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Budget, Spending, Fiscal Crisis

- January 2012

Budget, spending and the debt limit – wrapping up 2011:

We began the second session of the 112th Congress in January much as we began the first session – in fact, much as we have begun most sessions of Congress for the last decade or more – looking back on a prior session which failed to get the job done on fiscal issues. 

Perhaps fittingly, President Obama set the stage for last year’s fiscal gridlock when he announced that he would be a week late in submitting to Congress his required budget blueprint for Fiscal Year 2012.  But late was better than never.  Despite their statutory obligation to enact a Budget Resolution, Congress again failed to do so. 

To their credit, the new House GOP Majority did pass a Budget Resolution.  House Budget Committee Chairman – and acknowledged budget expert – Paul Ryan (R-WI) not only proposed a Budget Resolution, his blueprint courageously tackled tax and entitlement reform and called for reducing spending to 2008 levels to eventually bring the Federal Budget into balance.  While some conservatives in the House argued that the Ryan budget did not reduce spending enough or balance the budget soon enough, the House passed the budget and sent it to the Senate for its consideration.

The Senate Democrat Majority took a far less responsible course on the Budget.  Senate Majority Leader Harry Reid (D-NV) told the L.A. Times last May that “[t]here’s no need to have a Democratic budget, in my opinion.  It would be foolish for us to do a budget at this stage.”   Senate Budget Committee Chairman Kent Conrad (D-ND) told reporters at the same time that he planned to “defer” – indefinitely – action on a Budget Resolution in his Committee.   Unfortunately Chairman Conrad’s indefinite deferral was consistent with Senate history – they have not passed a Budget Resolution since 2009.

But last year the Senate not only failed to even propose the Budget that they are required by law to enact, they affirmatively rejected everyone else’s effort.  In a single day last May, the Senate:

  • Defeated the Ryan House budget by a vote of 40-57;
  • Defeated the President’s Budget 0-97;
  • Defeated a Pat Toomey (R-PA) Budget 42-55; and
  • Defeated a Rand Paul (R-KY) Budget 7-90.

The failure to produce a budget was followed by last summer’s debt limit debate – a contentious and seemingly endless debate which brought the United States to the brink of default and resulted in the downgrade of our nation’s credit rating.   After months of negotiations involving – at various points in time – Congressional leaders, the Secretary of the Treasury, the Vice President, and eventually the President, an agreement was reached on a multi-step and multi-part proposal to resolve the crisis.

The compromise provided for immediate spending cuts to match an immediate increase in the debt ceiling to avert default.  The legislation also created the Congressional Joint Select Committee on Deficit Reduction, immediately dubbed the  Super Committee, tasked with coming up with a proposal for $1.2 – 1.5 trillion in additional deficit reduction to accompany further increases in the debt ceiling. 

Creating a strong incentive for the Super Committee to reach agreement, the legislation mandated that there be across-the-board cuts in both domestic and defense spending – indiscriminate sequestration which no one wanted and which many argued would be critically damaging to our armed services – should the committee fail to reach an agreement.  But the policy differences among the Super Committee members were so fundamental – Republicans wanted spending cuts including reform of entitlement programs and firmly opposed using tax increases to achieve deficit reduction; Democrats opposed entitlement reform and demanded major and significant tax increases – that failure was almost a certain outcome. 

When Congress finally closed the door on the first session of the 112th Congress, passing an omnibus appropriations bill to fund the government through the September 30, 2012 end of the Fiscal Year, they once again kicked the unfinished business of fiscal policy to the next session of Congress.

A dιjΰ vu start to 2012:

The 2012 budget process is on track to be an exact repeat of last year’s.  The President submitted to Congress his Fiscal Year 2013 Budget in February as required – albeit again a bit late.  Republicans in Congress declared it dead on arrival; Democrats generally ignored it.  The House Budget Committee took up and passed the Budget proposed by Chairman Paul Ryan; and the full House passed it shortly thereafter. 

Senate Majority Leader Harry Reid (D-NV) has announced that the Senate will again not even consider a budget despite the statutory requirement that they do so.  Any votes taken in the Senate on a Budget Resolution will most likely be political and symbolic, not substantive – and at this writing it isn’t clear whether the Senate will even vote on a budget this year. 

Congress will move to the appropriations process without a budget, with the Senate using the terms of last fall’s agreement as their spending targets, but with little chance that they will actually pass any significant number of the required appropriations bills.  Spending for the year will likely again be resolved with an “omnibus appropriations” bill or a continuing resolution, enacted well after the October 1st beginning of the Fiscal Year. 

While this is the pattern that Congress has followed in recent years, there are some new factors in play this year.  Most significant, the 2011 Budget Control Act (BCA) – the debt limit deal – and the failure of the Super Committee to come up with a deficit reduction proposal put the task of deficit reduction back on the President and Congress.  The mandatory sequestration that is scheduled to take effect in 2013 has to be taken into consideration as the President and Congress plan their FY 2013 budgets.

Compounding the problem is the fact that a significant amount of Federal spending has been specifically exempted from the BCA’s sequester, making it even more difficult to make the necessary cuts in the remaining programs and particularly challenging to defense spending.   According to a House Democratic Budget Committee report from last December, deficit reduction measures would NOT include cuts to:  Pell grants, transportation trust funds, all programs administered by the Department of Veterans Affairs, Social Security, Medicaid, Supplemental Nutrition Assistance Program (formerly called food stamps), Supplemental Security Income, Temporary Assistance for Needy Families, Federal retirement and disability accounts, refundable tax credits, Federal employee pay rates and benefits, and “a variety of government insurance programs and activities funded from private donations or voluntary contributions.”   In addition, the cut cannot exceed 2 percent for most Medicare payments to providers, community and migrant health centers, or Indian health services and facilities.

Adding to the complexity, Congress will have to deal with a number of provisions of current law which are set to either expire or to take effect, which Congress has routinely either extended or blocked from taking effect and which, if Congress does not act, have serious fiscal and economic consequences.  Among them:

  • The “Doc Fix” dilemma:  Every year since 2002 existing law has mandated a significant reduction in the reimbursements paid to Medicare providers in an attempt to keep the growth in Medicare spending in line with the growth in Gross Domestic Product, and every year since 2002 Congress has passed a “doc fix” bill to prevent the mandated payment cut from taking effect.  The “cost” of the “doc fix” is $300 billion of additional federal spending over the next ten years. 
  • The tax rate dilemma:  Under current law, all of the tax rate reductions enacted in 2001 and 2003 will expire at the end of 2012.  Under the “static scoring” used by government estimators, which assumes that tax policies do not impact economic behavior – extending the tax rate reductions and AMT “patch” would “cost” the Federal Treasury more than $4 trillion.

As an aside, it is worth mentioning that the entire hyperbolic debate over the deficit reduction effort and the Budget Control Act may be “full of sound and fury, signifying nothing” as MacBeth spoke; or sticking with Shakespeare, “Much Ado About Nothing.”  According to Congressional Budget Office (CBO) estimates, over the ten year span covered by the BCA, Federal Gross Domestic Product will be about $195 trillion, and total Federal Spending about $44 trillion.  The proposed $1.2 trillion in deficit reduction amounts to about six tenths of one percent of that GDP, and under 3% of total Federal spending.

Deficit reduction in excess of a trillion dollars would obviously be welcome policy, but a lot more needs to be done to get our fiscal house in order.