Oh No, Not Again
The current fiscal showdown was actually a little different in that the House GOP and Senator Ted Cruz largely did not claim to be engaging in obstructionism in the name of reducing budget deficits. Indeed, their central demand—the wholesale rollback of the Affordable Care Act (ACA) would actually increase long-run deficits substantially.
But those days seem over and discussion after any short-term cease-fire on the continuing resolution (CR) and debt ceiling seems set to snap back to the Washington perennial of obsessing over long-run budget deficits. A clear sign that the nation’s political debate has shifted back to budget deficits is always that Erskine Bowles and Alan Simpson have launched a campaign calling on policy-makers to reduce deficits and are invited on talk shows and fawned over. Looks like we’re here again.
As comfortable as this makes Beltway pundits, it’s a disaster, since previous episodes where fiscal showdowns focused on budget deficits led to the radical austerity that has been so damaging to recovery from the Great Recession. Let’s recap.
The Budget Control Act of 2011 (BCA) became the law of the land when President Obama signed it on August 2, 2011. The BCA was the result of a threat by House Republicans to not raise the debt ceiling during the summer 2011 version of the fiscal showdown. The goal of the Act was to reduce budget deficits over the fiscal 2012 to 2021 period by over $2 trillion. Thus in the midst of an anemic recovery from the Great Recession with the unemployment rate at 9 percent, Congress and the President agreed to reduce federal spending beginning in October 2011 (the beginning of the 2012 fiscal year). These cuts, known as the discretionary spending caps, were specified in the BCA and would reduce fiscal 2012 budget authority by almost $70 billion (a 6 percent reduction) and 10-year budget authority by about $900 billion.
The BCA also established the Joint Select Committee on Deficit Reduction (popularly known as the Supercommittee) with a goal to “reduce the deficit by at least $1,500,000,000,000 over the period of fiscal years 2012 to 2021.” In the event the Supercommittee failed to achieve its goal, the Act specified that spending would be reduced by $1.2 trillion between fiscal 2012 and 2021. Of course, the Supercommittee failed because Democrats wanted more revenue raised than Republicans were willing to allow (basically none) and because Republicans wanted more mandatory spending cuts (mostly cuts to Social Security and Medicare) than Democrats would allow. (If all this sounds vaguely familiar, it should, because this is the debate Congress was engaged in all year before the showdown over the CR and the debt ceiling.)
The chart shown below provides a graphical representation of what the BCA has done and will do to discretionary spending. The top line shows the Congressional Budget Office’s (CBO) 2011 (before BCA) baseline projection of discretionary outlays as a percent of GDP. In the baseline, CBO assumes that discretionary spending will grow with prices. As can be seen, this assumption leads to discretionary spending actually falling relative to GDP over the 10-year budget window from 8.3 percent in fiscal 2012 to about 6.3 percent by fiscal 2021. In other words, the part of the government that administers programs, provides education and housing assistance as well as veterans benefits, funds medical and scientific research, runs the national park system, and enforces regulations* is projected to get smaller relative to the size of the economy.
Source: Author’s calculations of CBO data
Discretionary outlays as a percent of GDP, 2012 to 2021
Source: Author’s calculations of CBO data
The next line down displays the legislated trend in discretionary spending under the original BCA budget caps. Discretionary outlays are cumulatively reduced by almost $800 billion over 10 years and are projected to be 5.8 percent of GDP by fiscal 2021. The lowest line shows the projection for discretionary spending under the BCA sequester and reduced budget caps triggered by the failure of the Supercommittee. By fiscal 2021, discretionary spending is projected to be equivalent to 5.5 percent of GDP—lower than it has been at any time in the last 50 years.
These budget decisions have consequences for the well-being of the nation. The reduction in discretionary spending over the past two years has reduced the size of the federal deficit, but has had negative consequences for the nation. The budget caps and the fiscal 2013 sequester have resulted in at least 900,000 fewer jobs being created as well as reducing funding for educational assistance, housing assistance, and scientific research, among many other things.
*It should be emphasized that regulations are developed by the Administration to enforce laws passed by Congress.