Congress, after a week-long recess, is now returning to the subject of the government budget. The bill passed in the House of Representatives before that recess --- at 4:40 a.m. on Saturday morning --- was the Republican-inspired proposal for government spending to the end of Fiscal Year 2011 on 30 September. The $61 billion it called for in cuts in discretionary spending is unacceptable to Democrats, who can block it either in the Senate or with a Presidential veto, and so the immediate problem is approving a continuing resolution that keeps the government operating past the current shutdown date of this Friday.
Both parties fear the political repercussions of being blamed for forcing the government to shutdown. So last week witnessed Republican and Democratic leaders indicating they are willing to consider a short-term compromise bill that would extend government funding through 18 March. The bill includes $4 billion in cuts to government spending, numbers that Democrats are prepared to swallow as they are cuts proposed in President Obama's budget for Fiscal Year 2012.
But both parties are no nearer to agreeing on the fundamental approach that must be adopted to solve the problem of America's increasing debt. This continuing resolution, if it is passed, merely offers a two-week breathing space. With a controversial vote looming this spring on whether or not to raise America's debt ceiling, the real story in Washington at the moment are the moves behind the scenes to get leaders from both sides to sit down at the same table and negotiate a compromise on the debt problem.
In the vanguard of these attempts are some of the Senators who sat on the committee on deficit reduction created by President Obama last February. Led by the retiring Sen. Kent Conrad (D-North Dakota), who does not have the distraction of facing re-election in 2012, these politicians are arguing that, as Sen. Conrad said at a Senate Budget Committee meeting on 2 February, “We cannot continue to put off. We need to reach an agreement this year. It is time I believe, for the Administration and leaders of Congress, Democrats and Republicans, to sit down and hash out a long-term plan”
At this meeting Conrad dismissed Rep. Paul Ryan's (R-Wisconsin) conservative "Roadmap" for America's long-term future because it concentrated on means of cutting government spending, “but actually makes things worse on the revenue side”. As a consequence, Sen Conrad believes, it is not a realistic solution to America's deficit problem. Ryan does state in the Roadmap that his idea is not designed to solve the debt problem in the short-term, but Sen. Conrad pointed out that the Roadmap will not balance spending and revenue for 53 years. His preferred template for the bi-partisan discussions this the plan suggested inThe Moment of Truth; the final December 2010 report of the National Commission on Fiscal Responsibility and Reform.
The basic difference in the two documents mirrors the fundamental differences between Democrats and Republicans on how to reduce the debt. The Commission's report, while a bi-partisan solution, adopts the general Democratic contention that government revenue must be increased moderately, and spending cut moderately, until a balance is reached. It is a half-and-half message supporters believe they can sell to less ideological Republicans. The Roadmap, built on the foundational idea of conservatism that the government is too big already, stresses that spending must be slashed until it reaches pre-stimulus revenue levels. At this point, both revenue and spending can be lowered further.
President Obama established the Deficit Reduction Commission to find ways to reach two goals: balancing the budget and excluding interest payments on the debt by 2015 and considering how America's long-term fiscal outlook can be improved. To Obama's discomfort, however, the Commission stressed that reforms of Social Security, and especially Medicare and Medicaid, were the most important challenges for the future sustainability of the American economy. Conrad and Ryan both served on this Commission, and since they are the chairs of the Congressional Budget Committees, nothing significant affecting the economy is going to be decided in Washington until their concerns with entitlement programs are at least acknowledged by the leadership of both parties.
The Commission's deliberations produced six broad areas of recommendations. I will analyse each in detail, including one I have not seen mentioned in the media, the requirement to pay for improvements in transportation infrastructure improvements via a 15-cent federal tax on a gallon of gasoline. For now, however, although they do not possess a guiding philosophy like the Roadmap, here are the Preamble' and The Mission of The Moment of Truth.
The short Preamble demolishes the rosy-tinted view of some that an economic recovery will deal with the debt problem. It issues a stark warning, supported by every member of the Commission, "The era of debt denial is over, and there can be no turning back. We sign our names to this plan because we love our children, our grandchildren, and our country too much not to act while we still have the chance to secure a better future for our fellow citizens." And the Preamble emphasises the Commission's belief that the American public are ready to discuss long-term fiscal solutions, as long as they feel that everyone is sharing in the pain. The report notes that; “In the weeks and months to come, countless advocacy groups and special interests will try mightily through expensive, dramatic, and heart-wrenching media assaults to exempt themselves from shared sacrifice and common purpose,” but stresses that. “The national interest, not special interests, must prevail.”
The Mission of the report begins by reciting some of the numbers that prove the United States is facing a "Fiscal Crisis" and concludes that “our nation is on an unsustainable fiscal path,” fuelled by “staggering deficits”. The figures, provided by the Congressional Budget Office, are indeed staggering, and for the Commission, the driving force behind the "unsustainable" deficit levels is the unavoidable fact that as the generation of 'baby boomers' retire and as health care costs continue to increase, America faces demographic problems that make the situation even worse than it is now. If the United States maintains its current approach to entitlements, even with a rebounding economy, the Commission explains that by “2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security”. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money.”
We must use fiscal restraint to promote reforms and efficiencies that force government to produce better results and save money. We should insist on consistent productivity growth in our government.How many times have we heard that particular refrain?
But one of the principles deserves special mention, if only because articipants only need to look at Britain for help in coming to a conclusion. The report contends that cuts in spending should not take place until 2012 at the earliest, “so they don't interfere with the ongoing economic recovery.” Britain's Conservative administration --- and, for those with a historical turn of mind. the 1980s Thatcherite conservative revolution which started well before Ronald Reagan came to power in US --- began a series of deep and immediate cuts in government spending. However, the latest numbers were a disaster: Britain's economy actually shrunk in the last three months.
The British economy is not as robust as its American counterpoart, but the next few months will provide an indication for politicians in Washington of the impacts of cuts --- in practice, rather than in discussion --- on a mature, globalised economy.