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Budget, Spending, Fiscal Crisis

- June 2011

Budget and spending:

As a budget process primer: The President submits a budget proposal to Congress in February each year setting the Administration’s tax and spending priorities. Congress is not required to act on the President’s budget and rarely does so. Once the President’s Budget is submitted, House and Senate Budget Committees each begin consideration of their own budgets. Under statute, Congress is required to pass a Budget Conference report in the spring (it is not sent to the President for his signature). Once Congress has passed its Budget, the appropriations committees of the House and Senate are given their spending targets for the year and can begin consideration of the 13 separate spending bills that fund Federal departments and agencies.

One of the most dramatic “accomplishments” of the 111th Congress was their abject failure to meet any of their budget obligations. Neither house of Congress passed a Budget Resolution, and not a single one of the 13 appropriations bills was sent to the President for his signature.

Having failed to pass a budget or any spending bills, the last Congress had to enact stop-gap measures, or Continuing Resolutions (CRs), to keep the government funded when Fiscal Year 2011 began last October 1st. In the December lame duck session, a CR was enacted that funded the government only through March 4th of this year.

As a result, the new House GOP Majority was faced in January with the immediate task of attempting to enact a final CR to fund the government through the September 30th end of FY 2011, a CR which had to include the spending cuts the GOP had promised in its 2010 “Pledge” to voters.

Confrontation ensued almost immediately as the Tea Party House Freshmen, led by a few outspoken conservative veteran members, demanded more spending cuts than the GOP Leadership proposed. In the weeks that followed, short-term CRs were enacted that cut about $2 billion a week in discretionary spending, but dissent among the Tea Party/conservative members intensified and the number of House and Senate members defecting from their Leadership on key votes grew. In the vote on the 2nd short-term CR, 54 House Republicans voted “no” effectively forcing Speaker John Boehner to rely on Democrat votes to pass the CR. (Defections among Senate Republican also grew, but with Democrats still in the majority there those defections did not affect the outcome of the vote.)

Heading into the end of March, with government funded only through April 8th, the intensity of the debate escalated.

As the April 8th expiration of the last CR – and a government shutdown – approached, negotiations among the Speaker, the Senate Majority Leader, and a finally-engaged President intensified. In a classis example of 11th hour brinksmanship, a deal was finally reached among the negotiators – literally an hour before the government would have begun the process of closing down. And just after midnight yet another short-term CR was passed giving the Congress the several days it would take to write the provisions of the agreement into legislative language.

The spending cuts agreed to in the final long-term CR – legislation that would fund the government through the September 30th end of Fiscal Year 2011 – were significantly greater than those the President and Congressional Democrats said they would agree to, and only slightly smaller that those proposed by the Speaker ($38.5 billion vs. the Speaker’s original $40 billion). But the cuts were not nearly as deep as the more conservative members of Congress and their talk radio allies demanded. Moreover, as the final language of the CR was analyzed, concerns were raised by House conservatives that some of the spending cuts were not as deep or as immediate as claimed; as a result of growing dissatisfaction with the final compromise, 59 House Republicans defected from their leadership and voted against the CR.

Deficits, debt and the looming fiscal crisis: is real reform in the forecast?

Despite all the public attention – pro and con – focused on the battle in Congress over last year’s spending levels, the fight over the CR was in reality only a side-show – an opening act for the more significant battles to come.

With the CR behind them and government shut-down at least temporarily averted, Congress now has to attempt to pass a Fiscal Year 2012 Budget, pass appropriations bills to determine the level of government spending for next year, and – most critically – extend the U.S. government’s debt limit to avoid the possibility of U.S. default on its loans and almost certain severe market reaction. And these crucial fiscal policies are being addressed in the context of an American public increasingly alarmed by yet another year of seemingly out-of-control spending and escalating deficits.

Debt limit (added June 2011):

The debt limit extension is the most immediate and most critical issue facing Congress and the White House today. Vice President Biden was tasked by the President to lead talks with a small bipartisan group of House and Senate participants to attempt to reach an agreement on legislation to raise the limit and address the fiscal crisis facing the country. But there are multiple factors at play in the ongoing drama:

  • The Department of Treasury has said that if Congress fails to extend the existing ceiling on federal debt by August 2nd, we could face default on our loans and certain severe economic repercussions;
  • House and Senate conservatives don’t believe Treasury’s warnings and vow to vote against any debt limit extension that does not include deep spending cuts and structural budget and entitlement reform;
  • House Speaker John Boehner (R-OH) has announced that he will demand spending cuts equal to the debt ceiling increase on a dollar-for-dollar basis ($2.4 trillion in spending cuts with equal increase in the debt limit);
  • Senate Republican Leader Mitch McConnell (R-KY) is insisting that any debt limit extension include serious and real reforms in the bankrupt Medicare program;
  • Senate Democrat leaders have said that entitlement reforms are “off the table” and cannot be a part of any debt limit package;
  • VP Biden and Congressional Democrats insist that tax increases be included to help reduce the deficit;
  • Congressional Republicans have said tax increases are “a non-starter.”
  • House and Senate conservatives are insisting that any debt limit extension include not only immediate deep spending cuts and caps on future spending, but also a Constitutional Balanced Budget Amendment – an amendment that would require a 2/3 vote of both Houses of Congress to enact and which would not take effect until ratified by 38 states.
  • As of this writing, the Biden negotiations have stalled, with House Majority Leader Eric Cantor (R-VA) and Senate GOP Whip Jon Kyl (R-AZ) both with drawing from the talks on June 24th in response to the insistence by Democrat negotiators that tax increases by included in the deal. Further compounding the disagreement, Congressional Democrats brought a demand for new stimulus spending to the negotiations.

As of this writing, the Biden talks have been suspended and President Obama has finally entered the negotiations. Unfortunately, the President is also insisting on tax increases – including LIFO repeal. So far, GOP leaders remain firmly opposed to any tax hikes as part of a deficit reduction agreement. With the August 2nd deadline set by the Treasury Department for a debt ceiling increase to avoid possible default fast approaching, the likelihood of an agreement remains in very great doubt.

Fiscal 2012 Budget, Appropriations and Fiscal Reform (updated June 2011):

The President has, at least rhetorically, acknowledged the need to control spending and reduce Federal deficits and debt. To that end, he appointed a commission to study the problem and report back with recommendations for fiscal reform. The Debt Reduction Commission studied the issues for months and issued a report to the President last December. While they unfortunately and unwisely recommended a tax increase of more than a trillion dollars and a permanent increase in taxes as a percentage of GDP, they also urged reform of the out-of-control spending on the entitlement programs – Social Security, Medicare and Medicaid.

Despite the recommendations of his Commission and his rhetorical acknowledgement of the fiscal crisis, the President submitted a Fiscal Year 2012 Budget to Congress that was complete “business as usual.” He again proposed significant tax increases (covered in a separate staff report), spending increases, annual deficits of hundreds of billions – in some years more than a trillion – dollars, and a public debt that would grow to more than 87% of gross domestic product by 2021. Moreover, he completely punted on the out-of-control entitlements, proposing no reforms for Social Security, Medicare or Medicaid.

However, the new Chairman of the House Budget Committee, Congressman Paul Ryan (R-WI), offered a Fiscal Year 2012 Budget that tackles the huge fiscal crisis more boldly than any previous Congressional Budget. The Ryan Budget was approved by the House of Representatives in April with no Democrat votes.

On the other side of the Capitol, Senate Budget Committee Chairman Kent Conrad (D-ND) a moderate Democrat, hoped to write a budget based on the negotiations of the so-called “Gang of Six” – a bipartisan group of Senators who were attempting to get an agreement on legislation to implement the recommendations of the President’s Deficit Reduction Commission. But the Gang of Six negotiations stalled, with one of the participants abandoning the effort entirely. Subsequently, under pressure from the more liberal members of his committee, Senator Conrad floated a trial balloon budget that proposed to address the fiscal crisis with 50% spending cuts and 50% tax increases. Senate Republicans and moderate Democrats combined to reject a proposal with significant tax increases, and as of this writing it is expected that the Senate will – for the second year in a row – not even attempt to pass a Budget Resolution, despite their statutory obligation to do so.