|Fiscal Policy Implications of the 2008 Elections||Financial Rescue; More for AIG; Auto Industry Request||Stimulus Bill in November?||FY 2009 Appropriations: What Now?||What's the Future of PAYGO?|
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Budget Process: Step-by-Step
July 30, 2008: President signs housing recovery legislation
Sept. 7, 2008: Fannie Mae and Freddie Mac seized by federal government
Sept. 19: 2008: Treasury Dept. announces it will provide guarantees for money market mutual funds
Sept. 20, 2008: Bush Administration proposes $700 billion financial rescue package
Sept. 30, 2008: President signs stopgap funding measure (HR 2638) that includes full-year appropriations for the Departments of Defense, Homeland Security, and Veterans Affairs; continues funding for other programs at last year's levels through March 6, 2009; and includes a $25 billion loan to the auto industry (which has yet to be disbursed).
Oct. 1: Senate passes revised financial rescue legislation (after initial defeat by House on 9/29) including increase in FDIC insurance, renewable energy incentives, AMT relief, tax extenders, and disaster relief (HR1424) JCT estimates CBO estimates
Oct. 3: House passes and President signs financial rescue package
Oct. 14: Treasury announces it will use $250 billion (of the appropriated $700 billion) to purchase stock in major banks AND Treasury releases final deficit figure for FY 2008: $455 billion.
Oct. 20: Fed Chairman Bernanke endorses, in principle, enactment of a second economic stimulus bill
Nov. 4: Barack Obama elected President; Democrats widen congressional majority (analysis below)
Nov. 7: Senator Robert C. Byrd announced he is stepping down as Senate Appropriations Committee Chairman
Nov. 10: Treasury and Federal Reserve announce additional aid for AIG (see below for details)
Nov. 17: Congress reconvenes for "lame duck" session (possible action on economic stimulus bill -- analysis below)
Jan. 6: House and Senate convene for 111th Congress
Jan 20: Presidential Inauguration
Late January: CBO's annual budget and economic outlook (for fiscal years FY 2009 - 2019)
February/early March: Congress likely to enact FY 2009 supplemental appropriations and economic stimulus bill (see below for details)
March 6: Funding for much of the Federal Government expires under the terms of the current continuing resolution (see article below)
March/April: President Obama to transmit FY 2010 budget proposal to Congress
April/May: Congressional action on a 5-year or 10-year Budget Resolution
Fiscal Policy Implications of the 2008 Elections
--Democrats increased their Senate margin from 51-49 to at least 56 seats (possibly more, depending on which political party Sen. Lieberman will caucus with and the outcome of the races in Alaska, Minnesota, and Georgia).
--This new Senate margin, empowers "moderate Republicans" with leverage; their votes could give Democrats a working supermajority of 60 votes to overcome GOP filibusters on major votes. Moderate Republicans who have in the past voted with Democrats on budgetary matters include Susan Collins (Maine); Norm Coleman (Minn); Olympia Snowe (Maine); and Arlen Specter (PA). (Add Lieberman to this category if he switches parties.)
--Alternatively, since Democrats do not have a built-in 60-vote supermajority, we may well see an active use of filibuster-proof "budget reconciliation" procedures to move Obama Administration budget initiatives through Congress. (Budget Reconciliation procedures allow budgetary legislation to be considered under strict time limits, thereby preventing a filibuster.) A difficulty for Senate Democrats, however, is that they have actively sought to limit the use of Reconciliation procedures to deficit reduction measures -- while most of the major upcoming budgetary legislation (stimulus measures, health care etc.) would increase deficits.
--On the House side, with the Democratic majority increasing to at least 255, the fiscally conservative Blue Dog Democrats will continue to hold critical leverage over fiscal policy issues. The Blue Dogs have 49 Members in the current Congress.
--The Blue Dogs have been ardent supporters of the House PAYGO rules (see the article below: What's the Future of PAYGO).
--In early October, then candidate-Obama, took time out from campaigning to speak with Blue Dog Coalition leaders: Mike Ross (AR); John Tanner (FL); and Allen Boyd (FL). Ross told the Washington Post, "He said he (Obama)...wanted to work with us....He also recognized that we had the numbers to block or clear" legislation.
Financial Rescue; More for AIG; Auto Industry Request
Click here for an overview and timeline of: the July 30th housing rescue legislation; the September 7th seizure of Fannie Mae and Freddie Mac; the October 3rd passage of the $700 billion financial rescue package; the October 14th Treasury announcement of Federal plans to buy equity in America's major banks; the Nov. 10th announcement of additional relief for AIG; and the relief request from the auto industry.
The Concord Coalition's overview of the crisis also addresses the budget impact of the recent measures. While there is no way at this juncture to make an accurate projection of the FY 2009 deficit, it is fair to say that it will substantially exceed $750 billion--as estimated by CBO Director Orszag--and could go significantly higher than $1 trillion.
Adding to the complexity, OMB and CBO may score various actions differently. For example, CBO will incorporate the financial activities of Fannie Mae and Freddie Mac in the FY 2009 Federal Budget, whereas the current OMB Director, Jim Nussle, has said OMB will not do so (although this could change under the new Administration).
Regardless of how the FY 2009 and 2010 annual deficits are calculated, the real impact on the U.S. economy can best be measured by examining increases in the federal debt--the amount of money the Federal government has to borrow to finance Fannie and Freddie, the financial rescue plan, the AIG rescue, and relief for the auto industry.
House Speaker Nancy Pelosi (CA) and Senate Majority Leader Harry Reid (NV) requested in a letter on Saturday that Treasury Secretary Paulson consider giving "temporary assistance to the auto industry" as part of the government's $700 billion authorized for government purchase of troubled assets (TARP). No specific amount of assistance was recommended by Pelosi and Reid.
Stimulus Bill in November?
Federal Reserve Chairman Ben Bernanke told the House Budget Committee at an October 20, 2008 hearing it is "appropriate" for Congress to consider a second stimulus measure to boost the economy.
"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Bernanke told the Committee.
Bernanke continued, "Should the Congress choose to undertake fiscal action, certain design principles may be helpful....Any fiscal package should be well-targeted....Any program should be designed, to the extent possible, to limit longer-term effects on the federal government's structural budget deficit....If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses, and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation." (emphasis added)
Congress is scheduled to reconvene on November 17th for consideration of a possible (second) stimulus package. However, House Majority Leader Hoyer has cautioned that the "Lame Duck" session may not occur if a stimulus package has not been worked out with the Bush Administration. As reported in The Hill, Hoyer said "Clearly there's no point in us doing something if the administration is going to take the position that they're not going to sign something."
Nevertheless, the economic numbers released last week (unemployment at 6.5%) would seem to put pressure on the White House and congressional leaders to come to agreement on a near-term package.
The first economic stimulus bill this year was signed into law on February 13, 2008 and cost $152 billion (HR 5140). The bipartisan package provided tax rebates for individuals and business incentives.
The House of Representatives passed a second $61 billion economic stimulus bill (HR 7110) in late September. However, a similar bill (S. 3604) failed in the Senate when proponents fell 8 votes short of the 60 votes needed to shut down a Republican filibuster. The President had threatened to veto both the House and Senate bills. Veto threat: House Bill Veto Threat: Senate bill
Both stimulus bills would have extended unemployment benefits, and provided funding for infrastructure projects, state Medicaid programs, and food stamps.
It is also likely that proponents of a new stimulus bill will seek aid for the States.
FY 2009 Appropriations: What Now?
On September 30th, President Bush signed into law a funding measure (HR 2638) to keep the government operating into the new fiscal year -- FY 2009 -- which began October 1st.
The measure is actually a hybrid of an "omnibus" appropriations bill and a "continuing resolution":
--it includes detailed, full-year appropriations measures for the Departments of Defense, Homeland Security, and Veterans Affairs; and
--it includes stopgap funding through March 6, 2009 for Health and Human Services (HHS), and all other departments and agencies of government, at FY 2008 levels.
In addition, the bill also includes $23 billion for disaster relief, and authorizes $25 billion in loans to the auto industry to retool and develop more fuel efficient vehicles.
The stopgap provision does not provide inflation adjustments for the covered agencies. However, some specific programs did receive increases: the low income home energy assistance program (LIHEAP) received a $2.5 billion increase over '08; Pell Grants for higher education received $2.5 billion over '08; and the WIC program received $1 billion over '08 to assist with nutrition for new mothers and their children.
Because the stopgap funding expires, Congress will have to enact an FY 2009 continuing and supplemental appropriations measure no later than March 6, 2009.
This year's appropriations process was one of the worst on record in terms of following the regular order. Only one of twelve appropriations bill made it to the House Floor during the 2008 session. There are two reasons for the disruptions in the regular process:
First, President Bush threatened to veto any appropriations bills that exceeded his budget request, and Democrats--as reflected in the Budget Resolution--called for nearly $25 billion more than the President requested.Second, House Republicans were attempting to amend appropriations bills with off-shore oil drilling amendments, strongly opposed by many Democrats. On June 26, House Appropriations Chairman David Obey (D-WI) suspended markup of the Labor-HHS-Education appropriations bill when Republicans attempted to substitute drilling language for the labor, health, and education provisions. However, in the end Democrats yielded on the drilling issue and let an annual ban on offshore drilling expire as of September 30, 2008 (although it could be reinstated in some form next year).
What's the Future of PAYGO?
In 1990, the Bush Administration and Congressional Democrats negotiated the first of three 1990's deficit reduction agreements that led to budget surpluses by the end of the decade.
A centerpiece of that "Budget Summit" agreement was the enactment of a new Budget Enforcement Act of 1990 that included: (1) a "pay-as-you-go" requirement for new tax cuts and new entitlement spending;and (2) caps on discretionary spending for the subsequent 5 years.
The "pay-as-you-go" requirement--now called PAYGO--was a straightforward requirement that any new tax cuts or new entitlement spending have to be offset by revenue increases or mandatory (entitlement) spending cuts. It was enforced by an automatic "sequester" mechanism that would trigger automatic budget cuts (including Medicare cuts) in the event that Congress failed to enact offsets. (Similarly, the caps on discretionary spending were enforced by automatic across-the-board cuts in discretionary programs.)
Enforcement of the 1990s PAYGO requirement was suspended in cases of war or adoption of a congressional resolution recognizing "low economic growth." (Note that if the 1990s PAYGO law was reinstated, it would very likely not take effect until after the current recessionary period.)
The bipartisan PAYGO requirement was later extended in 1993, and again in 1997.
However, the Bush Administration -- in order to enact the massive tax cut legislation of 2001 -- included provisions to circumvent and effectively repeal PAYGO.
Following the mid-term elections of 2006, when Democrats became the majority party in Congress, one of their early priorities was to reestablish PAYGO. The Bush Administration and many congressional Republicans were, however, adamantly opposed to reenactment of the 1990s PAYGO law, believing it would hinder extension of the tax cuts due to expire in 2010. Consequently, congressional Democrats adopted PAYGO, but only as an internal rule of the Congress -- lacking the teeth of automatic budget cuts to enforce the requirement.
The House fiscally conservative "Blue Dog" Democrats have been the strongest advocates for the PAYGO rules, but with strong congressional Republican and White House opposition, the House and Senate PAYGO rules have been frequently waived (for example, AMT relief, GI Bill, and Tax Extenders).
- During the campaign, President-elect Obama pledged to "reinstate PAYGO rules." His website says that "Obama and Biden believe that a critical step in restoring fiscal discipline is enforcing pay-as-you-go (PAYGO) budgeting rules which require new spending commitments or tax changes to be paid for by cuts to other programs or new revenue." Moreover, in a Senate Floor speech prior to voting on the $700 billion fiscal rescue package, Obama said, "Runaway spending and record deficits are not how families run their budgets, and it can't be how Washington handles people's tax dollars....It's time to return to the fiscal responsibility we had in the 1990s. We need to go through the budget, get rid of programs that don't work, and make the ones we need work better and cost less. With less money flowing into the Treasury, some useful programs or policies might need to be delayed in the years ahead."
- However, reinstating the PAYGO discipline of the 1990s will encounter resistance on both sides of the aisle.
- On the Republican side, there is strong opposition to the 1990s PAYGO law because it would require offsets (i.e. revenue increases or spending cuts) to pay for the extension of the Bush Tax Cuts. Republicans generally believe that the Bush tax cuts should be "assumed" to continue despite their statutory expiration at the end of 2010.
- Similarly, the Obama campaign, while calling for "reinstating PAYGO," does not believe that their proposed middle class tax cuts should have to be offset. Rather, under their version of PAYGO, the Bush tax cuts are assumed to continue beyond 2010, and middle class tax cuts, healthcare reform, and other initiatives would be "offset" by rolling back portions of the Bush tax cuts.
- However, under the 1990s PAYGO law, the budget baseline, or starting point, would assume expiration of the tax cuts in 2010; and any extension of the Bush tax cuts or alternative types of tax cuts would have to be fully offset. This traditional (1990s) approach to PAYGO is likely to be supported by the fiscally conservative Blue Dog Democrats in the House, and like-minded Senators. (see election analysis above)