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The Budget Deal: And the Winners Are?

US Capitol-WinterWithin the last two days, the U.S. House and Senate have passed the Consolidated Appropriations Act, 2014, a $1.1 trillion spending bill for the 2014 federal budget.

So who are the winners in this budget and spending deal?

Without question, Washington politicians are the biggest winners.  With caveats, the American people can also be considered winners.  The only real losers in this deal were the people who wanted significant increases or cuts to federal spending.  Let’s explore each group a little more closely.

Washington Politicians

Although no party or chamber got everything they wanted, everyone got enough to declare victory.  The political movers and shakers also got to burnish their bipartisanship credentials and willingness to compromise.  They also avoided another bruising government shutdown akin to the first 16 days of October.  Even though another shutdown might have inflicted more political damage to Republicans, Democrats were wise not to antagonize a restless electorate.  It’s an election year, and there’s always a risk voters will develop an anti-incumbent attitude and vote to “throw the bums out.”  At the same time, the bills passed by large enough margins that anyone wanting to cast a vote of displeasure could easily do so without scuttling the deal.  In the end, these votes were more symbolic than substantive.

The American People

We the people are winners to some extent.  Albeit four months into the current fiscal year, Congress passed its first real budget and spending bill in four years.  The government has essentially been operating on autopilot for the past four years via temporary and stopgap measures, rather than following the budgetary and appropriations process.  We also avoided another government shutdown, which ultimately doesn’t save any money and only makes many lives more difficult.  Congress also ended the across-the-board spending cuts known as Sequestration.  Although I agreed with the reduction in federal spending, the manner in which it was carried out was asinine.  Sequestration was a political maneuver which was never supposed to be implemented, but it was.  Therefore, it took some time for Congress and the President to figure out another political angle to extricate themselves from the mess they created.

As much as we are winners in this deal, we’re also losers.  In the deal to eliminate Sequestration, Congress increased short-term spending with the promise of larger cuts to future spending.  History has proven the promises of future cuts rarely materialize.  While spending may not have increased much in the short-term, the hard decisions of how to reduce spending and balance the budget have been postponed once again.  The enactment of a spending plan is good, but the process stunk.  Instead of Congress passing the requisite 12 appropriation bills for federal spending, they combined them all into one 1,582 page, must-pass bill, voted on hours after being released.  How well do you think your Representative or Senator read this 1,582 page bill?

The Advocates

Those who advocated for significant spending increases were disappointed. However, if you consider the federal spending increases over the past four years, they have already won in some respects and were unlikely to secure further increases.  The big losers were the budget hawks and those who want to dramatically pare federal spending and balance the budget.  They not only lost the battle to further cut spending, but some of the guaranteed Sequestration cuts were replaced with a promise of future cuts.  Although this deal is only for the 2014 budget, it has set the stage for the 2015 budget.  The motivations for Congress to reach this deal will drive the politics for the 2015 budget to be quite similar.  Therefore, the 2016 budget will probably be the first real opportunity for the budget hawks to make significant steps towards a balanced budget.

Win  and Lose

The 2014 budget and appropriations bills essentially maintain the status quo, which is a win for preventing major financial disruptions.  At the same time, we have lost another opportunity to make the tough decisions and address the issues which are perpetuating the overspending by the federal government and adding to the mounting federal debt.

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Can Congress Cut Spending?

As part of their Pledge to America, Republicans promised to cut $100 billion of federal spending in the first year they were in office.  With the Republicans regaining majority control in the House of Representatives, the pressure is on for them to act.

Let’s take a little look beyond the political rhetoric and consider some of the facts.

  • Congress has yet to pass the 2011 budget, so the government continues operating based upon the 2010 budget.
  • Total federal spending for FY 2010 (October 1, 2009 – September 30, 2010) was $3.55 trillion.
  • Mandatory spending (i.e., Social Security, Medicare, debt service) was $2.184 trillion, defense spending was $664 billion and all other discretionary spending was $702 billion.
  • The deficit for fiscal 2010 was $1.42 trillion.

When you look at federal spending of $3.55 trillion, $100 billion is approximately 2.8% of the total.  It’s hard to argue that a 2.8% reduction in expenditures is a draconian cut.  However, opponents of the cuts have a valid reason to be concerned. 

When Congress talks about cutting spending, they usually are referring to non-defense discretionary spending, which is only about 20% of all federal outlays.  When you look to trim $100 billion from $702 billion of spending, the cuts are far more dramatic, so it’s understandable why the recipients of these funds are concerned.  Furthermore, this is the area of the budget that directly impacts the various constituents of a particular Member of Congress, which is one of the reasons it’s so difficult to enact spending cuts.  Everyone is trying to protect their turf.

Irrespective of these issues, I believe that Congress has to cut spending.  When you look at the numbers, there is simply no way that the government can raise sufficient revenue to balance the budget, nor can it continue to overspend in excess of $1 trillion each year.  At the current rate of spending, the total federal debt is projected to be near $20 trillion by the end of 2015, and will continue climbing ad infinitum.  It doesn’t take a genius to realize it is unsustainable.

I’m also of the opinion that this is a test of Congress’ true mettle and ability to deal with our fiscal crisis (yes… I’ll call it a crisis).  On the big picture, if Congress can’t trim $100 billion from nearly $3.6 trillion of spending, something is wrong.  That’s less than 3% of the total pie.  It’s also less than 10% of what would be needed to balance the budget.

Given the political dynamics of Washington, the burden doesn’t rest solely with the Republicans. President Obama and the Democratically controlled Senate also need to be part of the process.  Both parties contributed to the debt and excess spending, and both need to be part of the solution.

Without doubt, it’s going to be a difficult and painful process.  Just like your personal finances, it’s easier to increase spending than reduce it, but if necessary, you do it.  For me, a $100 billion spending cut is the beginning and not the end.  They will need to reduce spending by much more to solve our fiscal crisis, but you have to start somewhere.  Time will tell if Congress really can reduce spending.