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Budget, Spending, Fiscal Crisis

- January 2013

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

The staff report written last year on this subject began with the following:

“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.”

Sadly, that opening sentence is just as appropriate today as it was a year ago. And joining “kick the can down the road” last year as an over-used phrase was “fiscal cliff” – a term used for decades but inserted into our current dialogue by Federal Reserve Chairman Ben Bernanke last February to describe the tax hikes and spending cuts that would have been implemented in January, 2013 had Congress and the President failed to act to avert them.

Unfortunately, the actions taken by Congress in its rare New Year’s Eve and New Year’s Day sessions to avert that fiscal cliff will not take cliffs and cans out of our everyday vocabulary. As CNN accurately reported after Congress passed the American Taxpayer Relief Act of 2012 (ATRA): “The deal kicks the can, and three more fiscal cliffs are looming.”

More important even than what was enacted into law on January 1st is the unfinished business; specifically, the ATRA did absolutely nothing to address the out-of-control spending responsible for creating the fiscal crisis. The President claimed for months that he would insist on a “balanced” approach to addressing the spiraling debt; that spending cuts would accompany the tax increases he demanded Congress enact. We were originally promised $3 of spending cuts for every $1 in tax increases. Then the President’s ratio slid to $2-to-$1. Then it got worse.

Despite his call for “balance,” the President neither proposed nor agreed to accept any meaningful spending cuts. In fact, according to the Congressional Budget Office, the bill he signed into law raised more than $10 in new taxes for every dollar of spending cuts. The legislation delayed for two months the $110 billion in automatic spending cuts that were scheduled to take effect in January, and the only spending cuts in the bill were an insignificant $50 billion to offset both that delay and the so-called “doc fix” to prevent a reduction in Medicare reimbursement payments to health care providers.

The legislation that prevented our dive off the fiscal cliff in fact provided no soft landing. The legislation did not cut spending, raised about $600 billion in new revenue, and extended the patchwork quilt of dozens of expired and expiring tax code provisions that complicate our code. And it set up new fiscal cliffs to face in the next few months.

First, the debt limit: The Treasury Secretary announced in late December that the U.S. government had reached the statutory limit on the amount of debt it may incur, but that by moving some money around, he could postpone for a couple months the date at which the government must stop spending money. This sets in motion an inevitable conflict between Congressional Republicans, who are demanding that any increase in the debt limit be accompanied by real and meaningful spending cuts, and the President, who has announced that he will refuse to negotiate with Congress over extending the debt limit.

Republicans believe that, unlike the politics of the fiscal cliff debate, they have some political leverage in the debt limit debate. In the last battle their choice was between accepting tax increases only on upper income earners, or allowing an automatic tax increase on all earners – a $4 TRILLION revenue windfall for the Administration. Either outcome was a win for the President.

The debt limit, on the other hand, is not a win-win proposition for the White House. If Congress and the President do not reach an agreement on extending the debt limit, the result could be default on our debt or a downgrading of our credit rating – neither outcome a good result for the Congress but hardly one any president would want on his watch, either. And this issue is not about taxes, where the President’s simplistic “tax the rich” had a receptive audience. In the debt limit debate, the issue is whether or not we should cut government spending – an issue on which most Americans side with Republicans in Congress.

The President will have the bully pulpit of the White House in the debate, and the ability to speak with one voice on the issue, as every president does. But he will not have the easy sound bite of “tax the rich” and will have to defend more spending. Rather unbelievably, the President has declared that Congress should approve a debt limit extension with no spending cuts because “Congress should pay the tab for a bill they've already racked up.” The President has proposed budgets with trillion dollar deficits each year, and our public debt has increased by 79 percent since he took office, so it remains to be seen if his attempt to blame Republicans for increased spending and debt will succeed.

The Republicans will again have the cacophony of more than 250 voices from the Hill, it will be very difficult for them to discipline those voices into a single, consistent message, and they have to fight to be heard over the single and focused voice of the President. They also have to sell their message to a public which shares their belief that federal spending should be restrained but has a very negative view of Congress as the messenger.

It remains to be seen who wins, but the President’s repeated – and completely outrageous – statement that he refuses to discuss the matter with the Republican Majority in the House certainly creates another cliff.

Second, the postponed sequester: The deal reached on New Year’s Day postponed the sequester for two months, so unless further delays are enacted, those postponed spending cuts will occur in March. The cuts are evenly divided between domestic and defense programs (but do not impact Medicare, Medicaid or Social Security – the so-called entitlement programs). Pro-defense Republicans and the President’s (current) Secretary of Defense believe that the defense cuts will impair our military readiness; President Obama and Congressional Democrats argue that the sequester would hurt domestic programs they support. Fiscal hawks who insist that government spending be restrained believe the sequester should be allowed to take effect as the only sure way to get spending cuts. It is unclear what path leads to a reconciliation of these divergent positions – cliff number two.

Third, the Continuing Resolution: As the last fiscal year came to a close on September 30, 2012, Congress and the President had yet again failed to agree on spending bills for Fiscal Year 2013. In fact, none of the 12 appropriations bills were signed into law last year. In order to prevent a government shutdown, which would have occurred had the new Fiscal Year begun on October 1st with no spending bills enacted, Congress passed and the President signed into law a “Continuing Resolution” – a law simply authorizing the government to continue spending at previously-authorized spending levels. That CR runs through March 31st, 2013, half-way through Fiscal Year 2013. So on March 31st of this year, Congress and the President have to again enact a spending bill – most likely another CR – funding the government through September 30th, 2013. The CR enacted in late September last year was passed with no controversy, but with the heightened focus on federal spending in the aftermath of the just-enacted tax bill, it is far from certain that another CR will be so easily enacted. Cliff number three.

Looking beyond the cliffs:

In addition to those specific looming cliffs, the President will again be required to submit his Fiscal Year 2014 budget to Congress in early February, and the Congress is required by statute to pass a Congressional Budget Resolution setting spending and revenue targets for the next fiscal year (the president does not sign the annual Congressional Budget Resolution). The House has passed its Budget Resolution each year, but the Senate has failed for several years to even consider a budget resolution, completely abdicating their statutory responsibility to do so. It’s hard to imagine in this polarized political atmosphere that they will rectify that failure this year.

Whether or not a Budget Resolution is considered in the Senate, Congressional Republicans have made it very clear that now that the fiscal cliff tax bill has been signed into law, the second phase of the deliberations on further deficit reduction will be a fight over spending, including dealing with the entitlement programs which, left untouched, will bankrupt our government.

Setting up that fight, the President has announced that not only will he not push for spending cuts, he will call for more government “investments” – more spending. Even more remarkably, the president announced that he will insist on more tax increases on upper income Americans as part of the next round of deficit reduction legislation.

Republican reaction to the president’s call for more taxes hikes was absolutely firm: the fiscal cliff bill was the tax bill, and the next step is spending reduction. No more taxes, and no new spending. Even some of the media most often in the president’s camp politically have taken note of the Democrat refusal to tackle spending.

The Washington Post editorialized on December 14th:

“Democrats like to say they are for “balance” in the fiscal debate and that Republicans favor spending cuts. That argument is increasingly difficult to credit . . .Since the election last month, a few modest proposals have been floated to slow the growth in entitlement spending. None of these would fix the problem, but they would at least acknowledge that a problem exists. One by one, the ostensible advocates of balance have shot them down, portraying each in turn as a mortal threat to the poor or the aged. . . [T]here’s no way to fix America’s problem without doing something on entitlements. If the Democrats — and Mr. Obama, in particular — don’t get more seriously into that discussion, they have no standing to complain about the Republicans’ lack of balance.”

Whatever the outcome of coming deficit reduction negotiations, the fact that automatic tax increases will not occur if the President and Congress do not reach agreement puts the Congressional Republicans in a better position to deny the president’s request for more tax and spend policies. Whether they can in turn persuade the President to work with them to address our spending crisis and entitlement reform remains to be seen. . . . but there’s certainly no indication from the White House at this point to suggest that will happen.

The business community has historically taken an active role in the public policy debate on tax policy, and we expect to be actively involved in the coming consideration of tax reform and the President’s threat of yet more tax increases. But the business community as a whole has not been as vocal or involved in the debate over the size and scope of government and the need for spending cuts and entitlement reform. This is a debate in which we need to aggressively and actively participate in the months ahead.