August 1, 2014

Despite Difficulties, There's Still Hope for a Grand Bargain

Developments on the budget front last week demonstrated both the difficulty of achieving a grand bargain and why it may not be totally out of reach.  

First, the difficulty.

It became apparent last week that the House and Senate have made no progress on resolving their differences over Fiscal Year 2014 appropriations.  At issue is whether to assume that the sequestration cuts that took effect in March will continue. They are about $90 billion apart and unable to budge.

Then, in a speech last Tuesday, President Obama floated a new kind of  “grand bargain”: one aimed at short-term job creation rather than long-term fiscal sustainability.  The speech broke no new ground and did little to break the budgetary logjam.

While conceding that a fiscal sustainability plan must eventually be adopted, including a way to replace the sequestration cuts, Obama argued that his plan would at least address the current slow pace of job creation.

Essentially, he proposed to pay for a package of jobs programs (such as he proposed in his budget) with “transition revenue” from base-broadening corporate tax reform ideas that he proposed last year. The only new elements were to repackage these ideas into a stand-alone proposal and to make it all deficit-neutral by adding a “one-time” revenue-raising component to the corporate tax reform.

The proposal has two main problems. It would remove corporate tax reform from the mix of options that could be used to help strike a long-term deal, decoupling it from individual tax reform, and it would require all the political pain of corporate tax reform for no gain in long-term deficit reduction.

Republicans quickly dismissed the proposal, which was not surprising since they have consistently opposed raising revenues to pay for new spending.

Thus, shifting the focus of a grand bargain from the long-term to the near-term simply swapped one set of political trenches for another. It did not resolve the fundamental philosophical trade-off that must eventually be made between spending cuts, which were not included in this proposal, and tax increases.

In fact, by isolating corporate tax reform from individual tax reform and using any new revenues for new spending rather than deficit reduction, Obama’s proposal seems to leave the two sides even further apart.

And yet, two days after his speech Obama met for an hour at the White House with eight Republican senators who are clearly still interested in the kind of “go big” grand bargain that would replace the sequestration cuts and perhaps move further towards a fiscal sustainability plan. The same group has been in frequent contact with White Chief of Staff Denis McDonough.

While these talks have not risen to the level of a negotiation – Republican participants describe themselves as a “sounding board” – it is encouraging that they are taking place. With no funding plan yet adopted for Fiscal Year 2014, which begins on October 1, and the debt limit looming shortly thereafter, an agreement of some sort will have to be reached soon after Congress returns from its August recess.

The issues are so intertwined that a comprehensive grand bargain is still the best way to resolve them. Funding for Fiscal Year 2014 cannot be determined without deciding how to deal with sequestration. Altering sequestration to relieve the pressure on discretionary programs means finding other cuts in mandatory programs (entitlements) – a key Republican objective. But putting mandatory spending cuts in play means that Democrats will insist on new revenues as well.

It’s hard to see how this sequencing could be cut off at any point in a way that would command sufficient votes to pass. Certainly nothing that transpired in the last week in Washington would provide support for such an outcome.

So while things look bleak at the moment, there is still reason to hope that the compelling logic of a grand bargain that deals with appropriations, sequestration and fiscal sustainability will ultimately prevail.