The release this week of President Obama’s fiscal 2012 budget and the beginning of debate on the House Republican plan for funding the government through October rang the opening bell: Despite some conciliatory notes, we’re in for what’s likely to become Washington’s most heated fiscal confrontation since Bill Clinton and Newt Gingrich slugged it out through two government shutdowns in the winter of 1995-96.
This fight undoubtedly will be revealing. But probably not in the way that either party intends. In fact, the collision is likely to show that each party needs the other to forge a program that can tame the deficit.
The initial GOP thrust captures the problem. House Republicans have opened the fight primarily on the terrain of domestic discretionary spending—the programs that Washington authorizes each year. The bill they are debating would reduce fiscal 2011 appropriations for domestic and defense programs by $100 billion from what President Obama proposed. Obama has countered with a five-year freeze for discretionary spending at 2011 levels.
These programs are the guts of the federal government’s daily operations—and, as such, they are a tempting target for conservatives who long to retrench Washington’s role. The GOP’s proposals to roll back, or eliminate, programs that would seed alternative energy, promote national service, protect the environment, and support education have already ignited furious confrontations with Democrats. What these proposals won’t do is make a big dent in the deficit.
All domestic discretionary spending—everything Washington does apart from defense, interest payments, and entitlements such as Social Security and Medicare—now constitutes only one-seventh of the budget, about $500 billion. The Congressional Budget Office projects that this year’s federal deficit will reach $1.5 trillion, a gap that dwarfs the Republicans’ discretionary cuts. That’s why former Sen. Alan Simpson, R-Wyo., the cochairman of Obama’s well-regarded deficit-reduction commission, described the proposals from Obama and congressional Republicans to squeeze domestic discretionary spending as “peanuts” relative to the overall challenge.
Discretionary spending can contribute to deficit reduction, but it can’t bear its central load. The bigger money is found elsewhere. One place is revenue. Over the past 40 years, federal revenues have, on average, equaled 18 percent of the nation’s economic output. But the slow economy and the tax cuts approved under President George W. Bush have driven federal revenues since 2009 down to less than 15 percent of the economy. That is the lowest level since 1950—before Medicare or Medicaid, the environmental laws, or even the interstate highway system.
The lost revenue from the Bush tax cuts alone mocks the effort to reduce the deficit by slashing discretionary spending. When the conservative House Republican Study Committee recently issued its blueprint for shrinking the federal government, it immediately occupied the far-right boundary of the debate over Washington’s yawning budget deficits. The panel proposed to reduce federal spending by nearly $2.5 trillion over the next decade, which would amount to a 25 percent reduction in all domestic discretionary programs.
Yet even if Washington somehow adopted all of those cuts, after all those programs had been trimmed and truncated and terminated, the effort would save the Treasury only as much as the $2.5 trillion it will cost to extend the Bush tax cuts over that same period.
Other targets demand attention, too. Spending on defense now exceeds all domestic discretionary spending. Greater still is the bill for entitlements, which account for 55 percent of federal spending, with the aging population and rising medical costs propelling that growth. Obama’s health care reform law takes some important steps to break that cost spiral, but far more must be done.
Only a package that combines all of these elements—taxes and outlays, defense and domestic spending, discretionary programs and entitlements—can control the deficit. The problem’s magnitude “forces you to do some of everything,” says Urban Institute President Robert Reischauer, a former CBO director. Yet neither party on its own can offer such a comprehensive program for fear of alienating its core supporters. Democrats can accept biting entitlement reforms (such as greater means-testing or linking the retirement age to rising longevity) only as the price of persuading Republicans to accept tax increases. For the GOP, the reverse is true.
In all likelihood, the two sides will spend less time before the next election seriously negotiating such trade-offs than highlighting the chasm between their priorities. Each hopes that voters in 2012 will strengthen its hand to impose its preferred answers. That calculation makes some sense: The relative leverage of the two parties will powerfully shape any eventual deficit deal. What’s illogical is for either side to imagine that it can effectively confront the problem solely with the solutions its coalition favors.
Even a comprehensive deficit-reduction package does not guarantee success: Some congressional Democrats may never accept entitlement reductions, and a daunting number of Republicans will reject any tax increase. But any package acceptable to just one party guarantees failure. The budget debate will become serious at the moment Washington acknowledges that truth. And that day, most likely, won’t arrive until 2013.
This article appears in the February 19, 2011 edition of National Journal Magazine.