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Magazine / THE INHERITANCE: BUDGET

The Next Fiscal Showdowns That Could Ruin Us

Both parties fantasize about a grand bargain. In the real world, they’ll be lucky to avoid a fiscal catastrophe.

(iStock)

January 17, 2013

Two weeks before his reelection last year, President Obama set a goal of achieving a grand bargain on the budget early in his second term. “We’re going to be in a position where, I believe, in the first six months we are going to solve that piece of business,” he told The Des Moines Register. Marginal tax-rate hikes, entitlement cuts, and tax reform would set the country on a healthier path. They could also end the interminable fiscal squabbles and free up some political oxygen for priorities such as immigration reform.

It was a nice idea. Then the fiscal-cliff brawl of late 2012 brought everyone back to earth. After the collapse of talks with House Speaker John Boehner over a package that could have raised $1.2 trillion or more in tax revenue and curbed entitlement spending, Obama had to settle for just $600 billion in revenue and a series of winter showdowns over spending.

Somehow, the president is still touting his hope for a grand bargain. But even restoring stability will require surmounting immense hurdles. The obstacles range from a broken federal budget process (which has made it harder for the sides to negotiate), to the fallout from a fiscal-cliff deal that limits Democratic options on taxes, to the steadily rising demographic pressures that could cause entitlements such as Medicare to crowd out other budget programs. For those committed to reforming America’s fiscal system—let alone devising a grand bargain—the next two years will be exceedingly difficult. Here’s why.

 

A BROKEN PROCESS

If the budget process worked the way it’s supposed to, Obama and his aides would have spent much of December putting the finishing touches on a fiscal 2014 budget to be sent to Congress in early February. Then, as spelled out in the Congressional Budget Act of 1974, the House and Senate would settle on a framework—or “resolution”—for spending and taxes, paving the way for Congress to take up the 13 annual appropriations bills due on Oct. 1.

Instead, the White House spent last month frantically negotiating with congressional leaders to avert a cataclysm. The two sides scraped through by deferring tough decisions and setting up more showdowns. Now, when Congress should be preparing its budget resolution and discussing how to fund the government, it will be debating basic questions that should have been resolved years ago, starting with: What is the role of government?

This was not a fluke. The 2012 fiscal-cliff clash was the culmination of a years-long decline in stable budget-building; the process has simply reached a new low. The House and Senate haven’t agreed on a full budget resolution since 2009, Obama’s first year in office, when Democrats controlled both chambers.

Months of deliberations on tax and spending policies have been replaced by eleventh-hour deals like the cliff, stopgap funding bills, and omnibus packages passed under the threat of a government shutdown. Congress has adopted at least one budget resolution in 31 of the 38 years since 1975, when the modern congressional budget process began, according to the Congressional Research Service. The seven failures have all occurred since 1998. And the House and Senate haven’t jointly passed a full year’s blueprint for taxes and spending since 2009. (Even when Congress has passed a budget, it never has been good at sticking to a timetable. It has met its spring deadline for the resolution only six times since 1975, most recently in 2003.) A return to regular order is unlikely anytime soon. The hyper-partisanship at the root of the disarray shows no sign of abating.

Everyone seems to agree that this is “no way to run government,” as Senate Minority Leader Mitch McConnell, R-Ky., put it in an ABC interview this month. Rep. Chris Van Hollen of Maryland, the ranking Democrat on the House Budget Committee, tells National Journal, “If we could have a common budget, come out of a budget conference process, it would mean we’ve resolved a framework for a lot of these issues.” But that hasn’t worked. Now, when Obama unveils his spending blueprint for 2014, it will serve more as a negotiating position for the coming standoffs than as a framework for appropriations. “The budget will represent the way the president would write the budget if he got to write it,” Van Hollen says.

The GOP will try something similar, sources say. At an issues retreat concluding Friday in Williamsburg, Va., Boehner was to discuss with rank-and-file House Republicans how they should advance another budget this spring. Republicans will use that to pressure Senate Democrats to pass their own spending plan. Budget proposals are now used as political messaging tools, which of course hinders the process of actually funding the government, says Gordon Gray, a budget expert at the American Action Forum and a former aide to Sen. Rob Portman, R-Ohio. “If they’d agree on actual budget resolutions in both chambers, they’d be setting a lot of the conditions for getting these issues resolved well in advance of their expirations,” he says.

Republicans blame Senate Democrats for abandoning the budget process altogether. In 2010, the Democratic-controlled House and Senate did not adopt a fiscal 2011 budget resolution. And Senate Democrats have not done so since, arguing that the Budget Control Act of 2011, which resolved the debt-ceiling standoff, sets discretionary spending levels for several years. “The Budget Control Act is a budget, for all intents and purposes—which is exactly why it sets the appropriations levels and gives members the tools (budget points of order) to enforce them,” argues one Senate Democratic aide who asked to speak anonymously on a sensitive subject. Republicans counter that annual budget legislation enables the public to at least see the two parties’ priorities and visions for governing.

On the other side, Jim Manley, a former aide to Senate Majority Leader Harry Reid, D-Nev., says that Republicans’ efforts to “walk back” from agreements—such as the Budget Control Act of 2011—have thrown a wrench into the process. The 2013 fiscal blueprint offered by House Budget Committee Chairman Paul Ryan, R-Wis., which the House passed last March, set domestic discretionary spending at nearly $20 billion below the $1.047 trillion agreed to in the 2011 deal, Manley notes. “If House Republicans can’t even stick to agreements they’ve previously made, how can you get anything done in this day and age?”

THE MINI-CLIFFS

To avert the fiscal cliff, both sides made (very) modest compromises. Obama settled for marginal tax-rate hikes on only those families that earn more than $450,000 per year, which will bring in just $600 billion over a decade—half of the revenue he wanted. And now that those rates are permanent, he won’t have an influx of cash to shore up troubled entitlement programs such as Social Security. “I don’t see how what just happened makes a grand bargain any easier,” says William Galston, a scholar at the Brookings Institution and a former aide to President Clinton. “Unfortunately, I can see a number of respects in which it will make it more difficult.”

The only other source of revenue is broad-based tax reform, but the parties are unlikely to find common cause there. Democrats envision streamlining the tax code to raise more money for federal coffers by removing special breaks, such as the “carried interest” provision that benefits senior managers of private-equity firms. Republicans want a revenue-neutral overhaul of the tax code in which they put federal income gained by nixing tax credits—say, for NASCAR race tracks—toward lowering corporate rates.

But before lawmakers can even contemplate broad-based tax reform, they’ll have to get through a spate of mini-showdowns. Of the three budget confrontations looming in the coming weeks, the fight over the debt limit poses the biggest threat to the economy. Although the country hit the legal borrowing limit on Dec. 31, the Treasury Department can pay the government’s bills for several more weeks with accounting gimmickry. Those tricks won’t last much past mid-February, and they’ll certainly be used up by March 1. If Washington hasn’t raised the debt limit by then, a default could lead to a downgrade of the country’s credit rating and throw financial markets into chaos.

Raising it, however, will be no simple matter. Republicans want to use the threat of default as leverage to force spending cuts. “A temporary disruption because we have to furlough the workers at the Department of Education or close down some national parks or not cut the grass on the Mall—that’s not optimal; that’s disruptive. But it’s a hell of a lot better than the path that we’re on,” Sen. Pat Toomey, R-Pa., told MSNBC earlier this month. “We absolutely have to have this fight over the debt limit,” he said. Meanwhile, by promising not to negotiate over the limit, Obama is taking a tough stance; he says the GOP is putting the full faith and credit of the United States on the line.

At the same time lawmakers are haggling over the debt ceiling, the deferred $85 billion sequester is set to kick in on March 1—unless Congress delays it yet again. Many lawmakers in both parties dislike the sequester, which divides the cuts evenly between defense and domestic discretionary programs. But keeping the threat alive may represent the GOP’s best hope of further fiscal austerity, especially if Republicans can’t get Obama to trade a debt-ceiling hike for cuts.

Finally, a third budget battle is approaching over the need for yet another stopgap measure to fund the government. In September, Congress passed a six-month continuing resolution for all fiscal 2013 appropriations bills, putting off final funding decisions for the full fiscal year. If Congress fails to pass the legislation by March 27, agencies will shut down. Republicans are likeliest to cave here: They still remember the two shutdowns of the 1990s, for which voters blamed Speaker Newt Gingrich, not President Clinton. Tellingly, the latest short-term funding measure passed Congress in September with relatively little drama.

Nevertheless, some Republicans seem prepared for a shutdown. Writing this week in Human Events (headline: “Picking Fights Republicans Can Win”), Gingrich plays the strategist. He counsels that while GOP lawmakers shouldn’t draw a line in the sand over the debt ceiling—they’d ultimately have to capitulate—they could stand pat on the sequester and a continuing resolution. By “threatening to selectively close, eliminate, or shrink various parts of government,” Republicans could get the cuts they want, he writes.

A TIDE OF RED INK

Without action to rein in annual deficits, the federal debt will continue to climb as aging baby boomers drive up safety-net costs. Medicare, Medicaid, and Social Security eat up about 10 percent of gross national product. If something is not done to slow their explosive growth, they will surge to 16 percent of GDP by 2037, according to the Congressional Budget Office. The Treasury would obviously need much more tax revenue to pay for the programs. And funding them would crowd out other important needs such as roads, education, and defense.

At that point, the federal debt burden could get out of control quickly. The debt-to-GDP ratio is on track to hit 77 percent in 2013, according to estimates from the White House Office of Management and Budget. That’s the highest since the aftermath of World War II. It’s also nearly double the 40 percent ratio of 2008. Trouble could begin brewing if the ratio surges closer to a danger zone of 90 percent: Financial markets might suddenly become queasy about the government’s ability to pay its bills. This frightening possibility gives Obama at least some incentive to seek a grand-bargain-style deal this spring, because an agreement like that could head off a potential panic.

If sharply divided members of Congress can wade their way through the mini-cliffs without triggering a debt default, a government shutdown, or a downgrade of the country’s credit rating, they could still possibly come to terms. They might even inch their way toward the $4 trillion deficit-reduction plan drafted in 2010 by former White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, R-Wyo. Some budget experts say broad tax reform would fit into this rubric.

And even without a giant agreement, lawmakers could take small but significant steps. “A grand bargain is probably the wrong term,” says Judd Gregg, the former GOP senator from New Hampshire and a longtime budget hawk. “It’s going to be done in chunks.” He notes that the 2011 budget has already set curbs on discretionary spending. “There’s still the opportunity and likelihood that you’re going to get major tax reform to replace the agreement on revenues that was reached just now,” Gregg says, although Galston and many other experts are more guarded.

The main incentive is the rising tide of red ink, which GOP lawmakers say they will cite in the upcoming budget showdowns. “We all know that we don’t get out of this in one year, but debt-to-GDP is too high,” says Rep. Austin Scott, R-Ga., the House GOP freshman class president in the previous Congress. There will be “serious discussion over the fiscal realities” at the Williamsburg retreat, he says.

Obama is attentive to the problem, but he and other Democrats want to make sure the burdens of austerity fall on a better economy, not a fragile recovery. “We still need to do more to put Americans back to work while also putting this country on a path to pay down its debt,” Obama said in a radio and Internet address this month.

Still, both parties’ vows to fix the country’s fiscal woes may give way, as they’ve done before, to a grim reality: In a dysfunctional Washington, deferrals, standoffs, and mini-cliffs are more likely than an actual solution. 

 

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KEY VOICES

Chris Van Hollen: The top Democrat on the House Budget Committee warns that GOP efforts to “play politics” with the debt ceiling won’t “go over well with the public” and are “not a sustainable strategy.”

Newt Gingrich: The former House speaker says that fights over government funding and the sequester are chances to get spending cuts, because “threatening to selectively close, eliminate, or shrink various parts of the government” puts President Obama and Democrats “on defense.”

Jacob Lew: The nominee for Treasury secretary, a veteran of past fiscal showdowns, is expected to take a tough line in negotiations with the GOP.

Mitch McConnell: The Senate minority leader brokered the fiscal-cliff deal with Joe Biden but has ruled out further tax increases in upcoming budget talks. “The tax issue is finished, over, completed,” he told ABC.

 

WHAT’S MOVING

Federal debt: As a share of GDP, the debt has nearly doubled since 2008. An aging population that strains Medicare and Social Security will push it even higher, posing a potential threat to the financial markets and the economy.

Tax reform: Both Democrats and Republicans see an overhaul of the multilayered tax code as a worthy goal. But they are at odds over whether reform should be aimed at collecting more revenue.

Budget process: Dysfunctional, or even abandoned. And there is little change in sight as Congress continues to defer tough budget decisions and to set up more showdowns and eleventh-hour deals.

This article appears in the January 19, 2013 edition of National Journal Magazine as Budget Minefield.

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