Thinking About A Second Sequester, Fiscal Year 2014, and Congress

The battle between the House and the Senate over Fiscal Year 2014 appropriations combined with the need to raise the federal debt ceiling limit will once again dominate the legislative calendar this fall.

For those who have worked hard on immigration reform or energy policy, the reality of a fall filled with more fiscal deadlines and debt fights is bad news. Immigration legislation will have to battle spending and debt deadlines to get time particularly on the House floors.

For Congress, however, this gives it a chance—once again—to do something fundamental on both the fiscal and growth fronts. Can either chamber or either body move beyond political tactics to policymaking strategy?

When the Domenici-Rivlin Debt Reduction Task Force plan was developed , all 19 members of the Task Force agreed that fiscal challenges and growth problems cannot be separated. Thus the plan advocated aggressive short-term policies to encourage growth and a longer-term approach that would phase-in fundamental tax and entitlement spending reform. Recently, the BPC has updated major proposals to reform one of the critical entitlement programs – Medicare – and health-related tax policy. So far, Congress has given no indication that it can handle either the tax or entitlement reform challenges, let alone both.

That prompts a question. Will the slowly growing pain of the current sequester now moving through the national economy be enough to make Congress act both on the growth front and on the long-term fiscal front? April’s slight improvement in employment masks continued declines in federal, state and local employment combined with no growth in the important goods producing sector of our economy. So far, policymakers only response to the misguided sequester has been to make sure the Air Traffic Controllers get back on the job.

Federal Reserve Board Chairman Ben Bernanke was blunt about the confrontation between fiscal and monetary policy in his statement of Fed policy Wednesday—“fiscal policy is restraining economic growth.” This follows his earlier statement on the limits of monetary policy alone to produce growth. Has a Fed Chairman ever been blunter?

As the Domenici-Rivlin 2.0 plan explicitly noted again last year, austerity alone won’t meet the twin economic policy challenges.

Those challenges intensify this year. The May 18 federal debt limit reinstatement date will pass largely un-noticed, since Treasury can use “extraordinary measures” to pay federal debts until later in the year. But Congress will be hard-pressed to compromise on 2014 spending bills, and with a compromise between the two bodies on those bills, a second sequester and more self-defeating pain for the nation would loom.

The House intends to pass 2014 appropriations bills totaling $966 billion, the spending cap set by the sequester. The Senate has said it will pass bills totaling $1.058 trillion, the FY14 spending cap set before sequester by the Budget Control Act of 2011 and amended by the American Taxpayer Relief Act of 2012. The differenc e – $92 billion – surpasses the total funding for the Transportation Department, or the combined budgets of both the Department of Education and Energy. The immediate reaction of analysts may be, “Well they will just compromise somewhere between.” Never mind the gymnastics Congress needed to get a compromise for 2013 spending where the gap between the chambers was only $29 billion.

Any compromise above $966 billion (without specific provisions vitiating the sequester) will set off a sequester for 2014 discretionary spending. The sequester cuts for mandatory programs, like payments to Medicare providers, would continue unabated on October 1 of this year. By mid-January of calendar year 2014, the sequester would hit the annual appropriations bills. The economic impact of such a second sequester will exacerbate the very problem that Bernanke noted: fiscal policy is impeding growth.

Will the pain the present sequester imposes, as we asked before, force Congress to act?

If the 1986 sequester gives us any hints at the answer to that question, Congress will do one of the following:

1. Pass a compromise 2014 Continuing Resolution (CR) for Appropriations (above the $966 billion level) and in the same legislation vitiate the BCA caps;
2. Pass a compromise 2014 CR and let the second sequester occur;
3. Pass a short term 2014 CR (three months, perhaps) , try to forge a larger deal before the sequester takes effect in January, possibly leading to repeal of the entire law at year’s end, creating a mini-fiscal cliff with the debt limit and expiring tax provisions toward the end of 2013..
4. Just repeal the BCA and forget about sequester. More scenarios come to mind, but none of them, note, respond to the twin demands of short-term growth and long-term spending and tax reform.

Some slim chance exists that a “global” fiscal settlement could be prompted by a major tax reform bill. Such a bill could raise revenues, lower rates, and accompany major entitlement reform legislation,. giving Congress a chance to solve the 2014 domestic and defense spending challenge without sequester.

The U.S. economy grinds along slowly. The psychological impact on Americans of a paralyzed and polarized Congress increases. Congress needs to act, or outside forces will likely act for it.