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In the Nation's Interest

Yet Another “Cliff”

By Joseph Minarik

Spring has led to summer, which leads to fall, which leads by current custom to another round of “fiscal cliffs.”  There are four that reach a relatively high level of gravity: (1) a run-in with the debt limit, expected between mid-October and mid-November; (2) the expiration of the annual agency appropriations (with a hard deadline of September 30 / October 1); and both (3) pending Medicare reimbursement cuts under the “sustainable growth rate” (SGR) provision, and (4) expirations of several temporary tax cuts, both at the turn of the calendar year.  Beyond those, there is plenty of other remaining unfinished public business (you have read about the conflict over the Farm Bill, for example).

We have talked a fair amount about the debt limit, which carries the greatest potential for damage to the nation’s well-being.  But it is worth providing a bit of additional background on the annual appropriations bills, because they too are looking increasingly fraught as the hours of the Congressional session tick away.  (In contrast, you can bet that the Medicare SGR provision will be de-fused with another “doc fix,” and virtually all of the remaining temporary tax cuts will be extended for yet another round, both more with Kabuki than with true drama.)

For the record, the last instance when the Congress passed all of its appropriations bills on time was September, 1994, for the 1995 fiscal year – so just short of a fifth of a century ago.  Some might by reflex refer to such a Congressional session as “normal,” but clearly, at least by the standard of the frequency of achievement, it was anything but.

In every year since, at least some federal agencies did not have their appropriations on time.  This is in the interest of no one – even those who have a low estimation of the value of government.  Presumably, high on the list of reasons for skepticism about government are inefficiency and waste – and uncertainty about and delays of agency funding clearly add to waste and inefficiency.

Over the last few years, however, with regularly scheduled brinkmanship over agency funding, the end-of-fiscal-year deadlines have become increasingly tense.  And this year, the tension reaches a new high, for several reasons that are worth explaining here.  Let’s look at what the Congress has been up to.

First, flash back to the debt-limit crisis that culminated in August of 2011.  The deal to turn off that time bomb was understood by some as an overall attack on the budget problem, but all it really entailed was cuts in appropriations – which were and are a small and shrinking part of the budget (and therefore not the cause of the long-term budget problem, though no part of the budget should be excluded as a contributor to the solution).  The appropriations cuts that were enacted at that time were imposed (as were appropriations cuts for the last quarter century) through statutory spending caps, covering a ten-year period.  Yes, there is fat in every large organization.  But by a reasonable standard, those caps impose increasing restraint over the ten years; and most experts believe that the magnitude of the eventual amount of prescribed restraint (and therefore the amount of the assumed budget savings) was adventurous, if not excessive.  The fat was easiest to find in the first year.  FY2014 will be year three (depending on how you count), and we are having this discussion in some part because the negative reaction has begun.

But the assumed spending cuts don’t stop with the August 2011 appropriations caps.  On top of that, the August deal created a “supercommittee,” charged it to save a further $1.2 trillion over 10 years, and in the event that it failed created an additional “sequester” of that amount, falling exclusively on those same annual appropriations – which once again are a shrinking share of the budget, and not the source of the long-term fiscal problem.  With the failure of the supercommittee, we now face the additional savings from the sequester.  It began last year, so fiscal year 2014 will constitute year two of its spending reductions.  So for those who believe that the first round of appropriations caps will prove at some point to be excessive, the sequester accelerates and aggravates that problem.

However, unlike the 2013 sequester – which was an automatic across-the-board cut of all annual appropriations – the 2014 sequester (like the sequesters in all subsequent years) is merely a further reduction in the original August, 2011 spending caps.  That bears good news and bad news.  The good news is that, unlike the across-the-board 2013 first-year sequester, the Congress now has flexibility to try to minimize any pain.  The bad news is that to implement those savings this year the Congress must govern, and make difficult decisions.  As noted earlier, the track record of governing and decision-making in recent years – with respect to the annual appropriations, but more broadly as well – may be judged by many to be relatively weak.

So that is one reason why this year’s appropriations process looks to be particularly awkward.  There are other reasons as well.  One flows from the divided political control of the Congress.  The two chambers are on totally different tracks in their appropriations processes (such as they are).  The beginning of the textbook process is for the House and the Senate to agree on total amounts to spend, both overall and in different substantive areas.  This year, the House and the Senate have disagreed on the total, and on virtually every individual program area.  And strikingly, neither chamber has followed the current law.

As the following chart shows, the House has chosen to write its appropriations bills to conform to the spending caps including the effect of the 2014 sequester.  The Senate, however, is writing bills that meet the caps without the sequester – that is, the Senate appropriations target does not achieve the additional savings prescribed by the 2014 sequester.

So you may choose to rack up one point for the House.  But the current law specifies separate spending caps for defense and non-defense appropriations.  The House disregards those separate caps, and raises defense spending up to the level prescribed by the law without the sequester, and then makes up for that extra spending on defense by cutting nondefense spending below its cap in equal amount.  Now, technically and legally, the separate defense and non-defense caps are maximums, not precisely prescribed amounts.  But all of the caps were determined in a negotiated deal involving the Senate, the House and the White House; and so, arguably, overspending one cap and underspending another violates that previous agreement.  And overspending the defense cap clearly is contrary to current law.  The Senate, although it ignores the additional cuts in the sequester, does observe the separate defense and non-defense caps that were written in the law before the 2014 sequester was imposed, as is shown in the following charts.

So a second reason why this year’s appropriations process will be difficult is that the two chambers of the Congress are going their separate ways, but neither is obeying a strict interpretation of the current law.  Neither can claim the moral (or legal) high ground, and that could tend to prolong the process.  And if the House claims righteousness on the ground that it obeys the sequester, the Senate can take offense that the House violates both the sequester’s defense spending cap and the prior bipartisan agreement, likely extending the argument.

And there is one final reason why this year’s appropriations process will be both unusual and difficult, and that has to do with an interaction of the Congress’s obvious tendency to procrastinate on this part of its business, on the one hand, with the phenomenon of the level of spending going down, on the other.

As noted earlier, no college freshman or younger (prodigies excepted) has lived through a timely Congressional appropriations cycle.  As you might imagine, therefore, the Congress has learned how legally to violate the rules.  It passes a temporary appropriations bill, called a “continuing resolution” (or “CR”), so that agencies can continue operating until the Congress can come to agreement on a complete full-year bill.  Now, it stands to reason that if the Congress cannot agree on a full appropriations bill, it cannot agree on much detail in a CR either (else it would just pass a full bill rather than dither with a temporary CR).  Therefore, the typical formulation of a CR is simply to continue agency operations at the same funding levels as last year, until the new funding levels can be agreed upon.  (There are routinized mechanisms for dealing in CRs with “anomalies” in spending, such as year-to-year changes in spending amounts specified in long-term contracts.)

But this glide-by method makes sense only when spending is going up.  An agency can pinch pennies for a short period of time if it knows that more funds are in the pipeline.  But that same agency can get in big trouble if it starts a fiscal year at a higher spending level, and then has its funding cut.  Building on that point, if the Congress wants to procrastinate, simply continuing at the previous year’s funding level is an easy handle to grab.  But if spending is actually going down from one year to the next, and continuing at the previous year’s level is not a viable option, then there is no such easy hand-hold on a CR amount.  Instead, the Congress has to negotiate an appropriate lower amount.  And if the Congress had been prepared to negotiate such an agreement, it should have been able to pass a full bill on time, instead of procrastinating through a CR.

And this year, of course, appropriations will go down – in nominal (not-inflation-adjusted) dollars – because this year’s caps are well below last year’s actual spending (as shown in the following chart).  So the Congress cannot simply argue up until the deadline and then temporarily extend last year’s spending levels.  Instead, they must come to a substantive bipartisan agreement – and if the Congress were capable of doing that, we would be talking about something other than appropriations deadlock at this very moment.

So what happens if the Congress cannot agree?  Well, that is yet another bear trap awaiting a misstep by the Republic.  At this stage of the process, such as it is, neither chamber agrees with the actual current law – the August 2011 spending caps, plus the further reduction in those spending caps under the 2014 sequester.  If the two chambers cannot agree to a new law to change those amounts, then those amounts prevail, and determine the maximum spending amounts under the 2014 annual appropriations.  But the eternal verity that is easy to forget in all this jumble is that those maximum spending amounts in the law do not actually appropriate a single dime.  If the Congress does not pass its annual appropriations, the agencies have no money whatsoever to spend, and the government shuts down.  So if the Congress cannot agree, we get a mess.

Now, a government shutdown ranks leagues of seriousness below a government default (understanding that the two parties in the Congress argue over precisely what the term “default” means).  But our economy is shaky enough as it is.  Most economists would rather not know what would happen to growth and employment if some people, businesses, and state or local governments who had planned to write checks cannot do so because they have not received the federal government checks they were expecting.

You have heard recent reference being made to the “regular order” in the Congress.  Again, if the “regular order” includes annual appropriations bills being passed on time, then it has been a rare order indeed.  But even just a little bit more regularity certainly would be welcome at this time.  It is hard to justify all of the brinkmanship that we must endure at this time of economic peril.  And the impending fight over the annual agency appropriations looks set to be another painful component of that brinkmanship.