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Budget, Spending, Fiscal Crisis

- October 2013

The U.S. fiscal crisis:

The U.S. Federal deficit this year is the lowest since President Obama’s election; under $650 billion and under a trillion dollars for the first time since 2008. But even if one could take comfort from a $650 billion annual deficit, our fiscal situation remains grim. The Congressional Budget Office, in releasing the lower deficit estimate, warned that our “fundamental budgetary challenge has hardly been addressed.”

Federal debt, now close to $17 trillion, remains at 73 percent of GDP, 30 points higher than before the market collapse in 2008. And we are not headed the right direction; debt is estimated to rise again to more than 90 percent of GDP.

While there are increasing calls for reform of the insolvent entitlement programs that are the drivers of our debt and fiscal crisis, the Administration and the Democrat leadership either adamantly oppose any meaningful structural reforms or give lip service to the need for reform by offering only tinkering that would not address the structural flaws.

Compounding the problem, multiple recent studies reveal an alarming increase in the number of Americans receiving government payments: the total number receiving payments rose from fewer than 94 million in 2000 to 128 million in 2011. 55 percent of Americans have been on at least one ‘safety net” program; if you add veterans’ benefits and college loans the number climbs to 70 percent. As many as 49 percent of American households receive some type of government payment; more than 35 percent receive payments from means-tested government assistance programs. Almost 48 million Americans, more than 23 million households, receive food stamps – that’s 15% of the entire population and more households that the Census Bureau counts in the entire northeastern United States.

As the entitlements grow, so does the percentage of Americans who are retired and drawing benefits. According to CBO, soon one-third of Americans will be retired, while the number of workers whose taxes fund retirement programs continues to shrink.

And as the number of Americans receiving government payments grows, the number paying Federal income taxes falls. Today almost a full 50 percent of tax filers pay no Federal income tax, and some studies claim that more than 40 percent make a net profit from government programs and payments.

It is that fiscal crisis that Congress and the President must address.

A fiscal recap – what Washington has done this year . . .

Tending to the country’s finances is the primary responsibility of Congress. They are required by statute to pass individual appropriations bills and adopt a Budget Resolution each year, within specific statutory time frames. It is a statutory obligation they consistently fail to meet. The last time Congress enacted all of the individual appropriations bills before the end of the fiscal year was 1994, almost 20 years ago. Congress last met its obligation to pass a Budget Resolution in 2009 . . . but they haven’t passed one by the statutory deadline since 1994.

This year Congress actually began its work discharging a fiscal duty (actually completely the job left undone in 2012): they enacted the so-called “fiscal cliff” legislation. The legislation averted a $4 trillion tax hike that would have occurred automatically with the expiration of all of the 2001 and 2003 tax cuts, and made more than 80% of those tax cuts permanent, while allowing the tax rate to rise on incomes over $400,000 ($450,000 married).

In late January, both houses of Congress adopted legislation to raise the Federal debt ceiling, with little controversy, but with a unique twist: the “No Budget, No Pay Act of 2013” included a provision that if either house of Congress failed to pass their required Budget resolution by April 15th, the salaries of those members of Congress would be withheld until either they passed a Budget or the end of the 113th Congress, whichever came first.

In March, Congress finally allowed mandatory spending cuts enacted in the 2011 Budget Control Act – the sequester – to take effect, despite calls by the Administration and others to rescind those cuts.

In April, the Senate and House each passed a Fiscal Year 2014 Budget. It was the first time in four years that the Senate had even considered a Budget resolution; the “No Budget, No Pay Act of 2013” no doubt providing a strong incentive for them to break that pattern of inaction.

Although each house of Congress passed a budget resolution by April 15th, the two fiscal blueprints were radically different, and there was no serious effort to take the two budget proposals into a “conference committee” to negotiate a final budget on which both houses would agree.

The House budget would reduce the federal deficit by $4.6 trillion over ten years, produce a balanced budget in 10 years and eventually return to budget surpluses, and limit the growth in Federal spending to 3.4 percent. It also provided a blueprint for revenue-neutral comprehensive tax reform, with details to be worked out by the Ways and Means Committee, and called for significant and structural entitlement reform, reducing the federal debt to 56 percent of GDP.

The Senate budget proposed to raise taxes by $1.5 trillion (on top of the $600 billion enacted only 3 months earlier), proposed no entitlement reform, and allowed spending to grow at more than 5 percent. In fact, the Senate budget called for $5.27 trillion in Federal spending in 2023, an amount Forbes described as “the highest government spending in one year by any government in world history.” In the 114-page Budget document the word “wasteful” is used 16 times – 15 of them used to describe wasted opportunities to increase taxes.

And what Washington has NOT done:

The radically different fiscal policies espoused in the Senate and House budget resolutions set the stage for the stalemate that paralyzed Washington as the September 30th end of the fiscal year approached. As usual, not a single appropriations bill had been passed, much less all 12 of them, so Congress was again faced with having to pass a “continuing resolution” (CR) to fund the government.

Adding to fundamental disagreements on government spending levels between Republicans and Democrats, conservative activists in the GOP conferences in both the House and the Senate and their allies across the country demanded that the Affordable Care Act – Obamacare – be defunded in the CR. In fact, much of Obamacare was funded outside the regular appropriations process and would not be impacted by either the CR or a government shutdown, but that fact did not deter those demanding the unattainable goal of defunding the law.

Adding to the Quixotic nature of the defund quest, Senate Democrats made it clear that they would not pass any legislation that defunded the health care law, and the President was even more adamant that he would not sign legislation repealing his signature legislative accomplishment should it somehow reach his desk.

Despite the inescapable fact that holding the CR hostage to defunding Obamacare could not succeed, House and Senate conservatives, led by Senator Ted Cruz (R-TX), rejected any compromise proposals. The House sent to the Senate a CR that had no chance of passing. As threatened, the Senate rejected the House defunding CR, and on October 1st the new fiscal year started with no government funding appropriated and much of the government ground to a halt. Ironically, the Obamacare exchanges opened the same day the government shut down, an irony apparently lost on those claiming that a government shutdown would defund Obamacare.

Once the shutdown was under way, the Obama Administration made every effort to make the aftermath as painful as possible (as he did after the sequester – you may recall the thousands of delayed or cancelled airline flights). Federal authorities spent time and taxpayer dollars – even the very night the shutdown occurred – hauling barricades to block access to the open air World War II museum and Lincoln Memorial, the scenic overlooks on the nearby George Washington Memorial Parkway, and parks, trails and bike paths across the country. They attempted to close the Mt. Vernon historical site, failed because the site is completely privately funded, then closed the parking lot to block access to the buildings. A jogger in the Valley Forge National Park returned to his car after his run to find a police car with lights flashing waiting beside his car – the only one in the parking lot – and was given a $100.00 fine. He is contesting the charge.

While the CR and the shutdown were the main focus at first, the far more serious challenge facing the Administration and Congress was the looming expiration of the statutory limit on the amount of debt the US can incur. Raising the debt limit is always more difficult than passing appropriations bills: the White House traditionally asks Congress to raise the ceiling and the opposition in Congress traditionally votes against doing so. The Congress has never failed to lift the ceiling and risk U.S. default, but it is rarely an easy accomplishment.

As an interesting sidebar, then-Senator Obama opposed raising the debt ceiling during the Bush Administration and his floor speech in opposition to the White House is often quoted by Republicans today. A few notable snippets from then-Senator Obama’s speech: “The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. . . . Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is "trillion" with a "T." The U.S. debt today, under President Obama’s leadership, is almost $17 trillion – with a “T.”

As the shutdown continued into October, and the estimated October 17th debt ceiling deadline approached, Washington seemed increasingly unable to function. The President declared his absolute unwillingness to negotiate at all with Congress until Congress passed a clean CR, reopened government, and increased the debt limit; only then would he even agree to talk to them. House Speaker John Boehner (R-OH) ridiculed the President’s demand, responding that one side demanding unilateral surrender from the other side before the first conversation could take place was not the way serious negotiations are conducted.

The President condemned Congress for not acting promptly on a “clean” debt limit, and claimed that never in the history of the country had any Congress added non-budget items to a debt limit measure. The liberal Washington Post’s fact checker promptly awarded the President with “four Pinocchio’s for the false claim: the debt limit legislation is frequently used as a vehicle for debate on extraneous matters, and in fact 25 non-germane amendments were attached to debt limit bills between 1978 and 1987, including amendments dealing with school prayer, forced busing and a nuclear freeze.

As the stalemate dragged on, the rhetoric in Washington grew increasingly heated, and the public hostility to Washington grew as well. Republicans shouldered the overwhelming share of the blame for the stalemate and shutdown, but Democrats and the President saw their approval ratings tumble to new lows as well.

In that context, going into the final weekend before the debt ceiling deadline of October 17th, opening conversations finally took place. Serious negotiations began in the Senate between Democrat Leader Harry Reid (D-NV) and Republican leader Mitch McConnell (R-KY). Senate Democrats attempted to push their GOP counterparts into accepting increased Federal spending through adjustments to the statutory sequester cuts; Republicans firmly rejected that demand. GOP attempts to include serious modifications to Obamacare were similarly rejected by the Democrats. The White House convened a few meetings with Leaders and members of Congress, but declined to exert any leadership in helping to shape a final compromise.

House GOP leaders made one final attempt to get the GOP caucus to agree on a plan and, in a rare demonstration of cooperation, the Senate leaders suspended their negotiations to allow the House Republicans time to coalesce around something. The House GOP caucus could not reach agreement on anything, Senate negotiations resumed, and a final compromise bill was finally passed by both houses of Congress and signed by the President – only hours before midnight on October 16th.

Unfortunately, while the CR deal ended the shutdown, its enactment was only the beginning of the next phase of the ongoing partisan stalemate. The “defund Obamacare” forces in the Senate GOP caucus mustered only 18 votes in opposition to the compromise, but a significant majority of the House Republicans voted against it. Moreover, the tired cliché about “kicking the can down the road” reappeared in virtually every news story: the compromise bill funds the government only into mid-January, extends the debt limit only into mid-February, and instructs the House and Senate to begin the process of “conferencing” their widely disparate budget resolutions and to report back an agreement by December 13th.

As government reopened on October 17th, discussions were already beginning on budget conference issues. It remains to be seen if the very badly divided partisans – and their supporters across the country – can reach an agreement in December and avoid another cliff-hanger as the funding runs out and the debt limit approaches early next year.