The Next Budget Battle

October 24, 2013

The fight over the government shutdown may have come to an ignominious end, but the reprieve from Washington budgetary politics will be short-lived. The latest continuing resolution will expire on January 15, while we will hit our debt ceiling again on February 7. In the meantime, a budget conference committee, headed by Representative Paul Ryan (R., Wis.) and Senator Patty Murray (D., Wash.), is supposed to reach an agreement by December 13.

While the shutdown fight was so traumatic that many Republicans may prefer that the budget debate simply go away, these negotiations are as crucial as ever.

Yes, a combination of increased revenue and slower spending (mostly a result of the sequester) means that the budget deficit has fallen to $642 billion in 2013, compared with a high of $1.4 trillion in 2009. Of course, that just means that our debt is not growing as fast as it was before; it’s still growing.

More important, lower deficits are a temporary phenomenon. According to the Congressional Budget Office, deficits will start increasing again in 2016. By 2023, they will be back up to almost $900 billion, and our gross federal debt will have risen to $25.23 trillion.

Republicans may be divided and demoralized right now, but they cannot afford to throw in the budgetary towel. As the debate moves forward, Republicans must hold the line in several key areas.

Save the sequester: The Democrats’ reverence for “settled law” evaporates when it comes to the sequester, a law duly passed by bipartisan majorities in both houses of Congress and signed by the president. Repealing the sequester’s mandated spending cuts is likely to be the Democrats’ No. 1 priority in budget negotiations. Already, Obama has promised to “keep fighting to get rid of” the law, saying it’s “hurting our military and our economy.”

Moreover, Democrats may find allies in this fight among Republican defense hawks, who object to cuts in military spending. John McCain, for example, has said that “some of us Republicans and Democrats are meeting about” undoing the law, “particularly those who are deeply concerned about the effect on defense.”

Some Republicans have other priorities: Even Paul Ryan has suggested that he might be willing to trade sequester changes for promises of future entitlement cuts.

We should be clear: The sequester hasn’t actually cut spending. Even if we preserve it, spending in 2023 will still be higher than it is today. But it has reduced spending growth well below previously projected baselines. In fact, without the sequester, discretionary spending will be $87 billion higher in 2023 than it’s projected to be with the law still in effect. The sequester will ultimately save taxpayers some $1.1 trillion over ten years, through lower discretionary spending and reduced interest payments. By slowing the growth of spending to a rate that’s below the growth of the economy and revenues, the sequester is helping to shrink both the deficit and the size of government as a share of GDP.

Across-the-board cuts may not be the most elegant method of budgeting — and some greater interagency budget flexibility may be desirable — but reversing or weakening the sequester will open the floodgates to much more federal spending. Republicans must fight to preserve it.

Hold the line on taxes: Already the president is back to talking about the need to include additional revenues in any budget agreement, a so-called balanced deal that, for instance, “closes corporate tax loopholes that don’t help create jobs.”

It should be recalled that the president got a ten-year, $617 billion tax increase as part of last January’s fiscal-cliff deal and that Obamacare includes $1.2 trillion in new taxes over the next ten years. That’s a total of $1.8 trillion in taxes he’s already won.

In fact, the Congressional Budget Office estimates that revenue will reach 18.6 percent of GDP by 2015, the highest level since 2001 and slightly above the post-war average. Washington has a spending problem, not a revenue problem.

Even that bastion of establishment liberalism the Washington Post opposes tax hikes as part of this deal, editorializing:

The temptation for Democrats, as always, will be to insist on higher revenues — a non-starter with the GOP — in exchange for entitlement reform. We hope they won’t. More tax money is part of the long-term fiscal fix. At the moment, however, what’s vital is fixing spending priorities. Even over the long run, insufficient revenue is not the problem it was before the “fiscal cliff” deal that increased taxes on the well-to-do.

If Republicans end up to the left of the Post, something is terribly wrong.

Start reforming entitlements: The driving force behind future deficits and debt is not federal funding of Planned Parenthood, foreign aid, or the cost of Obamaphones but the skyrocketing growth in entitlement spending, notably Medicare, Medicaid, and Social Security. (Obamacare too, but that fight will have to wait for another day.) In fact, all domestic discretionary spending — everything from the Department of Education to the Department of Commerce, the FBI to the FDA — will account for just 24 percent of federal spending by 2023, the lowest share since 1962. On the other hand, entitlements will consume roughly 54 percent of the federal budget.

Social Security’s unfunded liabilities top $23 trillion. Medicare is in even worse shape: Under the most optimistic scenarios, it faces almost $43 trillion in future red ink. If more pessimistic forecasts prove accurate, those unfunded liabilities top $88 trillion.

President Obama has hinted he’s willing to accept at least some entitlement reform as part of a larger deal. In his post-shutdown speech, for example, he admitted, “The challenge that we have right now [is] the long-term obligations that we have around things like Medicare and Social Security. We want to make sure those are there for future generations.”

Rather than get drawn into divisive battles over pet spending causes, Republicans need to go big, putting the president to the test and demanding fundamental entitlement reform.

The fight over Obamacare and the government shutdown was just one battle. Republicans lost that one. But the long war over the size, scope, and cost of government goes on. The next battle is under way.

And this one is winnable.

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