Budgetary warfare on the edge of a ‘fiscal cliff’
Published: November 25,2012
The debate over the approaching “fiscal cliff,” the overworked term for the drastic belt-tightening imposed by the federal Budget Control Act of 2011, has misleadingly centered on raising taxes on the wealthiest 2 percent of wage-earners.
Both Republicans, who favor maintaining reduced tax rates for the highest earners, and Democrats, who favor raising taxes on the rich and on corporations, say they are determined to prevail and to force the other side to capitulate. And both sides are clutching the same bludgeon, the election, which elicited dueling “m” words.
“The majority of Americans agree with my approach,” said President Obama. “We have a voter mandate not to raise taxes,” said Senate Minority Leader Mitch McConnell, a Republican from Kentucky.
In fact, according to Gallup, more than two-thirds of voters want both sides to “compromise equally.” More than 80 percent want an agreement that stops short of the fiscal cliff. More than 70 percent are following news about the negotiations very closely or somewhat closely.
Unless Congress and the president come to an agreement beforehand, on Jan. 2, reduced income and payroll taxes will go back up, extended unemployment benefits will expire and budget cuts passed into law in 2011 will take effect. The parties’ leaders say that although they are mindful of the dramatic effect many of the fiscal-cliff items will have on the economy, on taxpayers and on an array of vital federal programs, they will stand firm rather than surrender their positions on tax increases for earners who make more than $250,000.
Failure to reach an agreement probably would have effects that make both sides’ intransigence seem more bluffs than boasts. If the non-partisan Congressional Budget Office is correct, Congress and the president are in effect deciding whether 2013 will be a recession year, “with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.”
But some Democratic-leaning observers disagree that the cliff is really a cliff at all. They want to increase the pressure on Republicans by stretching out the negotiations at least a few weeks into 2013.
Chad Stone of the Center for Budget and Policy Priorities, a progressive think-tank, wrote in September that, “(P)olicymakers should not make budget decisions with long-term consequences based on an erroneous belief: that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on January 2 because policymakers haven’t yet worked out a budget agreement.”
Jonathan Chait, an opinion writer for New York magazine, wrote this month: “Starting in January, there will be a series of automatic tax hikes and spending cuts that greatly improve Obama’s bargaining leverage. If those policies stay unchanged for the entire year, they would harm the economy a great deal. But if they only stay in place for a few weeks, or even a few months, the impact would be minor.”
Both writers do, however, acknowledge that, in the end, an agreement is needed to avert another recession, and it can’t be delayed too long after Jan. 1.
The Budget Control Act was the result of the 2011 standoff between the two parties over raising the debt ceiling from $14.3 trillion to $16.4 trillion. The act created a bipartisan budget supercommittee charged with finding $1.2 trillion in budget cuts over a nine-year period starting with the fiscal 2012 budget. The supercommittee failed to agree on anything, so the entire amount of the legislated budget cut must be applied evenly to the federal budget – some would say robotically – at a rate of $109 billion per year. (The reason $109 billion multiplied by eight falls short of $1.2 trillion is that the spending cuts and tax hikes would reduce the amount of debt incurred, thus reducing the amount of interest owed to holders of government bonds.)
According to the law, the $1.2 trillion in cuts would be applied across the board, divided equally between national-security programs and discretionary domestic programs. After 2013, entitlement programs like Medicare, Medicaid and Social Security would be exempted. Also exempted after 2013 are Overseas Contingency Operations, a bureaucratic euphemism for wars.
This robotic method of making cuts of specific amounts from the whole budget and applying them to programs across the board is what distinguishes the BCA from previous methods by which Congress has tried to rein in its own spending.
The Gramm-Rudman-Hollings Balanced Budget Act of 1985 called for automatic budget cuts when the federal deficit hit certain levels. The U.S. Supreme Court in 1986 declared that law unconstitutional because of its method for determining how deep the cuts would be. The court ruled that by tying the hands of the executive branch in determining how cuts would be carried out, Congress had overstepped its authority.
Congress revised Gramm-Rudman-Hollings in accordance with the Supreme Court’s decision, but then the Budget Enforcement Act of 1990 superseded that law. The Budget Enforcement Act introduced PAYGO, a method of achieving smaller deficits by requiring that any new spending be offset by revenue increases or cuts in other programs.
While the Budget Enforcement Act was in effect, Congress and President Bill Clinton managed to balance the federal budget for four consecutive years, although Social Security was not included. But in 2002, Congress allowed the Budget Enforcement Act to expire.
Each of the past budget-balancing measures was passed with high hopes that it would usher in a new era of fiscal responsibility. Not so with the BCA, which was born of the irreconcilable rancor between the two parties in 2011, with the cuts designed to be so detestable that the prospect of them would force the members of the supercommittee to come to an agreement. But that ploy failed, so now the across-the-board cuts will take place unless a deal is struck.
And unless Congress and the president act, here are some of the cuts and other fiscal-cliff events that will take place this fiscal year, according to estimates by the Office of Management and Budget and the CBO:
• The annual federal budget deficit, which has been exceeding $1 trillion, would plummet to $640 million, according to the CBO.
• A 2 percent cut in the payroll tax enacted in 2009 will expire.
• Medicare providers will see cutbacks in reimbursement for treating Medicare patients, but not to exceed 2 percent.
• No itemized cut list yet exists for the Department of Defense, but its operations and maintenance will be cut by $3.8 billion, Defense Health Programs will be cut by $3.27 billion and Navy shipbuilding will be cut by $1.4 billion.
• Embassy security would be cut by $129 million, an 8.2 percent cut.
• Aviation security overseen by the Transportation Security Administration will be cut by $429 million.
• The enforcement division of the IRS would be cut by $436 million.
• Military pay and benefits would be exempted from cuts. But to make up for it, weapons procurement would be reduced.
John Stodder Jr., is The Dolan Company’s national affairs correspondent and web-editor-at-large.