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Budget, Spending, Fiscal Crisis

- September 2012

Budget, spending, the debt limit and the fiscal cliff:

There has been so much written and said about the fiscal crisis we face and the inability of Congress and the White House to address the crisis that there is almost nothing new to be written – and describing Washington’s failure to act as “kicking the can down the road” is a truly over-used cliché.

Just like last year, the President submitted a Budget to Congress in February that was completely ignored by Republicans and Democrats alike. Just like last year, the House of Representatives complied with its statutory obligation and passed the Budget written by Budget Committee Chairman and now GOP Vice Presidential nominee Paul Ryan. And just like last year, the Senate failed to meet its obligation and did not even consider a Budget resolution.

Last year Senate Majority Leader Harry Reid (D-NV) said “[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.” This year he argued that the Senate did not need to meet its statutory obligation because the Budget Control Act enacted in 2011 was tantamount to a Congressional Budget. Whatever the excuse, the Senate has not passed a Budget since 2009.

Just like last year, the House of Representatives has passed a number of the individual appropriations bills they are required to enact; just like last year the Senate has passed none and is expected to pass none.

Unlike last year, however, Congress has not waited until after the September 30th end of the fiscal year to pass the “Continuing Resolution” (CR) to keep government funded and open. This year they acknowledged in advance that they could not pass the required appropriations bills and, wishing to avoid a politically-charged government shut-down only weeks before the elections, reached agreement in July on a CR that will fund the government through March 31, 2013.

While agreement on a funding bill removed one of the most contentious issues from the agenda, it did not put Congress on a path to a cooperative or uneventful short Congressional session in September and lame-duck session after the November elections.

Most significant, the 2011 Budget Control Act (BCA) – the debt limit extension and deficit reduction legislation enacted in August, 2011 – and the failure of the Congressional Super Committee to come up with a deficit reduction proposal late last year set in motion the enactment of a mandatory spending sequestration to address the federal deficit.

The mandatory sequester calls for across-the-board spending cuts of almost $110 billion in 2013 – half from defense even though defense spending is less than 20% of the budget. Many in Congress, and President Obama’s Defense Secretary, have warned that the drastic defense cuts will impact our military readiness; Defense Secretary Panetta said that “[t]he impacts of these cuts would be devastating for the department.”

Also, the threatened cut in defense spending is already causing economic problems as defense contractors react to the scheduled cuts. Federal law, the Worker Adjustment and Retraining Notification Act (WARN), requires that employers provide notification to their workers 60 days in advance of possible plant closings or mass layoffs; under the WARN Act, defense contractors facing loss of federal contract revenue would be required to notify their workforces of potential layoffs 60 days before the January sequestration takes effect – or right before the election.

Despite the clear language of the law, in late July the Department of Labor issued guidance to defense contractors advising them to ignore the WARN Act. The guidance said that because Congress MIGHT enact legislation to avoid the sequester, “ . . . WARN Act notice to employees of Federal contractors, including in the defense industry, is not required 60 days in advance of January 2, 2013, and would be inappropriate, given the lack of certainty about how the budget cuts will be implemented and the possibility that the sequester will be avoided before January.”

The Labor Department, however, does not enforce the WARN Act, and its “guidance” would provide contractors no protection from lawsuits that affected workers would almost certainly file should they not receive advance notification of possible layoffs.

Contractors, therefore, may well ignore the Labor Department and comply with the law. Lockheed Martin started the process in the summer when they said they were “already taking action by not hiring and training new workers, not investing in new plants and equipment and . . . in new R&D” and that they are likely to notify the 'vast majority' of their 123,000 workers that they're at risk of being laid off. Other defense contractors are expected to take similar actions.

The other half of the sequestration must come from domestic spending, but a significant amount of Federal spending was specifically exempted from the BCA’s sequester, making it even more difficult to make the necessary cuts in the remaining programs. 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 also have to deal this fall 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. What Congress does to tackle these issues and avoid the “fiscal cliff” remains to be seen, and their few remaining weeks in session this year will be as challenging as any in recent memory.