The Latest on the Budget

Feb 13, 2012

Here's the Latest Budget News

Five Things the Media Won't Tell You About the Budget

The President’s budget came out today. A few clicks on the computer, and we can see the numbers that White House and the Office of Management and Budget have been immersed in for the last several months. The news headlines will be all about cuts in the military budget and increased taxes. But the numbers tell a somewhat different story.

The President is making a good effort to invest in both short term and long term supports for the weak economy. These include some direct job creation programs, especially in manufacturing, transportation, school repair, and funding for states to keep teachers and first responders. The budget also includes long term supports such as investments in education from early childhood through college, with a special emphasis on updated skills training in community colleges. There are increases in funding for non-military research and development, and continued investments in health research through the National Institutes of Health.

To avoid the prospect of a sequester, the President’s budget would cut more than $600 billion from mandatory programs, including Medicare, Medicaid, agricultural subsidies, federal employee retirement and health benefits, and reforms to the unemployment insurance system and the Postal Service. Overall, the President’s proposal would lower the deficit to less than 3 percent of GDP by 2018 – a benchmark that many economists see as sustainable.

The big picture is moderately positive. But behind the big picture are some troubling details.

Here are five things about the budget that your newspaper might not tell you:

  1. The President’s Budget does not comply with the Budget Control Act. The Budget Control Act requires Pentagon spending to be reduced by another $500 billion over the next ten years, in addition to the $487 billion reduction that the President has proposed.
  2. Specifically, the Budget Control Act calls for an additional $55 billion to be cut from the core Pentagon budget in FY2013, for a total of about $103 billion. The President proposes a cut of only $4 to $5 billion compared to FY2012. Another reduction of $48.3 billion comes from winding down war spending – but war spending is not included in the Budget Control Act requirements.
  3. Some “cuts” aren’t really “cuts.” Most of the proposed reductions in the military budget over time are roll backs from what the Pentagon had planned to spend, before the requirements of the Budget Control Act really hit home. So last year, in the FY2012 budget, core Pentagon spending actually increased by about $5 billion. This year, the President proposes a decrease of about $4 to $5 billion, compared to FY2012.
  4. The president proposes $1.5 trillion dollars in new revenues – but most of these tax changes actually aren’t new. They come from restoring some of the “temporary” tax cuts promoted by President Bush in 2001 and 2003. They were supposed to last just 10 years, but Congress extended them through the end of this calendar year.
  5. The account for “Overseas Contingency Operations” (OCO) serves up a couple of wild cards. This account shows spending for the wars in Iraq and Afghanistan. All of that spending was borrowed over the years. No new taxes were collected to pay for this trillion-plus expenditure and, unlike other kinds of new spending, proposals to spend more out of the OCO line item do not have to be accompanied by a “pay for” – which would be a cut elsewhere in the budget, or a new tax. In the last couple of years, as Pentagon spending has come under more scrutiny, some spending that is not strictly war-related has been shifted to the OCO line item. This is troublesome because the Budget Control Act appears to allow a blank check to be written for the OCO. The spending limits set by the Budget Control Act for each year can be adjusted upward by whatever amount is allocated for the OCO. That’s one wild card. Watch for items that Congress might want to shift into this apparently bottomless account.

The second wild card served up by the OCO is how “savings” from it should be counted. As one budget guru described, if you go to college for four years, spending $15,000 a year, relying primarily on loans, when you leave college, you don’t suddenly have $15,000 more a year to spend. In fact, you should be looking for some serious income to start paying back those college loans. The OCO amounts to a bundle of “war loans.” To lower our national debt, the federal budget needs not only to borrow less (or stop borrowing) for this account, but also to find some serious revenue to start paying back what was borrowed for the wars.

The president has “capped” OCO spending over the next several years, to reflect the winding down of the wars and, in part, to prevent Congress from shifting other spending into that protected line item. That’s a good move. But the president counts these caps as “savings.” Are they real savings?

The President has left Congress with a challenge. Nothing in the Budget Control Act requires the President to propose the full amount of military spending reductions, but since he didn’t, Congress is left with a dilemma. If it decides to meet the requirements of the Budget Control Act, it will have to find more savings in military and non-military accounts. If, on the other hand, Congress decides to pass a new law setting aside the requirements of the Budget Control Act, it will need to agree on another plan that reduces the debt by at least an equal amount. Will military spending reductions continue to be a significant part of that plan?

Aye, the game is afoot.

January 10, 2012

Congress returns next week to some immediate challenges: extending the payroll tax cut and unemployment insurance benefits beyond March, and beginning work on the Fiscal Year 2013 budget.

Some members of Congress are troubled by the cuts in Pentagon spending that are mandated by the Budget Control Act, passed last August. Some have threatened to introduced bills to "undue the deal" that allowed the debt reduction measure to be approved last summer, and to exempt the Pentagon from cuts.

Despite all the angst, the mandated Pentagon cuts are relatively modest year to year. The first year of the "debt deal" resulted in a 1% increase for the Pentagon, with a 27% decrease in military spending overall, due to the draw-down of troops from Iraq. See FCNL's comparison of FY 2011 and FY 2012 military spending.

Because of the way the formulas work, more than half of the cuts mandated for 2013 and years beyond will come from domestic programs.

December 19, 2011: Appropriations Done!

Over the weekend, the Senate gave final approval to an “omnibus” appropriations measure (H.R. 2055), which included nine appropriations bills. The other three appropriations bills were finalized in mid-November. All tolled, the twelve appropriations bills allocated the exact amount of spending that was permitted for FY2012 in the Budget Control Act, passed last August: $1.043 trillion.

Poverty and low-income programs: The news, according to some of our stalwart anti-poverty colleagues, is “not as bad as expected.” Most programs designed to assist low income people retained their 2011 funding levels and there were even a few modest increases. One standout, though, is the Low Income Home Energy Assistance Program or LIHEAP. Funding for that program was cut by more than a quarter, from $4.7 billion in 2011 to $3.5 billion in 2012. Also, adjustments in the formulae for the Pell Grant (college student aid) will mean that some working college students will have a harder time qualifying for a full grant, but the maximum grant amount remained at $5,550.

Military spending went both up and down. The base budget for the Pentagon went up by about $5 billion, or 1 percent compared to 2011. Funding for nuclear weapons went up by $505 million, which works out to about a 5 percent increases. But funding for nuclear weapons cleanup went down by about 800 million, or 12 percent. For Overseas Contingency Operations, the account that has funded the wars in Iraq and Afghanistan, Congress allocated $43 billion, or 27 percent, less than in 2011.

These military accounts add up to $650 billion in the FY 2012 appropriations bill, compared to $688 billion in 2011, a decrease of $38.3 billion, or 6 percent. Of the total appropriations bill -- $1.043 trillion – 2012 military spending will account for about 62 percent.

December 14, 2011

The Agriculture, Commerce-Justice-Science, and Transportation-HUD Appropriations were signed into law on November 18, 2011.

The omnibus, eight appropriation bills attached to the Military Construction- VA appropriations (H.R. 2055), must pass by December 16th, 2011 when the current funding law will expire. Two of the included appropriations, Labor-HHS-Education and Interior Environment, are continuing resolutions that will be kept at 2011 spending levels with the exception of cutting them by a percentage to keep spending levels with in the cap laid out in the Budget Control Act of 2011.

November 23, 2011

was the official deadline for the Super Committee to make its report to Congress on how to save $1.2 trillion in the federal budget. That's not going to happen.

What will happen? Check these resources:

Jim Cason's blog on "Pentagon Cuts: The Next Chapter"

Here's an overview of the debt reduction and sequester process

For more details on how the sequester process will affect the budget, see Super Committee: "No Deal"

August 11, 2011

House and Senate leaders have announced their selections for the so-called "Gang of 12," the joint committee that is charged under the debt ceiling deal with achieving at least $1.2 trillion in deficit/debt reduction over the next decade, from further discretionary cuts, savings in entitlement programs, or new revenues. Find more information about debt and deficit proposals and players.

August 1, 2011

This is the day; Congress has to decide. Both houses are working at this moment on a deal agreed to by House and Senate leaders and the White House. The bill:

  • creates an automatic increase in the debt ceiling in two stages, ($900 billion now, and at least $1.2 trillion in a couple of months)
  • requires Congress to agree to $900 billion in discretionary spending cuts now, and to either approve a $1.2 trillion debt/deficit reduction package by December 23, or suffer a "sequester" -- across the board spending cuts
  • requires cuts in military spending in the first round of discretionary spending cuts. If the second part of the deal doesn't work out, an across-the-board sequester would cut about $100 billion/year from the Pentagon's budget
  • includes programs that low-income people rely on in the first broad set of cuts that would go into effect immediately, but protects many such from the across the-board-cuts in the case of a sequester. These programs may well be cut in a package designed by the "gang of 12."

Votes are expected this evening in the House and Senate. Read more about the "big deal."

July 29, 2011

Speaker Boehner had scheduled a vote on his proposal yesterday, but he cancelled the vote last night, because he does not have enough support from his own side of the aisle. He continues to lobby the conservative wing of his party to get their support.

Meanwhile, Senator Reid has sent a message to the Speaker informing him that the majority in the Senate will not pass the Boehner proposal. In particular, the Senate majority (and the White House) object to the "two-step" process in the House bill. (The House bill would approve an immediate small increase in the debt ceiling that would last only a couple of months, and then another increment contingent on further cuts.)

Senator Reid plans to begin the Senate process today -- not waiting for the House -- posting a cloture motion today to permit a vote over the weekend.

Both House and Senate proposals include a third step -- appointment of a bi-partisan House and Senate committee to recommend tax reforms and entitlement reforms.

President Obama emphasized this morning in his public remarks that the debt ceiling needs to be raised -- not to permit new spending -- but to meet commitments that Congress has already approved.

July 27, 2011

House partisan politics continue to get in the way of a solution. Speaker Boehner, upon receiving the bad news from the Congressional Budget Office that his latest proposal would cut spending by only $500 billion over the next ten years, went back to the drawing board. He is struggling, under criticism from his party's conservative wing, to find a solution that would unite the Republican party. At this point, what's needed is a solution that will garner sufficient votes from both parties to be approved by the House.

In the Senate, Majority Leader Reid has presented his proposal, but does not intend to bring it the the Senate floor until the House has acted. Meanwhile he and Minority Leader McConnell continue to look at "Plan B."

All of the solutions on the table right now are both inadequate and draconian, because they all rely exclusively on direct spending cuts to reduce the debt. The problem was created by unfunded wars and tax cuts; the solution must address both of those factors.

July 25, 2011

8 days until the Treasury Department's deadline. Will Congress and the White House agree on a plan?

On Monday, July 25, Speaker Boehner revealed more details of his proposed plan, which would raise the debt ceiling and reduce spending in two stages.

Stage one would impose a 10-year cap on discretionary spending (the part of the budget decided through the appropriations process.) This cap would save $1.2 trillion. The proposal includes an enforcement mechanism called a "sequester:" if Congress appropriates more than allowed under the caps, an across-the-board-cut would immediately go into effect on all "non exempt" accounts. Speaker Boehner's release says that the sequester is modeled on a similar mechanism in the 1997 Balanced Budget Act; that Act exempted certain low income programs and a number of other programs.

Stage two would be determined by a new "gang of 12" -- three members of Congress from each party in each house. This new committee would have broad powers to recommend changes in revenues, entitlement programs and direct spending. The total savings would be another $1.8 trillion. Congress would have to approve the recommendations on an up or down vote without amendments by December. After that, President Obama could request another increase in the debt limit, which would go into effect automatically unless Congress voted to disapprove and, if necessary, to override the President's veto of their disapproval.

Also on the 25th, Majority Leader Reid introduced a cloture motion on S.1323, a resolution brought to the Senate floor last week calling for millionaires to make their contributions to debt reduction. Senator Reid's proposal will be amended into that resolution. Senator Reid's plan would increase the debt ceiling by $2.7 trillion and reduce spending by $2.7 trillion. These are the proposed 10-year spending cuts:

  • $1.2 trillion from military and non-military discretionary spending (not clear whether any portion is specified to come from military spending)
  • $1 from savings expected as the wars wind down in Afghanistan and Iraq (and the Pentagon is not allowed to keep and reinvest the savings
  • $100 billion savings in mandatory (entitlement) programs, without touching Medicare, Medicaid or Social Security benefits
  • $400 billion savings in interest payments
Senator Reid has laid aside the two-step process proposal he was working on with Senator McConnell, because neither the White House nor House Democrats supported it.

July 22, 2011:

On Friday, President Obama and House Speaker Boehner continued talking, until they reached another impasse over the topic of taxes. Boehner ended the negotiations and walked out.

Over the weekend, both Speaker Boehner and Senate Majority Leader Reid continued working, coming up with separate proposals. The updated details of Boehner's and Reid's proposals are outlined above.

And what about taxes? Speaker Boehner is willing to count $800 billion in revenue increases over the next decade, provided that the new revenues are based on an improved economy -- not on changes to the tax code. Any tax legislation would have to originate in the House, and House leadership will not let that happen.

July 22, 2011:

President Obama and House Speaker John Boehner are talking about a new "grand bargain" to raise the debt ceiling. The deal is reported to include $3 trillion in spending cuts, up from the $1 to $1.5 trillion under recent discussion. Tax increases are not a part of the package -- only a promise that tax reform would be taken up in 2013, by the next Congress. Since one Congress cannot bind the actions of the next Congress, the effect of this bargain would be to cut spending by more than the debt ceiling needs to be raised, without finding more revenue -- a deal that is remarkably similar to the initial demand of the most conservative caucus in the House.

July 20, 2011:

Thirty-three senators signed a letter in favor of the Gang of Six proposal.

Eighty conservatives representatives signed a letter urging Speaker John Boehner not to bring the McConnell-Reid compromise to the House floor for a vote.

President Obama emphasized this morning in his public remarks that the debt ceiling needs to be raised -- not to permit new spending -- but to meet commitments that Congress has already approved.

2011 FCNL | 245 Second St, NE, Washington, DC 20002
202-547-6000 | Toll Free 800-630-1330