The Outlook for Discretionary Spending: Cloudy with Patches of Bright

London weather is notoriously cloudy, and when it’s not actually raining it’s likely to be misting, and nearly always dark and dreary.  Sunny days are rare, especially in the winter.  My favorite weather forecast is “cloudy with patches of bright”, which might be too optimistic an outlook for discretionary spending in the next couple of years.

Barring the unlikely event of a grand bargain in the near term that would include cancelling sequestration (this would require about $1 trillion in deficit reduction), discretionary spending is on track for further cuts in the next fiscal year and beyond.  However there’s a great deal of uncertainty as to whether those cuts will be across the board at the program level, as they were in 2013, as well as to how those cuts might be apportioned between defense and non-defense spending.

Sequestration and the BCA, FY13 and FY14
For FY13, the federal government is operating under a continuing resolution (CR) that set discretionary spending at $986 billion. For FY14, the 2011 Budget Control Act (BCA) sets discretionary spending at $1.058 trillion, prior to sequestration. Within that, defense would be capped at $552 billion, and non-defense at $506 billion. Sequestration would reduce the total to $967 billion, a decrease of $91 billion from the BCA amount and a decrease of $19 billion from the FY13 CR.  With the sequester, the BCA calls for a cap of $498 billion on defense and $469 billion on non-defense discretionary spending in FY14.

There are currently three different FY14 budgets in play: the president’s budget submission, and the House and Senate versions of the budget resolution.  The president’s FY14 budget request and the Senate budget resolution both match the BCA-set level of $1.058 trillion in discretionary spending ($552B for defense, $506B for non-defense as noted above).

The House version of the budget resolution is much different. It sets discretionary spending at $967 billion, the BCA level minus the sequester amount. It deviates from the BCA, however, by taking all the cuts from non-defense agencies (leaving those with just $415 billion) while maintaining the $552 billion level for defense. Given the enormous gap in non-defense discretionary allocations between the House and Senate, it’s extremely difficult to see an end game for most appropriations bills—and maybe for any of them.

Appropriations, House and Senate
The Senate Appropriations Committee is moving forward with all 12 of its bills working from the BCA level as outlined in the Budget Resolution passed by the chamber. The aim is for the committee to dispose of the bills by the end of the summer. However, there is little or no prospect that time will be found to bring to them to the floor.

The House will work from the overall sequester level of $967 billion, as outlined in their version of the budget resolution. The House has allocated from that figure  a 5.4% increase from the FY13 level for Defense, a 3.4% increase for MilCon/VA, and a 3.2% increase for Homeland Security. On the other hand, there would be severe cuts in funding for most other agencies not covered in those three bills, including the Labor-HHS-Education bill (a 19% cut from FY13), State and Foreign Operations (16%), Financial Services and General Government (15%), and Interior and Environment (14%).

The House Republican strategy appears to center on passing those appropriations bills that would increase spending on their priorities—Defense, Milcon/VA, and DHS—while deferring on the spending bills that would impose massive cuts in Democratic domestic priorities. In fact some of the non-defense bills would be next to impossible to pass through subcommittee at the allocated numbers, much less the floor—something that even Appropriations Chairman Hal Rogers (R-KY) has hinted at. Earlier this week, the White House issued a Statement of Administration Policy that threatened to veto any FY14 spending bills that are based on the House–passed budget.

What is the end game?
The likely outcome? 100% chance of CR for FY14—at least for the first part of the fiscal year, if not ultimately for the whole year. The CR would leave spending at the current levels, with some changes (“anomalies”) in the distribution of resources among the agencies. What could change the calculus is the impending breach of the debt ceiling sometime this fall. All bets are off as to what might be included in a bill that would increase the borrowing limit—including new levels for discretionary spending.