Deficit Worries Increase Likelihood of Spending Cuts, Possibly Jeopardizing the Economic Recovery
As the House and Senate Budget Committees head towards taking up their versions of the Congressional Budget Resolution on Wednesday, March 25, opposition to important provisions in the President’s budget is surfacing.  In recent years there has been no pretense of bipartisan cooperation in passing budget resolutions, and nothing seems to be different this time.  But beyond the expected Republican opponents, some key Democrats are calling for changes in the President’s budget.  Although the Budget Committee chairs expect to craft resolutions that remain faithful to the President’s priorities, many of the revenue sources identified in the President’s budget are being called into question.  Further, the skittish-on-spending Blue Dog Democrats in the House and similarly inclined Senate Democrats are urging reductions in domestic appropriations, even though these programs are not contributing much to the deficit.

Concerns over the deficit grew on Friday when the Congressional Budget Office released its updated budget and economic projections, including its own estimates of revenues and spending proposed in the President’s budget  (http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf). In large part because the economy worsened dramatically since the Obama Administration prepared its budget, CBO’s deficit projections are far greater than the President’s.  For example, the Obama budget estimates a $1.17 trillion deficit in FY 2010 if its proposals are adopted; CBO thinks the Obama proposals would produce a $1.4 trillion deficit in that year, or 9.6 percent of the Gross Domestic Product (GDP).  (The President’s budget originally estimated the deficit would be 8 percent of GDP in 2010.)

Because the recession is so deep, many economists believe that it is important to approve the spending proposed for FY 2010 by the President; cutting it would be a drag on the struggling economy.  However, Chairman Conrad (D-ND) of the Senate Budget Committee has been talking about making savings in light of the CBO numbers, with expectations that he intends to reduce the appropriations total below the President’s recommendation.  House Budget Committee Chairman Spratt (D-SC) repeated the President’s commitment to cut the deficit in half over four years; that could be achieved with little or no reduction in the President’s spending recommendations.

After the two Budget Committees report out their budget resolution recommendations, votes in the full House and Senate are expected during the week of March 30, just before the spring recess.  A final Budget Resolution, settling the differences between the two version, will be agreed to once Congress returns during the week of April 20.

The moderate Blue Dog Democrats in the House have asked that annual appropriations (aka “discretionary spending”) increase no more than inflation, which would be less than the amount proposed by the Obama Administration.  Many disagree with this proposal, because it would hit domestic appropriations hard, especially many services providing assistance to low-income people.  The CBO estimate shows all discretionary spending rising by 9.3 percent from FY 2009 to FY 2010 – that includes military, international, and domestic programs.  Non-defense discretionary spending increases less – probably about 7 percent, not counting inflation.  But much of that growth is caused by one-time costs associated with the 2010 decennial census and with large costs associated with Federal Housing Authority mortgage loan guarantees.  These costs are expected to be temporary.  Leaving these costs aside, non-defense appropriations growth drops to closer to 4 percent, counting inflation.  Bearing in mind that this amount must cover a substantial increase in services for the growing numbers of Iraq/Afghanistan war veterans, it is clear that reducing the total for domestic appropriations will squeeze education, job training, housing, child care and child welfare services, public health, and other family and community services.  Most of these programs have sustained cuts over the past four or more years, despite growing need.  (See Domestic Spending Must Be Adequate To Serve Growing Needs, athttp://chn.org/pdf/2009/BudgetFY0508vOmnibus09.pdf.)

While cutting such services in the depth of the recession is likely to set back the recovery, many economists would prefer that the deficit be a smaller proportion of the economy by the end of budget’s 10-year period.  The long-term answer will require an emphasis on increased revenues, which declined as a proportion of GDP throughout the “good years” of this decade, before the recession kicked in.  If revenues returned to 20 percent or more of GDP, as they were in 1998-2000, the deficit in FY 2019 would decline by more than $243 billion.  Further, a more concerted effort to collect revenues that are now sheltered overseas or simply unpaid could raise hundreds of billions of additional dollars each year.

The President’s budget does increase revenues and seeks savings from military and domestic expenditures.  Some of the additional dollars pay for initiatives in health care, education, and clean energy that will help to revitalize the economy.  Other funds help to achieve long-term deficit reduction.  The worsening economic picture drawn by CBO means that Congress will probably need to plan on adding to the President’s revenue recommendations once the recovery is well under way.

While negotiations about the budget resolutions continue on Capitol Hill, a growing number of advocates who want to fight for the President’s budget priorities are being heard.  About 1,200 supporters around the country went door to door over the weekend to encourage neighbors to tell their elected officials to support the President’s budget.  Thousands of calls and emails are being placed, in hopes that actions in Congress do not shortsightedly undermine the budget’s goals.

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