Budget Panel Taking Up Spending Cuts as Expectations Low

A new congressional committee, working against a deadline for a budget agreement, most likely will turn to limited spending cuts and revenue increases while doing little to slow long-term growth of the nation’s debt.

Revisiting a three-decade history of failed attempts to force long-term debt reduction, the panel of House and Senate members will meet Oct. 30, with little more than six weeks to reconcile their differences over taxes and spending.

Both sides are lowering expectations for a breakthrough on trimming the nation’s $17 trillion of debt, focusing instead on replacing the automatic spending cuts approved in 2011, known as sequestration, that are trimming funding for education, transportation and medical research.

“If we shoot for a grand bargain we won’t get it,” Republican Paul Ryan, chairman of the House Budget Committee, said in an interview last week. “The question is if we can find smarter ways to cut spending to replace the sequester.”

The measures most likely to survive negotiations are a proposal from President Barack Obama’s 2014 budget to slow the pace of Social Security’s cost-of-living increases paired with curbing of some tax credits and exemptions that don’t raise income tax rates, said Steve Bell, a onetime senior Republican Senate budget adviser. Republicans and Democrats say it’s the best they can do after bitter partisan battles.

‘Abject Failure’

“It is the abject failure of three years of work,” said Bell, drawing parallels to the 1985 Gramm-Rudman-Hollings Balanced Budget Act, the model for the mandatory cuts created in 2011.

In the five years the Gramm-Rudman law was in effect, the triggers were activated twice -- one of which was reduced by Congress and the other overridden by a subsequent budget agreement. The cuts under sequestration are also likely to be muted or overridden while the long-term debt grows unabated, he said.

“More than a quarter-century apart and the same damn thing,” said Bell, now a senior director at the Bipartisan Policy Center in Washington.

According to the nonpartisan Congressional Budget Office, federal debt held by the public is now 73 percent of the economy’s annual output, higher than at any point in U.S. history except a brief period around World War II. If the sequestration cuts stay in place, such debt would decline slightly over the next several years before rising above its current level.

Head Start

Sequestration led to $80 billion in automatic cuts in March to government programs that Democrats consider priorities, including Head Start for poor children and scientific and medical research. An additional $19 billion cut is set to pinch the Pentagon in January, creating concern among Republicans including Senators John McCain of Arizona and Lindsey Graham of South Carolina.

At least five similar bipartisan attempts to draft a broad debt-reduction bill have failed in the past few years. Now some analysts are even skeptical of reaching a mini-deal. In that event, Congress would be forced to choose between allowing another round of deep federal cuts to proceed in January that even many Republicans say are unsustainable -- and canceling or delaying them.

The CBO has estimated that canceling sequestration would raise gross domestic product by 0.7 percent and add 900,000 jobs by 2014, while warning that negating the deep cuts also would increase the long-term debt.

‘Way Out’

“That could be the way out,” said Robert Reischauer, a Democrat and CBO director from 1989 to 1995, adding that it shouldn’t come as a surprise.

“When the Budget Control Act was signed into law everyone said these spending caps are unrealistically low, that there’s no way Congress and the American people will sustain them over a decade,” Reischauer said.

Since the mandatory cuts were made, the federal budget deficit has dropped to $642 billion, 3.9 percent of gross domestic product, from $1.1 trillion, 6.8 percent of GDP in 2012, according to CBO projections. The CBO forecasts a deficit next year of $560 billion, or 3.3 percent of GDP.

To be sure, any attempt to cancel or delay the mandatory cuts will spark fierce opposition in the Republican-led House. “If we do not get agreement, we have absolutely no interest in turning off the sequester,” said Ryan of Wisconsin, the Republican 2012 vice presidential nominee.

Not Smartest

“This is a very different Republican conference,” said Oklahoma Representative Tom Cole, a Republican and deputy whip who also sits on the new committee. “It’s the bravest conference I’ve ever been in, maybe not the smartest, but the bravest,” he said, warning against “calculating on them not to do the sequester cuts.”

Legislative bandages have become the norm since Democrats lost control of the U.S. House in 2010, and the two parties have clashed over conflicting philosophies on taxes, spending and the role of government.

The mandatory cuts don’t touch benefit payments for programs such as Social Security, Medicare and Medicaid. Many Republicans want to replace the automatic cuts with reductions in spending on these entitlement programs that account for most of the nation’s long-term debt. Democrats, Obama among them, have indicated they’re open to some of these ideas as long as they are paired with new tax revenue, which Republicans oppose.

Ending Preferences

Cole said he could envision a deal focused on some of the entitlement changes in Obama’s budget and ending some tax preferences such as repatriating corporate profits sitting overseas, worth about $200 billion over 10 years, and ending preferences for private-equity managers’ carried interest.

Other leaders on both sides are digging in, raising the specter of another stalemate. Talk of revenue has no place in the new budget conference, Ryan said.

“If they see the conference as an excuse to raise taxes, I don’t think it’s going to be successful,” said Ryan, who declined to identify any exemptions or credits his party could support ending. “I hope that’s just posturing.”

Republicans say they already agreed to about $600 billion in fresh revenue in the next decade, citing a law passed in January that let the top income tax rate rise to 39.6 percent from 35 percent. “My guys are not willing to swallow hard on revenues,” said Senator Saxby Chambliss, a Georgia Republican and veteran of past debt-reduction efforts. Both Ryan and Chambliss said the revenue issue belongs in a broader discussion on tax reform.

New Revenue

Democrats say an agreement is impossible without new revenue because every previous bipartisan negotiating group has combined the two, including the president’s 2010 fiscal commission that effectively offered $2 in spending cuts for every $1 in new revenue.

“Republicans have taken the grand bargain off the table by saying they’re not going to consider any revenue,” said Maryland Representative Chris Van Hollen, the top Democrat on the House Budget Committee. “Now they’re limiting opportunities for any agreement because they won’t even consider closing a single loophole.”

Even a mini-deal between Republicans and Democrats on taxes and spending is “a stretch given where many people are,” said Reischauer.

If the two sides remain deadlocked over revenue it increases the risk Congress will face a second round of deeper spending cuts, primarily hitting the Pentagon, in January.

House Obstacles

While Republicans insist that canceling the cuts may be politically impossible in the House now, there may be cracks in his party’s united front. Kentucky Representative Hal Rogers, chairman of the House Appropriations Committee that will have to make the cuts, wouldn’t rule out a delay if the committee deadlocks.

“It all remains to be seen. I’m hoping the conference will do its work,” he said. “They can have provisions in there for a lot of things.”

Many defense-oriented Republicans including Graham and McCain have said the defense cuts will compromise U.S. national security and decimate the military.

Regardless of the specifics, any deal the conference group reaches would be another patch to dealing with the debt.

“The obvious concern is we’ll be back in the soup right away,” said Senator Max Baucus, a Montana Democrat who is chairman of the Finance Committee. The conference committee’s Dec. 13 deadline is “right around the corner,” he said.

“Congress doesn’t pass long-term solutions, it passes short-term solutions,” said Baucus, who isn’t seeking re-election next year. “You have no idea how frustrating it is.”

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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