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Tuesday, January 22, 2013

A Guide To The Three Budget Fights Coming In The Next Four Months


Now that Inauguration Day has passed and both the President and Congress have been sworn in it is time for the executive and legislative branches of government to go back to swearing at each other.

As we enter the President’s second term America’s nation public debt (money owed to lenders outside the federal government) is over $16.5 trillion dollars and projected to by the Congressional Budget Office (CBO) to grow another five trillion by the end of Obama’s second term. The CBO also reports that the “fiscal cliff” deal will signed at the beginning of the year will actually raise the national debt by almost $4 trillion dollars during the next ten years.

Coming up in the next four months will be three more budget battles. The will pit the Democrats fighting for higher taxes and spending vs. the Republicans who will fight for spending and possibly even tax cuts.

The three battles include the immediate debt ceiling increase, sequestration and a long-term debt ceiling increase.

We may get lucky as first debt ceiling battle may already be over. The GOP has made a clear offer that can't be refused (OK maybe its better said that it shouldn’t be refused).  The GOP will agree to raise the debt ceiling to cover the countries financial needs through mid-May but they WILL NOT consider a long term debt ceiling increase until the Senate passes a budget (despite the fact they are required by law to pass a budget by April 15th, the Senate hasn’t passed a budget in four years).

NY Senator Chuck Schumer (fresh off abandoning Israel and throwing his support to Chuck Hagel) likes the proposal and looks forward to a senate-created budget. Schumer was on Meet the Press this past weekend and said that the Democrats see the budget process as “a great opportunity” to pursue additional tax increases — and to create a fast-track process to push them through the Senate;

“There’s going to have to be some spending cuts, and those will be negotiated,” Schumer, the No. 3 Democrat in the Senate, said in an interview after the show. “But doing a budget is the best way for us to get revenues.

As part of the fiscal cliff deal at the beginning of the year the second impending battle was delayed by two months.  The sequestration fight will now happen sometime near the end of February.
As part of the summer of 2012’s debt ceiling deal if a “super-committee” of Democratic and Republican legislators could not come to a compromise $1.2 trillion in automatic budget cuts to defense and social programs kick in.

The GOP has been fighting sequestration due to fear the defense cuts will hurt the US ability to defend its citizens. 

There is a dirty little secret however, that no one is talking about; the Democrats hate the social program part of the cuts as much as the GOP hates the defense cuts. According to a report in Politco, programs scheduled for across-the board cuts include:

the elimination of 2,300 National Institutes of Health research grants; nearly 100,000 children losing Head Start services; and no more child care assistance for 80,000 kids. Not to mention 12,150 fewer patients with access to AIDS Drug Assistance Program benefits and 169,000 people who would not get access to substance-abuse treatment programs.”

Despite that they are not happy with the defense cuts, it is very likely the GOP may decide to not to fight the sequestration cuts. In the end they may recognize that $1.2 trillion in across-the-board cuts are needed to start trimming the size of our massive debt. When one includes the $4 trillion dollar increase from the “fiscal cliff” deal, the sequestration cuts would actually mean the during the first two months of the year, projections for the national debt would have jumped by $2.8 trillion dollars. In other words, still heading in the wrong direction.

The second Debt ceiling debate will occur sometime around April-early May. This one is going to be a tough no-holds-barred battle on both sides of the aisle.

The President outlined a very aggressive tax and spend statist agenda in his inauguration speech. 

Based on his election victory Obama believes he has been given a mandate to increase government programs and spending (he calls them investments) and taxes (or as he calls them revenue enhancements). On the other hand each of the Republican Members of Congress have been given a mandate by their districts.  These Representatives have mandate to cut taxes and spending.  With the conflicting mandates comes the conflict between the executive and legislative branches that have been going on for the past two years, and the next one is going to be a doozy! 

On the other hand this “gridlock” is what our founders wanted when they created three co-equal branches of government. Each representing a different constituency each with the ability to check the other.

The battle has already been engaged. The President and his progressive minions don’t want any cuts to social programs and wish to tax the rich even more.  The GOP wants to cut spending, reform both entitlements and tax structure.

The GOP’s opening gambit is there will not be a long-term debt ceiling increase without a corresponding amount of budget-cuts.

The Democrats are just as adamant that there will not be cuts to entitlements (which represent the biggest chunk of federal spending) and that additional taxes are necessary.

There is a danger to the Democratic approach. Higher taxes generally lead to lower tax revenue.  How does that happen? Allow me to provide an example. 

This past weekend Championship Golfer Phil Mickelson announced he might follow the lead of GĂ©rard Depardieu, which is he may leave his home State of California or even the United States because of the harsh tax burden.

The golf superstar was interviewed by Sports Columnist Scott Michaux and revealed he might make major changes to counter what has become oppressive taxation (he pays a little over 62% of his income in state and federal taxes).

Some people vote at the ballot box, others vote with their feet.  As Mickelson implies--why work if you only get to keep 38% of your money?  Some people (who can afford it) will stop working others may leave even leave the country. In the end what usually happens is higher tax rates lead to lower tax revenue.

So what will happen between now and mid-May? There are some in Congress who will not vote for a debt ceiling increase no matter what. A feeling which echoes what a rookie Senator said in 2006 when he voted against the raising of the debt ceiling:

 "Mr. President, I rise today to talk about America's debt problem. The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is 'trillion' with a 'T.' That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President's budget will increase the debt by almost another $3.5 trillion." (Sen. Barack Obama, Congressional Record, 3/16/06, p. S2237)

Contacts within the beltway tell me that there is no way the GOP will pass a debt-ceiling bill without substantive cuts which begin shedding the oppressive weight of our national debt, but there is also no way the Democrats agree to substantive cuts.

 Then there is the pressure of the added possibility of lowering America’s credit rating.  Fitch Ratings, one of the three major debt-rating services has warned if the debt ceiling is not raised our debt will be downgraded. Fitch also warns if we do raise the debt ceiling, but don’t make significant strides toward cutting our debt, the US credit rating will also be downgraded.

Three budget fights in four months, the outcome/success of Obama’s second term and most importantly the future of the American economy may very well be determined before those four months are over

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