US Fiscal: Edging to a (Very) Small Budget Deal

Published on December 4, 2013

It has often seemed that Budget Conference Committee co-chairs Paul Ryan and Patty Murray were working as hard to lower expectations as they were laboriously working towards a budget deal these last few weeks.

And a good thing too, for the terms of the deal taking shape this week is studiously avoiding any of the politically existential issues for either party, like entitlements or taxes, and looks likely to barely cover 8% of sequestered discretionary spending.

*** That said, although the final terms are still being ironed out and could be derailed at the last minute, we do expect a conference committee agreement on its budget recommendations and that it could be announced as early as tomorrow. ***

*** The Ryan-Murray budget agreement is likely to “adjust” the sequester on around $80 billion to perhaps $90 billion of discretionary spending over two years, and lift the discretionary spending total in FY2014 to probably just under the $1 trillion mark. To avoid adding to the deficit, the budget agreement will need to assume the passage of one or multiple authorization bills to offset the adjustment to the sequester and the higher spending with a mix of fee-based revenues. ***

*** A House Rules Committee session has been penciled in for Friday, which could set up a floor vote on the new budget as soon as next week. The conference committee agreement is only a budget — a “framework”– and the probable vote next week will set the stage for all the follow-up legislation, including one or more authorization bills. We do think the budget will pass, but the vote will need to be whipped by both parties. ***

*** Once passed, the appropriation committees will draft new spending bills with the higher top lines and greater flexibility where freed from the sequester. Those bills could be passed separately or lumped together and passed in an Omnibus bill before the January 15 expiration of the current Continuing Resolution. Despite missing the committee’s pleas for a deal by December 2 to write the spending bills, they should in fact be able to easily do so. ***

*** Even with the inevitable stumbles along the way, as we wrote previously (SGH 11/20/13, “US Budget: Early Winds of a Small Deal”), a shutdown and debt ceiling showdown re-dux in January remains for all practical purposes off the table. ***

*** Importantly, this low expectations budget deal, if passed, will also establish the precedent to start unwinding the sequester over its remaining eight years. In turn, that prospect, coupled to the modestly higher discretionary spending levels over the near term, is something that will be weighed closely by the Federal Reserve as soon as their mid-December meeting, though perhaps more for its Summary of Economic Projections at the March 2014 meeting.

A Legislative Three-Step

The new spending level, if it indeed settles at just under $1 trillion, is still lower than the Senate budget level of $1.058 trillion, but well above the $967 billion House budget, and a tad more than the $986.3 billion under the current CR. It will be these final “top line” budget framework numbers, once drafted into legislative language, that could be voted on as early as next week.

But the framework is only the first of three steps to a new budget and avoiding a showdown when the current CR expires on January 15. First, is that “framework,” the budget resolution which “instructs” other committees to pass legislation “conforming” to its numerical caps on spending and new levels in revenues. The budget resolution is not a law — it does not change spending or revenues by itself — and is not presented to the president for signature or veto.

The second step is a series of follow-up legislation to implement the budget. These amend law and must be signed by the president. Expect multiple authorization bills allowing for the adjustment to the sequester through the offsetting revenue increases. These bills are often combined, sometimes through the reconciliation process which averts a filibuster threat in the Senate.

Step three is the appropriations process — either through an omnibus — a group of specific spending bills — or a continuing resolution — which is a formula for minimal spending adjustments. The “step two” bills — authorizing changes in law to implement the budget — are sometimes attached to these appropriations bills.

And it is the details of where the offsetting revenues will come from — step two — that is the sensitive subject of the negotiations yesterday and through today. For now, it looks likely that one of the largest providers of the new revenue will come through the broadband spectrum auctions, which could generate up to $20 billion or more in fees, as well higher so-called 9/11 security fees on airport security — all of $2.50 for each leg of multiple stop trips rather than just the first leg — that could raise about $11 billion. We are cautious about the $11 billion estimate as the politically aggressive airline industry is fighting the 9/11 fee hard.

But the rest will have to come from elsewhere, perhaps a tweak to increase contributions to the Federal Employees Retirement System, which is drawing protests from some unions a well as representatives around the Washington DC area. Another option on the table and likely to be included is an increase in the premiums for the government’s Pension Benefit Guarantee Corporation.

On the Democratic side, some are complaining over the abandonment, for now, of new tax revenues through closing various tax loopholes and credits. But the Democratic leadership wants to avoid losing a highly visible fight on net new taxes, fearing a wave of 30-second attack ads in the November 2014 elections. There have also been some complaints that the fee revenues are a burden on the average American, which seems a bit lame and mostly for maximum political theater.

Garnering the Votes

The vote gathering is always a tortuous process, but passage in both the Senate and House seems likely. The Republican leadership has to first sell the argument to its ever distrustful Tea Party colleagues that the higher discretionary spending levels and the targeted adjustment to the sequester is not a betrayal of the commitment to spending cuts.

Interestingly, many of the Tea Party objections seem to be as much about a newly found disdain for Ryan himself for being too pragmatic and showing such a willingness to cut a deal that runs contrary to the cause, whatever it is these days, as anything. Essentially, it’s Paul Ryan’s “turn in the barrel.”

And the Senate Democratic Committee co-chair Patty Murray is unlikely to agree to any deal without first getting the sign off from Senate Majority Leader Harry Reid that a deal,once announced,is likely to pass in the Senate. Senate Minority Leader Mitch McConnell is not likely to object strenuously to the deal, and in any case, there should be enough Senate Republicans voting for it, removing the biggest possible threat to its passage.

On the House side, Speaker John Boehner is being briefed on the details of the bill to better gauge where the votes are and how to corral them when the time comes. The stronger the Senate Democratic support, the more votes House Minority Leader Nancy Pelosi and Minority Whip Steny Hoyer will be able to gather. And the more Democratic House votes there are, the more House Republicans will be free to vote no, albeit only on the safe assumption it will pass.

For now, Boehner still intends to win a so-called “majority of the Majority” in the House floor vote to minimize Democratic leverage. It is too soon to say either way whether the Tea Party threat will be neutralized. If the Tea Party fires all its guns at the budget resolution, then leverage does shift to the House Democrats. And that, in turn, is a potential risk point if the House Democrats decide to add conditions in exchange for more affirmative votes.

In any case, Pelosi and Hoyer will proceed cautiously, hoping to shift the “incompetence” label on Republicans if indeed their ranks are divided by a Tea Party ambush.

The Senate is out this week but Murray already returned to Washington for the negotiations with Ryan, and the full Senate will be back next week. Boehner intends to adjourn the House next Friday, on December 13, but would keep the House in session for a few more days if that is what it takes to wrap the budget deal.

The risk is in whether the vote is split between one bill for the budget framework or one or more bills laying out the new offsetting fees. That could open the door to voting yes on the headline-grabbing budget deal but voting no for one or more of the spending offsets that might hurt favored constituents. That is where the party whips come in, and the decision by the leadership in how to draft the budget bill.

Beyond the budget framework and the revenue offsets, the appropriation committees then take over in writing the actual spending bills with their new flexibility on how and where to put the new funding to work, with defense spending being the most immediate and main beneficiary as well as a scattering of domestic social programs.

For all the bluster over missing a December 2 deadline set by appropriations chairs Hal Rogers on the House side and Barbara Mikulski on the Senate side, they should be able to quickly finish their work on several of the spending bills well before the January 15 end of the current CR.

The House reconvenes in the New Year on January 7, leaving a week to pass as many of the budget’s 12 spending bills, either as separate standalone bills or perhaps with all or a few lumped together in an Omnibus bill. If the appropriations committee work is far enough along and floor votes nearing, another very short CR could always be passed to provide a bit more time to pull the FY 2014 budget together.

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