Budget Deal on Back Burner in Scandal-Ridden D.C.

Published May 22, 2013. By Eric Pianin. In The Fiscal Times.

Prospects were never great for a budgetary “Grand Bargain” this year, even when President Obama was waging a Republican charm offensive with fancy dinners and golf outings. He was seeking a bipartisan accord on deficit reduction and tax reform in the Senate that could isolate House Republican leaders and drive them back to the bargaining table.

But now the air seems to be going out of the balloon for a major deal. The incentives to compromise have been reduced because of the declining budget deficit, the economic turnaround, and the dizzying array of Obama administration controversies – including the IRS targeting of Tea Party groups, the Justice Department’s snooping into reporters’ phone records, and the administration’s botched handling of talking points concerning the terrorist attack on a U.S. diplomatic post in Benghazi, Libya, that killed four Americans.

Lawmakers still talk about grand bargains, but neither side of the aisle gains much politically from conceding on crucial issues – from slowing the growth of Medicare and Social Security to capping long term spending to overhauling a byzantine tax system to averting another debt ceiling crisis.

Obama last Friday fled Washington for appearances in Baltimore in an attempt to shift the focus away from the scandals and back to the economy, but it met with minimal success. “Sometimes our leadership isn't focused where it needs to be focused,” Obama said, urging those in attendance to “tell the people in Washington [to] focus on getting stuff done.” He added, “We’ve been able to clear away the rubble of the crisis ... but our work is not done. Our focus cannot drift.”

For now, at least, Washington’s focus is anywhere but on the budget. The narrowed deficit—$200 billion below projections earlier this year—eliminates much of the immediate pressure. Outcry about sequestration mostly ended after Congress shifted funds to retrain air traffic controllers.  Administration hopes for a “balanced” deficit reduction plan of more spending cuts, revenue increases, and possibly adoption of a less generous cost-of-living price index to reduce increases in Social Security appears out of reach.

Many budget policy analysts fret that at best there’ll be passage of a minimalist agenda: new spending measures for the coming fiscal year, another short-term extension of the government’s borrowing authority, and possibly tax legislation allowing states to charge a new sales tax on Internet purchases.

“I didn’t think a grand bargain was very likely in the first place because Republicans would have needed to give on revenue and they seemed [in] lockstep against that – and I think it’s even less so now because there is considerably less pressure for a deficit deal,” Jared Bernstein, a former economic adviser to Vice President Joseph Biden, told The Fiscal Times this week.

Robert Bixby, executive director of the Concord Coalition, an advocate of deficit reduction, said it’s difficult to penetrate all the noise over the three administration scandals – especially when serious budget reforms require unpopular measures and sacrifices.

“Washington loves a good scandal and hates a bad budget,” Bixby said. “It seems like we’re entering scandal time here, and that makes it very difficult to concentrate on a budget deal.”

Rep. Chris Van Hollen (D-Maryland), the ranking member of the House Budget Committee, said that while “people talk about a grand bargain, at this point we would be pleased to get a good bargain.”

Van Hollen sees another dangerous side effect to the political distraction from the budget. The $81 billion of across-the-board spending cuts that began in March under sequestration are undercutting the modest economic recovery, and likely will drag down growth next year without an alternative.

The Congressional Budget Office projects the sequester will prevent 750,000 new jobs this year alone.

“The GOP is clearly content to continue the deep, arbitrary sequester cuts and House Republicans have failed to offer their own solution this Congress,” Van Hollen said. “They also refuse to move the budget process forward.”

 

FACTORS THAT FADED AWAY 

Just a few months ago, Washington was obsessed with the need for a grand bargain.The budget deficit was projected to be $845 billion, following four consecutive years of deficits of $1 trillion or more. Congress and the administration had already achieved about $2.1 trillion in long-term deficit reduction, and Obama was pressing for additional savings to achieve $4 trillion in overall deficit reduction.

Adding to the pressure, monthly jobs indicated an economy hitting stall speed, only to later be revised upward. House Republicans promised trench warfare over the debt ceiling increase, after having to capitulate on the fiscal cliff as tax rates increased on household incomes above $450,000.

The Treasury’s borrowing authority was set to expire this spring, providing the forcing action for the two sides to reach a larger budget and tax deal. While technically the government began to bump up against its nearly $17 trillion borrowing authority last weekend, a combination of “extraordinary” evasive actions and an improving economy that is generating more tax revenues will postpone the day of reckoning past Labor Day.

Last week, the CBO issued a report projecting a sharp decline in the budget deficit through the rest of Obama’s second term. The deficit will plummet to about $642 billion, or 4 percent of the gross domestic product, in the current fiscal year ending Sept. 30. That’s about $200 billion lower than the non-partisan budget agency projected three months ago – and nearly three times the size of the cuts in defense and domestic programs mandated by the sequester.

Although the deficit topped 10 percent of GDP in 2009, it could shrink to as little as 2.1 percent of the overall economy by 2015, before beginning to gradually climb the rest of the decade. For the remainder of Obama’s administration, the deficit would fall to $560 billion in 2014 and $378 billion in 2015, before rising to $432 billion in 2016.

Then, of course, there’s the White House scandals that have largely eclipsed serious discussion of fiscal reform.

Joseph Minarik, a former Clinton administration budget official and now vice president for research at the Committee for Economic Development, agrees that “the sense of urgency from the [deficit] numbers has definitely dissipated… while the public and Congress are focusing their attention on the scandals.”

However, “people like me look at the long term, and the fundamentals are still there” for serious depletion of the Social Security and Medicare funds as more and more baby boomers begin to retire, Minarik said. “Ultimately, it appears to be growing at an exponential rate that exceeds the rate of growth of the economy. You let that wind itself up long enough and you are going to have problems.”

 

The Fiscal Times’ Josh Boak contributed to this story.