The Budget Endgame
his year's extraordinary debate on the government's budget has many federal
managers reaching for their Maalox. They may share the American public's diverse
reactions -- optimism, cynicism, anger and amusement -- but they cannot share
the public's sense of detachment. The magnitude of the deficit-elimination plan
being considered by Congress, combined with the likely timing of the final
decisions, is providing what will likely be one of the toughest combined personal and professional challenges of their careers.
In some cases, executives will find their own jobs on the line, as virtually
every program (except Social Security and probably defense) is up for grabs
either this year or at some point before the end of fiscal 2002. But even
executives who don't fear for their jobs will have to deal with tremendous
uncertainty about the funding levels for their programs, uncertainty that is not
likely to be settled until months past the start of the fiscal year on Oct. 1.
In the interim, they will likely face a steady series of Perils of
Pauline-style budget cliffhangers. For lack of appropriated funds, one or more
work stoppages probably will occur. There will be uncertainty about whether the
federal government will have enough cash to pay its employees and contractors
and whether their banks will honor their paychecks. And at best, there will be
conflicting information about what Congress and the White House are going to do
to resolve various impasses on the budget.
Budget-related government shutdowns have occurred before -- four times during
the Reagan-Bush years, as the two Republican Presidents sought spending
reductions that were resisted by Congress, especially by strong Democratic
majorities in the House. In 1981, 1984 and 1986, "nonessential" federal
employees were sent home for one day. In 1990, the government shut down over Columbus Day weekend, closing national parks and museums.
But this year, with Republicans controlling Congress and its committees, the
climate of uncertainty on budget issues is the most corrosive it has been in
many years. The situation that prevailed during the 1980s is essentially
reversed: Then, the President proposed cuts and Congress resisted; now, Congress
is cutting and the President is raising objections. Congress has the upper hand
in the battle, especially with regard to discretionary programs; the President's
veto power, after all, cannot force an increase in appropriations. His veto may
be more effective against legislation to cut entitlement programs, though the
huge reconciliation bill congressional leaders have in mind will be so essential
to deficit reduction that it will be difficult to reject.
Uncertainty is heightened by the advent of new congressional leaders and
committee chairs, especially in the House. No one knew quite what to expect from
Newt Gingrich, R-Ga., in his first year as Speaker of the House, and his
hands-on style continues to evolve. House Budget Committee chairman John Kasich,
R-Ohio, is an axe-wielding firebrand with seemingly boundless energy. He has
been stepping beyond the usual role of Budget Committee chairman in his effort
to ensure that policies assumed in the budget resolution are in fact written
into law.
New to their jobs as well are Ways and Means Committee chairman Bill
Archer, R-Texas, and Appropriations Committee chairman Bob Livingston, R-La. The cast of leaders in the Senate, in contrast, seems relatively familiar, as
Majority Leader Bob Dole, R-Kan. and all the key committee chairmen were in the
same roles when the Senate was last under Republican control, in 1986.
Deficit-Reduction Calculus
The magnitude of what is being considered this year is startling, and the
cuts to be made will by no means fall evenly across the government's myriad
programs.
The dimensions of the task were outlined earlier this year, as Congress set
out to balance the budget. The Congressional Budget Office forecasts that,
assuming moderate economic growth and no changes in current law, the government
will run deficits totaling $ 1.9 trillion over the next seven years -- from
fiscal 1996 through 2002. Over a comparable period, the last big round of
spending cuts, enacted in 1993, saved only $ 400 billion to $ 500 billion.
The Republicans have ruled out tax increases, so all of the burden of erasing
the deficit falls on the spending side. To balance the budget immediately would
entail $ 230 billion in spending reductions in 1996, rising each year to $ 349
billion in 2002. Such large cuts could disrupt the economy, so CBO has suggested
a more gradual course of deficit reduction. Deficits could be tolerated until 2002, starting with a $ 173 billion target in 1996, dropping under $ 100 billion
in 1999 and disappearing three years later. This is essentially the course
Congress adopted in late June in its fiscal 1996 budget resolution. But even
after accepting some $ 600 billion in added borrowing between 1996 and 2002,
Congress still has to find $ 1.3 trillion in spending reductions.
CBO has said this can be accomplished in three steps.
First, CBO showed that a relatively easy whack could be taken out of
projected spending simply by eliminating assumed inflation adjustments in
appropriated programs. Such adjustments were already ruled out through fiscal
1998 by caps on discretionary programs; the caps would now be extended through
2002. This step -- which Congress endorsed in its budget resolution -- would cut
projected borrowing needs by about $ 200 billion.
Second, spending could be cut by an additional $ 900 billion starting in
fiscal 1996.
Third, CBO reports that federal borrowing would be less because the first two
steps would reduce debt-service requirements, saving another $ 200 billion. Not counting the interest savings, program reductions thus will have to total
about $ 1.1 trillion over the seven-year period if the budget is to balance.
Spending cuts of this magnitude are almost unimaginable. Cuts of $ 1.1
trillion amount to about 10 percent of the $ 10.1 trillion the government is
projected to spend under current law between fiscal 1996 and 2002, excluding
interest costs.
Also, roughly half ($ 5.5 trillion) of the $ 10.1 trillion will be off limits
to budget cutters: Social Security, defense and a number of other areas that,
for technical or legal reasons, cannot be touched.
Without other policy changes, programs that spend the remaining $ 5.6
trillion would need to sustain cuts averaging 19.6 percent to bring the budget
into balance. But, of course, this year's budget resolution also includes a $
240 billion tax cut between fiscal 1996 and 2002. This will necessitate added
spending cuts -- and mean that current spending programs would need to be
reduced by an average of 24 percent.
Some programs will be cut by much more than these amounts. Congress is
discussing reductions for some agencies, such as the Environmental Protection
Agency, in the 30 to 40 percent range for next year alone. Other programs will be cut by less than the across-the-board percentages.
Some public safety programs will be cut only minimally. Medicare and Medicaid --
the two biggest entitlement programs after Social Security -- also are slated
for smaller-than-average reductions.
The deficit-reduction plan passed by Congress in June assumed that $ 440
billion of all of the spending changes needed to balance the budget by 2002 (not
including offsetting a tax cut) would come from appropriations. To assure that
this would happen, Congress extended caps on appropriated programs through
fiscal 2002. That means the enforcement mechanism that has worked so well to
limit the growth and force cuts in these programs since fiscal 1991 will remain
in place for at least the next seven years.
Budget Stew
While implementing spending cuts is never pleasant, federal managers know
that the job is easier if the required cuts are identified early in the fiscal
year. That isn't going to happen this year, though.
Three things must occur for this year's budget process to be completed.
First, Congress and the President must enact the 13 regular fiscal 1996
appropriations. This part of the process is key for agencies and their managers,
since it sets operating budgets that govern staffing and other administrative
essentials.
Second, a reconciliation bill embodying the entitlement and tax changes
assumed in the budget resolution has to be enacted. The changes will present
administrative problems for those responsible for implementing them.
Third, an increase in the limit on federal borrowing will have to be enacted
sometime in October when the current ceiling is reached. Without the increase,
Washington will run out of cash sometime this fall.
The problem for federal executives is that while the appropriations bills may
be their chief concern, the politics of this year's budget process will almost
surely link heretofore routine funding bills to the more controversial
reconciliation and debt-ceiling-extension measures.
To meet the strictures of the budget resolution, and for ideological reasons
as well, congressional Republicans in July began acting on deep cuts in
appropriated programs -- and adding controversial riders to appropriations bills
on issues ranging from abortion to enforcement of environmental regulations. By the end of July, President Clinton had threatened to veto no fewer than 6 of
the 13 regular appropriations bills. Few if any of the appropriations bills
appeared likely to be enacted before Oct. 1.
At that point, of course, a continuing resolution will be required to fund
the government on an interim basis. And here the politics will heat up. Congress
may be unwilling to enact a continuing resolution that doesn't contain many of
the controversial riders Republicans have promoted. And it might well insist on
a resolution that hews closely to House-passed appropriations levels, entailing
deep cuts in amounts budgeted by Clinton. For these reasons, the President could
veto the continuing resolution itself. This would cause a work stoppage for some
period of time starting Oct. 1, jeopardizing the paychecks of hundreds of
thousands of federal workers who cannot legally be paid without duly enacted
spending authority.
The White House began planning for such an eventuality in midsummer. In a
briefing for the Cabinet on July 26, White House chief of staff Leon E. Panetta
said congressional Republicans "seemed fully prepared to shut down the
government for an extended period" -- perhaps as long as two months. The next
day, Office of Management and Budget director Alice Rivlin distributed a
memorandum instructing agencies not to implement reductions in force or office
closures in reaction to congressional budget action until OMB had developed a government-wide plan for fiscal 1996. Even under a government-wide shutdown,
essential services would continue to be provided, in line with an Attorney
General's opinion issued during the Carter Administration holding that essential
activities like issuance of Social Security checks and air traffic control can
continue without appropriations.
The reconciliation bill will almost certainly include spending and taxing
changes that the White House opposes and so could also be vetoed. Although a
vetoed reconciliation bill would not stop the government from operating, it
would prevent major deficit reductions from being put into place. As a means of
pressuring the President to approve the reconciliation measure, therefore,
Congress may consider combining the continuing resolution and reconciliation
into a single bill. By vetoing the entitlement and tax changes, Clinton would
then also be shutting down the government.
The debt-limit increase is considered to be "must pass" legislation because
without it, the government will literally run out of cash to pay its bills.
Within about four weeks, the Treasury would find itself hard-pressed to pay
Social Security benefits, contractors and salaries even for essential employees.
The debt-limit bill thus could be the ultimate weapon of the most committed
congressional budget-cutters, who are talking seriously about combining it with the prospective continuing resolution/reconciliation bill into what surely
would be one of the largest pieces of legislation ever to emerge from Congress.
If Clinton dared to veto that measure, in one fell swoop he would be shutting
down the government, preventing the deficit-elimination plan from going into
effect and limiting the government's ability to meet its financial obligations.
This is the so-called "train wreck" scenario that many have been talking about
for the past few months.
Timing of the Wreck
In an ideal world, all of this would come to a head by Oct. 1 so that federal
employees would at least know what they are facing as the fiscal year begins.
But, given the extent of the congressional agenda, the budget-process
requirements and the high political stakes, that's just not likely.
The process itself isn't geared to that deadline. All House and Senate
committees that received reconciliation instructions have been given until Sept.
22 to decide how they will achieve the required savings. So there is virtually
no way a reconciliation bill can be enacted by the start of the fiscal year.
In fact, there seems very little chance of enactment by the beginning of
November.
If history is any guide, all House and Senate committees involved with
reconciliation will take most or all of the time allowed to develop their
spending-cut recommendations. Even if Congress decided to work through the
weekend, there would be only eight days to get the House, Senate and White House
to agree on the assumed massive spending changes and a tax cut before the new
fiscal year begins.
But this year there will be an additional step in the process that will slow
everything down even further: certification by the Congressional Budget Office
that the proposed reconciliation bills will in fact balance the budget by fiscal
2002. In the Senate, the Finance Committee cannot even start to consider a tax
cut until CBO provides its certification. The process should last until about
Oct. 1.
Assuming CBO does certify that the deficit would be eliminated, each budget
committee will then have to package everything into a single reconciliation
bill, write and file a report and bring the bill to the full House and Senate
for debate. The House would have the additional step of getting its Rules
Committee to approve a rule governing the debate. If there are no snags, all of
this should take about five days, but with a weekend and the Jewish holidays
intervening, debate would not likely begin in the House and Senate until
mid-October.
Debate in the House could take as much three days. Debate in the Senate,
which is limited by the Congressional Budget Act to 20 hours, could take three
days or more. Therefore, the conference between the House and Senate on
reconciliation would not start until late October.
In the past, with less consequential measures pending, reconciliation
conferences have often taken four to six weeks to complete. A smooth, two-week
conference wouldn't finish until the beginning of November; Thanksgiving might
be a more realistic completion goal.
After House and Senate approval, the bill would go to Clinton, quite possibly
not until early December. A veto fight would delay things further. It's not
hard, therefore, to imagine a situation where reconciliation is not approved
until Christmas. And if the negotiations between the White House and Congress
are protracted, the agreement could occur after Jan. 1, 1996.
Prolonged delays on the reconciliation act will affect the nature and timing
of the anticipated "train wreck." The most serious wreck will happen if
reconciliation, the continuing resolution and the debt limit bill meet at the
same time. If reconciliation is not sent to the President until Thanksgiving or
later, only two of the three "trains" will collide. A government shutdown could
occur then, of course, as Clinton might veto the continuing resolution.
Or, Congress could pass a continuing resolution to fund the government until
the expected date of reconciliation and approve a short-term increase in the
debt ceiling to extend the government's borrowing authority until the same time.
The big train wreck might then come later in the fiscal year.
Albert Kliman, a longtime federal budget director who recently completed a
term as president of the American Association for Budget and Program Analysis,
characterizes the current situation as one of "total chaos." Kliman says
agencies and departments have prepared for shutdowns before when it appeared
that appropriations would not be enacted in time. But, he says, agencies'
established procedures do not cover the combined problems that will be presented
to managers by this year's budget process, since "we have never really been
through this before."
The Path to Balance
The budget resolution Congress passed on June 29 followed a fiscal path
toward budget balance that had been outlined earlier by the Congressional Budget
Office. The course Congress set tolerates about $ 600 billion in additional
deficit spending from 1996-2002. It also entails some $ 900 million in program
cuts. Added savings come from continuing the current hold on inflation
adjustments in discretionary programs after 1988 and from assumed savings in debt-service costs. Figures are in billions.
1996 1997 1998 1999 2000 2001 2002 1996-2002
Baseline Deficit $ 210 $ 230 $ 232 $ 266 $ 299 $ 316 $ 349 $ 1,902
Target Deficit 173 154 114 66 54 21 0 582
Required Reduction -37 -76 -118 -200 -245 -295 -349 -1,320
Program Cuts -36 -72 -107 -161 -173 -186 -200 -934
Inflation -- -- -- -19 -38 -59 -80 -196
Debt Service -1 -4 -11 -20 -34 -50 -69 -212
SOURCE: Congressional Budget Office
Where the Cuts will Come
More than 40 percent of program cuts Congress ordered in its fiscal 1996
budget resolution will come from discretionary programs subject to year-to-year
appropriations decisions. The rest will be taken out of entitlement programs,
chiefly Medicare and Medicaid. Budget savings are also assumed from adjustments
in some programs), from savings in debt service and from the budget effects of
higher economic growth that's projected as a result of the fiscal policy the
resolution dictates. The resolution calls for a $ 240 billion tax cut over the seven years it covers. The figures below show the cumulative (fiscal 1996-2002)
effect of the budget resolution on projected budget deficits, in billions of
dollars.
House-Passed Senate-Passed Conference
Program Cuts
Discretionary -$ 413 -$ 472 -$ 440
Entitlements
Medicare -288 -256 -270
Medicaid -187 -175 -182
Student loans -19 -4 -10
Other -178 -194 -161
Subtotal -672 -629 -623
Taxes, Other
Revenues +321 +179 +240
Debt service -162 -203 -182
CPI rebenching -48 -18 -18
Fiscal dividend -1,143 -1,332 -1,182
SOURCE: U.S. Congress
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