All Budget Deals Are Not Created Equal

Resolving budget issues to avoid a government shutdown or debt default is only half the battle.

By SHARE
EC_130919_sheneman.jpg

As I wrote here last week, a government shutdown would needlessly disrupt government programs; a government default would send the economy reeling. That doesn't mean, however, that any deal to avoid those outcomes would be a good one.

Here, courtesy of this analysis by my CBPP colleagues, are four criteria for evaluating any deal that emerges as we head toward zero hour for authorizing government spending for fiscal year 2014 and raising the debt ceiling, or as part of later negotiations after any temporary stopgap measures:

Does it strengthen or weaken the economic recovery?

The Federal Reserve's monetary-policy-making committee decided this week that the economic recovery is not solid enough to start phasing down any of the measures it's been using to stimulate economic activity.  One factor influencing the Fed's decision was surely a concern with the damage to the recovery that a government shutdown, or worse, a debt default would cause.

[See a collection of political cartoons on the economy.]

That damage would come on top of the drag on economic growth from fiscal tightening at the federal and state and local levels that's been underway since the stimulus from the 2009 Recovery Act peaked in 2010; at the federal level, that tightening includes the automatic defense and domestic spending cuts known as "sequestration." The Congressional Budget Office estimates that canceling sequestration for both fiscal years 2013 and 2014 would increase real Gross Domestic Product by 0.7 percent and boost employment by 900,000 jobs in the third quarter of next year.

An ideal budget plan would replace sequestration with sizeable deficit-reduction measures that take effect gradually as the economy and labor market strengthen as well as temporary, up-front measures to boost job creation now. As this CBPP analysis shows, such a policy would strengthen the economy in the short term and produce more total deficit reduction and a better long-run debt trajectory than sequestration beyond the first decade.

Does it protect low-income Americans and avoid increasing poverty and hardship?

In deficit-reduction efforts in 1990, 1993 and 1997, leaders of both parties embraced the principle that any deal should not increase poverty or impose additional hardship on low-income Americans. Fiscal commission co-chairs Alan Simpson and Erskine Bowles embraced the same principle in their plan.

[See a collection of political cartoons on the budget and deficit.]

This week's Census Bureau report on income, poverty, and health insurance suggests that any upcoming budget deal should adhere to the same principle. As CBPP President Robert Greenstein noted, "the new Census figures demonstrate that the painfully slow and uneven economic recovery has yet to produce significant gains for Americans in the bottom and middle of the economic scale."

Does it adequately fund public services?

Yielding to Republicans' demands for more large immediate spending cuts would not only threaten the recovery but also savage important government services. The House-passed budget resolution of this spring would set discretionary (non-entitlement) spending at the post-sequestration level but shift money from non-defense programs to defense. That would require programs in the Departments of Labor, Health and Human Services and Education be cut 18.6 percent below their 2013 post-sequestration levels.

Discretionary funding would shrink even without such large cuts. The cuts required under the Budget Control Act that President Obama and Congress enacted after their last debt-ceiling showdown would, by 2017, reduce non-defense discretionary spending to its lowest level on record as a percent of GDP, with data going back to 1962.

[See a collection of political cartoons on Congress.]

Does it strike a reasonable balance between spending and revenues and between defense and non-defense?

Deficit-reduction efforts since 2010 have tilted heavily toward spending cuts. Excluding sequestration, roughly 70 percent of the policy savings have come from program cuts and 30 percent from revenue increases. If sequestration continues, the ratio will move closer to 80-20. Revenues should account for a larger portion of future policy savings if we are to avoid savage cuts to important government services, anti-poverty programs and key entitlement benefits.

Policymakers designed sequestration to pressure both parties to reach a budget deal by requiring that cuts come half from defense and half from non-defense programs, thus giving both conservatives and liberals a reason to replace sequestration with a more thoughtful approach. Efforts to protect defense and put all of the burden on non-defense would reduce conservative incentives to compromise.

To sum up, resolving budget issues to avoid a government shutdown or debt default is only half the battle. The specific measures taken matter just as much.

Chad Stone is chief economist at the Center on Budget and Policy Priorities.

  • Read Ryan Alexander: Across-the-Board Pentagon Cuts Don’t Make Much Sense
  • Read Robert Dietz: What New Home Size Data Tells Us about the State of Housing
  • Check out U.S. News Weekly, now available on iPad