MEMO: What's Next? The Spending Debate after the Debt Ceiling

August 3, 2011

TO: Interested Parties

FROM: Gretchen Hamel, Executive Director, Public Notice

DATE: August 3, 2011

RE: What’s Next? The Spending Debate Post-Debt Ceiling Debate

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Americans watched with bated breath this past weekend as Federal lawmakers debated, and finally passed, a plan to increase the statutory debt limit and cut the budget deficit.

What’s In The Final Plan?

House and Senate must vote on a balanced budget amendment (BBA) by the end of 2011.

Creates spending caps for discretionary spending for the next ten years, starting in FY 2012, which begins on October 1, 2011.  The Congressional Budget Office estimates this will save $917 billion in the next 10 years.

Raises the debt ceiling by as much as $2.4 trillion in two phases:

The President may request an immediate $400 billion debt ceiling increase.  Another $500 billion increase would take effect so long as Congress does not pass a resolution of disapproval.  A resolution of disapproval could be vetoed by the President.

The President may request up to another $1.5 trillion increase if a special Joint Committee cuts spending by an amount greater than the requested increase, or if the House and Senate send a BBA to the states.

If the Joint Committee’s proposal does not become law or if a BBA is not sent to the states for ratification, automatic, across-the-board spending cuts take effect, although some entitlements, such as Social Security, are protected from these across-the-board cuts

Now That The Debt-Ceiling Crisis Is Over, Washington Can Enjoy The August Recess, Right?

Wrong – the country still faces a spending crisis of epic proportions.  Overspending was the driving force behind this debate and Congress was in this predicament precisely because it had failed to exercise restraint during past budget cycles.  The simple truth is while this compromise makes some spending cuts, and caps spending going forward, it’s hardly the solution to our deficit and debt problems.  Senator Lindsey Graham explained on ABC’s “This Week” on July 31, that the debt ceiling deal, which was in the final stages of development, would stanch the flow of red ink from Washington, but not end it.  He said, “We’re no longer running toward oblivion.  We’re walking toward it.  And now we need to stop and turn around, go back the other way.”  In an editorial on August 2, The Washington Post stated things succinctly, “The political crisis may be averted for the moment.  The fiscal crisis continues.”

In fact, the rating agencies that have threatened to downgrade the U.S. debt rating said their concern was much more about the fiscal trajectory of the nation than the actual increase in the debt ceiling.  In July, Moody’s Investors Service warned, “If the debt limit is raised again and a default avoided, the AAA rating would likely be confirmed … However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.”

And just yesterday, Moody’s confirmed that the U.S. would keep its AAA rating while their outlook on U.S. debt was lowered to negative saying, “Should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively.”

According to the nonpartisan Congressional Budget Office, this deal cuts up to $2.117 trillion in spending over the next 10 years, but the U.S. faces a cumulative budget deficit of nearly $8 trillion over the next 10 years.  The Budget Control Act is a good start, but still leaves the Federal government with a gaping hole to fill, not to mention the $14.3 trillion in cumulative debt, which according to the International Monetary Fund, stands at almost 100 percent of the entire U.S. economy.

This debate focused the public on the enormity of these numbers, and our problem.  That’s why, instead of thinking of this bill as a conclusion to the budget debate, we need to think of it as an introduction. It was a helpful – if dramatic – education into the serious consequences of our fiscal crisis.  This means voters will be listening with a keen interest to the other spending debates in the near future.  Each presents another opportunity for Congress to hold itself accountable to the public it serves and to exercise the restraint that has eluded it so often in the past.

What’s Next?  Future Spending Battles:

The continuing resolution (CR) that passed this spring was the 112th Congress’s first difficult budget decision.  The debt ceiling deal was the second.  There are still many budget battles to come before the 2012 election.  There are also a few that will come immediately after, and could color the debate in the weeks leading up to Election Day.

Fiscal Year 2012 Appropriations Bills. The end of Fiscal Year 2011 is just less than two months away as it starts on October 1, 2011.  Up to this point, the House has only passed six of the 12 spending bills for the next fiscal year.  The Senate has passed just one.  Even if the House and Senate manage to pass their versions of all 12 bills, it is virtually impossible for both chambers to reconcile them all before the new fiscal year, which sets up a much larger fight on an enormous omnibus spending bill or a CR.  Put in perspective, last year’s CR fight lasted over six months into the new fiscal year.

Commission Recommendations. The debt ceiling compromise requires both the House and the Senate to vote on the recommendations made by the 12-member Joint Committee by December 23, 2011.  The panel has until Thanksgiving to make its recommendations.

Authorizing Bills. There are also several authorizing pieces of legislation that need to be passed in the next couple of years, including an update to the farm bill and a new bill outlining spending for the nation’s transportation programs.  These bills are traditionally magnets for earmarks and over spending.  Voters – and lawmakers themselves – are not likely to tolerate pork-barrel spending this election cycle, or over the next several years so there will still be a fierce fight in Congress on the spending levels that will be set within these bills.

Entitlements. Medicare is set to go bankrupt just nine years from now.  Social Security has a few more years, but its fund will be depleted by 2036 (about the time today’s 40 year-olds want to retire).  While this deal includes some small across-the-board spending cuts within Medicare if the commission’s recommendations don’t become law or if a BBA is not sent to the states for ratification, it doesn’t require a vote on entitlement reform or future cuts to these programs, and as such should be considered as one of the opening salvos in the Federal government’s battle to get spending under control.

BBA. The debt ceiling compromise requires the House and the Senate vote on a BBA some time after October 1, 2011, but before the end of the year.

Conclusion:

Americans Are Still Concerned And Disheartened By Washington’s Broken System. Having settled the debt ceiling debate, Washington policymakers and staffers are all looking for some relief from the August heat.  Even though it has now adjourned for its summer recess, Congress is unlikely to find relief from the heat of Americans fed up with the size of the nation’s deficit and long-term debt.  Taxpayers understand there are many more budget debates to come and will keep up the pressure through the rest of the 112th Congress, and after the 2012 election.

It’s Time Washington Responds With A Serious Fact Based Conversation. During the debt ceiling debate, politics reigned.  Some important spending cuts were made, but, in large part, policymakers left the big decisions on the table and in the hands of a super commission.  When lawmakers come back in September they must rededicate themselves to finding a solution to our fiscal problems; they must concentrate less on simply keeping their jobs and more on providing a sound economy for our nation.  Americans and economists believe getting our fiscal house in order will create jobs.  According to a June Bloomberg survey, 55% of adults said the most successful way to increase economic growth and create jobs was to enact spending and tax cuts so companies would have more confidence to hire.  Stanford University economist John Taylor has argued, “A credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future.”

When Members of Congress and their staffs return in September, it’s time Washington put economics before politics and produce common sense solutions to the tough budget issues that remain.

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