StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Budget Deal May Not Last Until Christmas

23 Aug 2011
Posted by Stan Collender

OK...I'll admit that saying the agreement will be gone by this Christmas is likely (but not necessarily) an overstatement.

But saying that the "Budget Control Act" -- the debt ceiling increase/deficit reduction deal signed into law on August 2 -- isn't likely to be in place on January 1, 2013, or to have it's projected impact over the full 10 years it supposed to be in effect is anything but an exaggeration. 

The reason? Federal budget agreements have seldom, if ever, gone the distance. Instead, they have always been changed, waived, ignored or abandoned long before they were scheduled to expire.

Some examples:

1) Long before the current versions of the House and Senate Budget Committees were created in 1974, a joint committee on the budget was established with much promise in 1949. But in spite of the fanfare, that high- profile joint budget committee quickly faded into what is now obvious obscurity when almost no one from the House or Senate wanted to serve on it.

2) Major elements of the 1974 “Congressional Budget Act” failed to have the promised impact when they were routinely ignored or implemented very differently from what had been expected when the law was adopted. The best example was the second budget resolution Congress was supposed to adopt each year and the deficit reductions that were supposed to be implemented if certain targets were not hit in that resolution. These major provisions were ignored or otherwise rendered inconsequential almost immediately when most members of Congress didn’t want a second vote on the deficit.

3) The “Balanced Budget and Emergency Deficit Control Act” -- Gramm-Rudman-Hollings -- replaced the Congressional Budget Act in 1985 accompanied by loud applause and high hopes for serious deficit reduction. It was revised by the “Balanced Budget and Emergency Deficit Control Reaffirmation Act” two years later when GRH-1 proved to be unworkable.

4) Three years later, the “Budget Enforcement Act” supplanted GRH- 2.

5) BEA also didn’t live up to expectations and was replaced in 1997 by the “Balanced Budget Act.” Many of BEA’s most important provisions were ignored years earlier.

6) Major portions of the BBA were completely ignored when the deficit unexpectedly turned into a surplus in 1998 and (absolutely contrary to what the law actually stated) key members of Congress no longer thought they should have to comply with the act’s provisions.

This brief history shows that, even in the much slower political and economic worlds of the past few decades, budget agreements simply haven’t had much of a shelf life.

Given the large political changes that occurred in the 2008 and 2010 “wave” elections, as well as the growing expectations that waves will be the norm in this country for some time, there is no way for major policies like those included in the Budget Control Act to go unchallenged or unchanged. It’s exceptionally unlikely that any agreement put in place today on any topic (but especially spending, taxes, deficits and debt) will continue to be relevant for any length of time, let alone the 10 years anticipated in the agreement. Ten years represents five congressional elections, two and a half presidential elections, and countless natural and man-made disasters.

As a result, the headline approximately $900 billion in spending reductions put in place by the Budget Control Act are far more likely to be mere projections rather than actual changes that are realized. Although the agreement put spending caps in place every year through fiscal 2021, only the about $30 billion in changes projected for fiscal 2102 – which will start in about a month on October 1 -- should be considered likely to occur.

What does this mean for the budget outlook?

1) At best, the budget agreement signed into law on August 2 will only be fully implemented in fiscal 2012.

2) The spending cuts projected for fiscal 2013 through 2021 – including the across-the-board cuts that will be triggered if the super committee is unable to agree on a deficit reduction plan – will be revised, perhaps substantially, before they go into effect. In many or most cases those changes will never happen.

3) The impact on the sectors, industries, and individual companies of the spending cuts projected in the budget agreement will be far less than anticipated.

4) The federal deficit will not be reduced as far or fast as was projected when the agreement was signed into law.

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Stan, this is exactly what I

Stan, this is exactly what I commented on in your post from a couple days ago:

"The other thing that no one seems to talk about is the fact that it is nearly impossible for a current Congress to bind the appropriations of a future one. So the most perfectest bestest 10-year plan of all time can be enacted by the current Congress, and if the political winds have shifted, the next Congress can simply appropriate whatever they want, anyway."

Why are you one of the few people talking about this?

I can tell you that in my field--biomedical science--many of my colleagues are crying and gnashing their teeth about how "the NIH budget is going to be slashed 10%". This is based on the Obama administration's instructions to the agencies to propose two budgets for 2013 FY: one with 5% cut and one with 10%.

I keep trying to tell them that the final 2013 FY budget isn't going to be passed until after the 2012 elections by a new Congress and signed by the next President (maybe still Obama), and that the only reason the Obama administration has instructed the agencies to do this is that he can campaign on "belt-tightening".




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