U.S. Budget: The Fiscal and Political Calculations

A compromise budget from the House and Senate will not affect U.S. revenues and spending—but it may help Republicans frame key policy debates ahead of the 2016 election.

The House of Representatives and the Senate have each passed budgets. That the Senate passed a budget at all is remarkable. Though the law requires it, the upper house has failed to pass a budget for the past six years. Now the House and the Senate will go into conference to negotiate differences and vote again on a compromise budget. This is likely to work out. The budgets are not that different.

After this step, matters become more political than practical. The agreed budget is not binding. It does not require President Obama’s signature. Votes on appropriations will determine actual spending, and they will require that signature. As with President Obama’s budget from earlier in the year, this document will control neither spending nor revenue generation. It will only set out Republican budget priorities, as the president’s budget set out Democratic priorities. These then will at most set out the parameters of debate over more specific budget issues as they emerge in coming weeks and months.

The Major Features
Here are the broad outlines of the House and Senate proposals, at least as they presently stand:

On spending overall for 2016, the GOP budgets differ only slightly from President Obama’s figures or current law. That only stands to reason. Much of the outlays are on autopilot, and take time to adjust. Over the longer, 10-year period in which priorities become clearer, the Republican proposal would cut cumulatively some $5 trillion out of the spending presently budgeted and slightly more out of the president’s proposals. Against these general spending differences, President Obama’s budget proposed some $1.8 trillion in tax increases cumulatively over a 10-year period, while the Republican budgets, unsurprisingly, would block any new taxes. Entirely on the basis of their spending cuts, the GOP budgets claim to reach something near balance within 10 years, while current law, according to the Congressional Budget Office (CBO), would produce a deficit of slightly more than $800 billion.1

The biggest differences lie in the area of entitlements. Neither the House nor the Senate plan would touch Social Security. Both would, however, repeal the Affordable Care Act (ACA), which accounts for the bulk of the expected cuts in outlays. The full amount does not appear in deficit reduction because both GOP budgets also would repeal the 2.3% excise tax on medical device makers. In addition, these budget proposals would slow the growth of Medicare spending, from the 6.4% a year foreseen in current law to about 5.5%; slow Medicaid and the Children’s Health Insurance Plan (CHIP) spending, from the current law’s 5.6% annual rate of increase to about a 4.2% rate; and slow welfare spending, mostly food stamps, from the current law of 3.5% annual growth rate to a 3.3% annual rate of decline. The Senate plan offers much less detail on exactly how it would achieve its savings than does the House plan, which more or less embraces Congressman Paul Ryan’s (R-WI) proposals of a couple of years ago, seeking block grants for Medicaid, in order, the legislation says, to encourage states to economize, and a partial privatization of Medicare, allowing seniors to choose between the program as it exists or private insurance. On the welfare reform, specifics are sparse.2

On defense, the plans ostensibly stick to the sequester levels set in 2011. Since President Obama proposed raising the defense budget 7% above the sequester levels, this makes the GOP budgets look harder on the Pentagon than the White House. But both the House and the Senate would actually be more generous by allowing for a separate special fund for what they call Overseas Contingency Operations (OCO). This would not be subject to the 2011 caps, and that would give the Pentagon access to an additional $45–85 billion, allowing defense spending to rise some 2.4% a year or more under Republican plans, beginning in 2016, more from the Senate than the House. On non-defense discretionary spending, which constitutes less than 10% of all federal spending, the Senate proposal would cut a cumulative $238 billion from the amounts built into current law, a reduction of about 3.0%. Neither the House nor the Senate proposals offer much detail on how to achieve these cuts, except to point to the perennial effort to eliminate “waste.”

Interest Expenses
Both the president’s budget and the two GOP alternatives are reasonably realistic about interest expenses. They all take their cue from Congressional Budget Office estimates that interest rates will rise gradually over the next few years and hold those levels for the rest of the 10-year forecast horizon—about 350 basis points (bps) on short-term rates and 250 bps on longer-term rates. Although interest-rate expectations are similar, Republican plans budget lower overall interest expenses than the current budget baseline, amounting to about 20% by the end of this long-term period, because they anticipate narrower deficits than either current law or the president’s budget. Even with these savings, the rise expected in interest rates will increase interest expenses in the House and the Senate versions, from some 6% of all spending at present to some 12% at the end of the 10-year forecast period.

As already indicated, this budget is not binding. It will not go to President Obama for a signature and so cannot suffer a veto, which it almost certainly would if it required a presidential signature. But for all this, the passage of these budgets and the likely reconciliation vote are not without political impact. They make clear Republican priorities and underscore differences from the Democrats—clear distinctions that will influence detailed appropriations legislation later in this session and also have use by both sides during the 2016 election. More immediately, a reconciliation vote would lay the groundwork for a vote to repeal the ACA. This would otherwise be impossible in the Senate, for the Democrats would surely filibuster such legislation. But since reconciliation rules prohibit the filibuster, a passage of such legislation could allow Congress to send such a repeal to the White House, as early as later this year. No doubt President Obama would veto it. Since the Republicans in the Senate do not have the votes to override a veto, the ACA law would stand, at least for the time being. But for good or bad, a powerful political point will be made.

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