplus/Deficit(-)Resulting Deficit w/CBR

13. Budget Outlook, $ Billion

14. Projected Surplus/Deficit(-)Resulting Deficit w/ CBR Extended

15. Expected Additions to Deficit Omitted Items, $ Billion

16. Magnitude of Future Deficit Reduction, $ Billion

17. Comparison to 2004 House Budget$ Billion

18. Comparison to 2004 BudgetReduction for Ag, $ Billion

19. Projected Surplus/Deficit(-)Resulting Deficit w/Omitted Items

20. Policy Implications • How to reduce farm program spending. • WTO compliance by category (Amber, Blue, Green boxes). • Fruit and vegetables, specialty crops, planting prohibition.

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

22. CCC Outlays by Payment Type

23. Policy Implications: WTO Dimension • Policymakers must consider trade negotiation proposals in deficit reduction. • Previous US proposal to reduce AMS to 5% of value of Ag production implied Amber Box limit of $9.5B, 50% less than $19.1B. • Current “Substantial Reduction” is suggested to mean 40-50% reduction. Amount TBN. • Dairy and sugar pose major challenge: small budget impact, significant AMS impact.

24. Commodity Program Costs 1999-01 Avg

25. Meeting WTO Agreement • Dairy and Sugar must be considered in AMS reduction, if not budget reduction. • These are not just Market Access issues. • Cutting AMS will have disproportionate impact on farm income vs. budget cuts. • How reductions are made has broad policy implications.

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

27. Budget Reconciliation InstructionsHave Been Frequent • In 17 of the 25 years since 1980, budget resolutions have included reconciliation instructions to reduce spending, increase taxes, increase spending or reduce taxes. 1995: most recent year that agriculture was instructed to cut spending (reconciliation bill was vetoed). Other years with reconciliation instructions for agriculture: 1993, 1990, 1989, 1987, 1985, 1983, 1981. • 2003 and 2004 House versions of the Budget Resolution included reconciliation cuts for agriculture but cuts were dropped in conference.

28. Summing Up • Deficit reduction pressure will likely continue for several years, continued cuts in agriculture programs, similar to 1981 to 1995. • Policymakers must be mindful of how cuts are effected to reflect current WTO commitments and how a new agreement may reduce domestic supports, perhaps 40-50%.

29. Summing Up • Price support levels (Amber) likely to be cut the most, CCP’s (Blue) some, Direct payments (Green) less. • Dairy and sugar programs will need to be addressed carefully. • Specialty crops and planting prohibitions will likely need to be addressed.