Republicans Should Trade the Debt Ceiling For a Better Budget Baseline

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With Congress and the President now taking a small pause from their focus on whether or not to fire some missiles at Syria they can return to work on the budget for the next federal fiscal year and an increase in the debt ceiling. With only a handful of scheduled workdays left in the House for the month of September, Congress has not passed a single one of the thirteen appropriations bills for the fiscal year that starts on October 1. According to Treasury Secretary Jack Lew, the government will exhaust all the gimmicks it has been using to stay within the current debt ceiling in mid-October.

Thus, Congress has only about two weeks to pass a continuing resolution to avoid a government shutdown until they eventually pass a budget. Congress has about four weeks to raise the debt ceiling or we begin a whole new set of financial problems. Right now, compromise on both issues does not seem to be near at hand.

President Obama says he will not negotiate over the debt ceiling. He also says that Republicans cannot tie it to spending cuts or other measures. The President has threatened to veto the measure if they do not follow his orders. Beyond that, the President and the Democrats in Congress want to cancel the sequester budget cuts and spend more money.

Republicans want to keep the sequester cuts in place and find new spending cuts in exchange for raising the debt ceiling. Speaker Boehner has repeatedly suggested that the spending cuts (over ten future years) should be equal in size to the increase in the debt ceiling. Republicans want the complete opposite of what Democrats want on both the budget and the debt ceiling increase. Hence, the difficulty in finding a compromise.

Allow me to suggest a road that the Republicans can take that might be a path to an agreement: get a change in the way the budget baseline is set in exchange for a deal.
Besides the fact that politicians of both parties have been far too fond of spending money, one root of our country's budget deficit can be traced to the federal budget baseline process. The baseline budget is a projection of future expected spending created by Congress that is then used both to project future deficits and employed as a comparison to the budget plans actually passed each year.

This last use is why it is called a baseline, because it is the baseline for comparing all budget proposals and for evaluating the effect of any piece of legislation on the budget deficit.

A budget baseline was first created by the Congressional Budget Act of 1974. This law was replaced with the Deficit Control Act of 1985 which Congress last amended in 1997. Under the original Deficit Control Act the baseline budget was set at the previous year's spending with no adjustment for inflation unless Congress legislated something different (such as they might with a multiyear transportation bill). Later the Act was amended to add an inflation adjustment to the baseline. Finally, in 1997 an additional 3% annual increase in addition to the inflation adjustment was built into the baseline. That means that under the current law the baseline budget increases at 6-7 percent per year automatically.

This automatic increase of 6-7 percent lets Democrats complain that Republicans want to cut spending if they propose a budget with anything less than a 6-7 percent increase in spending. As long as spending proposals are measured against a rapidly growing baseline, it will be an uphill struggle to contain federal spending.

The current baseline budget essentially is designed to enable politicians to deceive the public by labeling smaller spending increases than those contained in the baseline budget as "cuts." Therefore, having a baseline budget that is as large as possible is crucial to politicians who want government spending to grow continually.

In a family's household budget we do not call a smaller-than-planned increase in spending a "cut." Simply slowing the growth in government spending should not be called a cut. Spending increases or cuts need to be defined relative to the previous year's actual spending levels, not an imaginary budget baseline that was built expressly to favor large annual increases in government spending.

The federal deficit will be lower this year for two reasons. First, there was a one-time surge in tax revenue as high income earners accelerated income at the end of 2012 to avoid the higher tax rates that were going into effect in 2013. Second, the sequester and other efforts by the Republicans have managed to hold spending more or less fixed for the last three federal budget years. In fact, spending might actual decline in the fiscal year that ends on September 30.

The lessons of this deficit improvement are that the sequester worked, but that much work still needs to be done. This year's federal deficit will still be higher than any deficit ever run by any president not named Obama. It will only look good relative to the trillion dollar deficits of his first term, deficits that are more than twice as large as any ever run before President Obama. Also, it is important to note that the sequester cuts are all relative to the ever-increasing baseline budget. Thus, they put a brake on spending, but will not make it decline over the longer run.

In order to make further deficit progress, Republicans in Congress should offer a simple proposal. They should agree to a continuing resolution on spending that holds spending levels as they are now, with the sequester cuts remaining in place. They should agree to raise the debt ceiling by enough to last for two or three years. In exchange, they should ask Democrats for one simple thing: an amendment to the Deficit Control Act so that the baseline budget returns to its original incarnation. This new budget baseline would only show spending increases when Congress specifically legislates them, most commonly when they do a multiyear transportation or farm bill.

No inflation adjustments, no automatic spending increases. If Congress wants to spend more money, let them legislate it and force them to openly acknowledge it as an increase in spending. No more playing with words. Re-establishing a baseline budget without automatic increases will return budget debate language to actual truth instead of political doublespeak.

How much money could be saved with this one simple change? The difference between a budget baseline with no increases at all and one with an automatic 7% annual increase in spending adds up to approximately $14 trillion over ten years. That is enough extra spending to almost double the national debt in the next decade.

Thus, a change in the baseline budget law is likely to save far more money than any spending cuts the Republicans extract in exchange for raising the debt ceiling, particularly given that President Obama says he will not negotiate over the debt ceiling. Rather than walking into the fight that President Obama wants (and will likely win), Republicans instead can make a deal with the Democrats to pass a clean continuing resolution on spending in a package with the change to the Deficit Control Act to redefine the baseline budget. With that achieved, Congress can pass a straightforward increase in the debt ceiling.

If Republicans follow this strategy, the short term gains may not be quite as large as they might achieve with another approach. However, the deal will probably be simpler to achieve and the long term gains will be much greater. With a new baseline budget, all future budget negotiations will be contested on a level playing field rather than one that is tilted in favor of unsustainable spending increases.

This would be a tremendous win for the Republicans, yet the Democrats might well agree to the deal. After all, they gain a continuing resolution (and, later, a budget for the rest of the fiscal year) without any further spending cuts. They also get an increase in the debt ceiling for long enough to avoid another fight over the national debt near elections.

For more leverage, if needed, the Republicans could raise the debt ceiling enough to carry past the 2016 elections in exchange for the change in the budget baseline process. This could well be enough of a carrot to convince the Democrats to take the deal. Democrats would remain free to argue for spending increases later. The baseline budget is not binding on future Congresses. It simply defines the argument by serving as the comparison for budget proposals.

Republicans and fiscal conservatives need to think long term on the budget as they negotiate over the next fiscal year's spending and the debt ceiling increase. They will end up raising the debt ceiling and they eventually will reach agreement on the budget at a spending level that is not much different from where we are now.

Rather than fighting over small changes in the country's financial course, a focus on the long term is more likely to find agreement and will pay larger dividend for the country. If they care about the financial future viability of the country, Republicans should fix the baseline budget law rather than trying to win some minor spending cuts. By playing nice now, they and the country will win big in the end.

 

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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