Congress Sets Stage for Second Budget Showdown

On Jan. 23, the House of Representatives sidestepped a battle over the debt ceiling and prepared itself instead for a coming fight over sequestration and a possible government shutdown. The No Budget, No Pay Act (H.R. 325), passed by the House, suspends the debt ceiling until May 18 and ties congressional pay to passage of budget resolutions in the House and Senate by April 15.

House Speaker John Boehner (R-OH) has said that the forthcoming House budget resolution will balance the federal budget within ten years. In the Senate, newly anointed Budget Committee Chair Patty Murray (D-WA) has indicated that the Senate plan will include new tax revenue beyond what was enacted earlier this year as part of the American Taxpayer Relief Act (ATRA) of 2012.

However, several other intervening events may force action much sooner than April 15. The president is expected to submit his annual budget proposal to Congress in late February or early March. He has already indicated that he would like to reduce the deficit by an additional $1.5 trillion over ten years, above the approximately $2.6 trillion that has already been achieved over the past two years, most of which came from spending cuts.

The president's budget proposal will come at about the same time that additional across-the-board spending cuts, called sequestration, are slated to begin on March 1. The president wants to replace these across-the-board cuts with a more balanced package of revenues and targeted spending cuts, but House Republicans appear unwilling to agree to new revenues and may prefer to accept sequestration instead.

According to the Center on Budget and Policy Priorities, if sequestration occurs, it will cut nondefense discretionary spending on programs like education and health research by $26.4 billion (a cut of 5.1 percent), defense spending by $42.5 billion (7.3 percent), Medicare reimbursements to health care providers and insurance plans by $11.2 billion (2 percent), and other nondefense mandatory programs that are not exempt by $5 billion (5.3 percent). Most entitlement programs, including Social Security and Medicaid, are exempt from sequestration.

The high likelihood that sequestration may occur was underscored on Jan. 14 when OMB released a memo providing guidance to federal agencies on how to prepare. According to the memo, most agencies had already begun preparation late last year, and OMB instructed them to plan for possible furloughs, conduct reviews of grants and contracts, and consider reprogramming and transfers of existing funds within agencies. According to some reports, the Defense Department is preparing to submit a plan to Congress in mid-February that would include furloughs of civilian personnel.

As bad as the budget situation may become, with sequestration looming at the beginning of March, it could get worse after March 27. If Congress fails to pass an omnibus budget bill by that date, or at least a temporary bill funding federal agencies for another few weeks, the federal government may shut down.

Dueling Budget Plans

Set against this backdrop, both parties will be laying out competing budgetary visions for the future. House Budget Committee Chairman Paul Ryan (R-WI) has been tasked with developing a plan that would balance the federal budget within ten years. The plan is not expected to include new revenues, which means that it may contain spending cuts that are more severe than those in the 2012 House Republican budget plan, which included deep cuts in both Medicare and Medicaid.

The House budget plan would probably also lay the groundwork for revenue-neutral tax reform. A senior GOP leadership aide told Politico that Republicans would support comprehensive tax reform to eliminate loopholes and lower rates, but that in terms of additional revenue, “that issue is closed.”

Meanwhile, Senate Democrats announced they will develop their own competing plan, much of which will probably reflect President Obama's budget submission to Congress. Unlike the House plan, the Senate plan is expected to contain new tax revenue.

According to a Jan. 24 strategy memo from Murray, "We should ... keep in mind that [the just-enacted tax deal] is projected to result in a ten-year revenue average of 18.5% of GDP (reaching 19.1% of GDP in 2022). We know from historical experience that revenue at that level will not be sufficient to balance the budget — the last five times the budget was in balance, revenues ranged between 19.5 and 20.6% of GDP — especially as more and more baby-boomers enter their retirement years."

The memo explained some of the choices that will need to be made. "We must ask ourselves, is it worth preserving the tax break for corporate jets at the expense of cutting Pell grants that help Americans gain employment and opportunity? Or keeping the giveaways for the oil and gas companies while cutting worker training programs that help small business owners hire the skilled workers they need? Those are the tradeoffs we need to consider as we fight for our values and priorities."

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