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As Congress avoids default, three budget battles loom

Posted By Allan Freyer On January 25, 2013 @ 8:00 am In NC Budget and Tax Center | Comments Disabled

On Wednesday, the US House voted [1] to suspend the federal debt ceiling—the statutory limit on the amount the US Treasury can borrow to finance existing obligations—until May, backpedaling on previous threats [2] to withhold the debt limit increase unless Congress and the White House agreed to significant cuts in federal spending.  As a result, Congress managed to avoid default [3] and a potential financial crisis that risked the nation’s creditworthiness and economic recovery [4]. At the same time, however, House leaders promised [5] to use three additional chokepoints in the budget process as leverage to secure their ultimate objective—deficit reduction based entirely on unspecified but dramatic reductions in federal spending and the transformation of entitlement programs Social Security and Medicare.

Although achieving a sustainable course for the national debt is clearly important to putting our nations’ fiscal house in order, any deficit reduction plan must take a balanced approach that includes new revenues (beyond the first step achieved in the Fiscal Cliff deal) and strategic spending cuts that do not disproportionately impact working families or damage state budgets.

In the new, post-debt ceiling landscape, the first chokepoint in the in the budget process is sequestration [6], the $1.2 trillion in automatic across-the-board spending cuts to Pentagon programs and other discretionary investments like education that were postponed in the Fiscal Cliff deal and are now scheduled to take effect on March 1. As we’ve written before in this space, both the defense and non-defense sequestration cuts will have a significant and negative impact on North Carolina’s economy, estimated at close to $2 billion in reduced GSP [6].

The second chokepoint is the result of another piece of unfinished Congressional business—the failure to pass the required appropriations bills necessary for funding the entire federal government for FY 2013.  Yes, that’s the fiscal year that started last October and is currently underway. Before adjourning for the November elections, Congress passed a Continuing Resolution (CR), essentially funding the federal government at FY 2012 levels (plus an adjustment for inflation). That CR is set to expire on March 27th, and if Congress cannot agree on final spending levels, the government will be shut down.

The final chokepoint is the Budget Resolution for FY 2014 [5], which is supposed to pass both House and Senate by the end of March.  As part of the debt limit increase, House leadership promised its members that the budget resolution [5] taken up in the lower chamber would secure sufficient deficit reduction to achieve balance by 2023 based entirely on spending cuts and without including any new revenues. 

Given this landscape, House leadership intends [5] to use the first two chokepoints—the threat of sequestration and the possibility of a government shutdown related to the 2013 CR—as leverage to force the White House and the Senate to support the House budget for 2014, including all of its historically unprecedented spending cuts.

Although specifics are clearly lacking at this point, the emerging 2014 House budget would likely involve even deeper spending cuts than the $5 trillion contained in last year’s House budget plan [7], authored by Budget Committee Chairman Paul Ryan, since this year’s plan achieves balance 17 years faster than last year’s (thus requiring more cuts).

Coupled with the absence of new revenues, spending cuts of this magnitude represent a dangerously unbalanced approach that will increase hardship for working families, seniors, and state budgets (which rely heavily on federal aid).  Worse, it’s an approach that’s simply unnecessary [8].

 As we’ve written before [4], the federal government needs to find only $4 trillion in deficit reduction over the next 10 years in order to put the nation’s debt on a sustainable path—that is, ensure that the debt does not continue to grow as a share of the economy. It is this $4 trillion amount—not some arbitrary date at which the federal budget achieves balance—that most economists agree [4] is the most appropriate target for ensuring fiscal responsibility and long-term debt reduction.  And when we include the $2 trillion in cuts contained in the Budget Control Act of 2011 and the $650 billion in new revenues from the Fiscal Cliff deal, we’re really only about $1.4 trillion away from meeting this $4 trillion target.

In finding these savings, any new deal should include additional revenues beyond those included in the fiscal cliff legislation. Currently, federal revenues as a share of the economy [9] stand at 15.8 percent of Gross Domestic Product, well below the 18 percent historical average [9] since the end of World War II, and bringing revenues back into historical balance are critical to addressing the deficit in a balanced way.

One source of revenues could include eliminating deductions and exemptions in the personal income tax. Another source could perhaps come from reforming a corporate tax code that currently gives away an estimated $130 billion every year [10] through special loopholes and tax breaks available to big banks and large corporations but not to middle class families and small businesses. Certainly, reducing revenue through cutting corporate taxes should be off the table, especially given the fact that every dollar less in revenue translates into a dollar more in spending cuts that affect middle class families.

Without additional revenues, Congress will be forced to take a far more unbalanced approach to addressing the spending side of the ledger. While spending reductions are clearly necessary, a punitive, cuts-only approach will only serve to increase poverty and inequality, and without yielding any solid deficit reduction in return.


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URL to article: http://pulse.ncpolicywatch.org/2013/01/25/as-congress-avoids-default-three-budget-battles-loom/

URLs in this post:

[1] voted: http://www.businessweek.com/news/2013-01-23/debt-limit-vote-in-house-refocuses-republican-cuts-plan

[2] previous threats: http://theweek.com/article/index/238834/republicans-getting-cold-feet-on-debt-ceiling-threat

[3] avoid default: http://money.cnn.com/2013/01/23/news/economy/debt-ceiling-house-republicans/

[4] risked the nation’s creditworthiness and economic recovery: http://pulse.ncpolicywatch.org/2013/01/15/will-us-house-refuse-to-pay-nations-bills-allow-default/

[5] promised: http://tv.msnbc.com/2013/01/23/new-gop-budget-may-have-unprecedented-spending-cuts/

[6] sequestration: http://www.harkin.senate.gov/documents/pdf/500ff3554f9ba.pdf

[7] 5 trillion contained in last year’s House budget plan: http://www.cbpp.org/files/3-21-12bud-stmt.pdf

[8] unnecessary: http://www.cbpp.org/cms/index.cfm?fa=view&id=3884

[9] federal revenues as a share of the economy: http://www.usgovernmentrevenue.com/downchart_gr.php?year=1900_2010&units=p&title=Revenue%20as%20percent%20of%20GDP

[10] estimated $130 billion every year: http://www.washingtonpost.com/wp-dyn/content/article/2010/05/01/AR2010050100243.html

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