Moving Right Along: The Fiscal Cliff

Barely taking a breath after an election that kept Republicans in control of the House and Democrats in charge of the Senate and the White House, our political leaders immediately turned to the work at hand. Of course we’re talking about a constellation of pressing budget issues, aka, the “fiscal cliff”. Within two months we have a raft of expiring tax breaks and a drastic discretionary spending sequester slated to go into effect if no action is taken either (a) to find $1.2 trillion in deficit reduction, or (b) to put off the day of reckoning. In addition, another debt ceiling debate looms within the first two months of the New Year. Here’s our early guide to the negotiations in the lame duck and into the 113th Congress.

GAI has compiled a quick-and-dirty list of “10 eternal truths” guiding the fiscal cliff debate.

1. The deal needs to find $1.2 trillion dollars in deficit reduction (spread out over the next nine years) by January 2, or else the sequester goes into effect.

2. The deal can involve revenue increases, cuts in mandatory programs, and cuts in discretionary spending in any combination.

3. While discretionary already took a hit in the 2011 Budget Control Act that put in place ten years of spending caps, additional cuts may be part of any deal.

4. Given the Democratic-favorable results of the election, any deal will involve some combination of revenue increases (opposed by many Republicans) and spending cuts.

5. $1.2 trillion is not enough in savings—and not even close—to quell the fears of the markets that the federal budget is out of control. This puts intense political pressure on both parties to come up with a deal in the near term, certainly by the end of 2013, to the tune of something closer to $4 trillion (including the initial $1.2 trillion).

6. Congress will likely elect to pass a law in the lame duck to push the day of reckoning down the road a few months—either for a $1.2 trillion deal, a bigger deal, or both.

7. Think BRAC—the Base Realignment and Closure Commission. Congress can pass a law to force itself to vote by date certain on a deficit reduction package as they did in the BRAC process to achieve efficiencies and savings in the Defense realm. This gets around the Senate filibuster and would carry with it the assurance that Congress would do something.

8. While a BRAC-style process would produce a bill that would not be filibuster-able, a lame duck session law setting up the vote would be. And it won’t be easy to pass. It is not clear that Senate Minority Leader McConnell is on board with any process that might lead to tax increases. The House is difficult, too. A Democratic House initially rejected TARP in the fall of 2008 despite dire warnings from the Bush White House and especially the Treasury Secretary Paulsen that we would be headed to a depression. In addition, the fractious Republican majority almost shut the government down in the spring of 2011, and failed to act expeditiously on the debt ceiling as that year wore on, nearly causing a first-ever default.

9. At the end of the day, the chambers will agree to set up a process, postponing the “fiscal cliff”, to address a wide range of fiscal issues in the New Year. This might not happen until after Santa Claus has made his rounds.

10. With the political pressure so intense to address these issues, and the public and the markets suspicious of the Congress’s ability to do difficult things (see #8), there will need to be a failsafe just in case if Congress rejects a grand plan in 2013. This could well include giving the president authority, in some limited areas, to implement spending cuts and raise revenue (by allowing certain tax provisions to expire) to at least find the $1.2 trillion. Such an arrangement (abdication?) might be exactly what would be needed to get the New Congress to compromise on a larger deal.