Sunday, December 23, 2012

Balancing the Budget: Plan B Fails, Speaker Boehner's Choices, and President Obama's Budget for FY 2013

Speaker John Boehner's "Plan B" did not garner enough support to pass the House. What's next?

"Plan B" was defeated because a number of Republicans deserted the Speaker and refused to raise taxes on persons earning over $1 million per year. See Steve Chaggaris and Brian Montopoli, CBS News (December 12, 2012) "Plan B" is dead; what's next for "fiscal cliff"What are Speaker Boehner's options at this point, and what is the President proposing?

The defeat of Plan B means that, at least for the moment, Speaker Boehner is unable to negotiate with the President on behalf of the Republican Party. The Speaker does not control the Republican caucus in the House and cannot speak for the party as a whole. Speaker Boehner has few remaining choices, and they all hinge upon what legislation he is willing to bring to the floor of the House. He could decide to negotiate a deal with the President that could garner the support of a simple majority of the Republicans in the House; such a budget would represent a compromise between the Republican and Democratic proposals, and Boehner might retain his position as Speaker. Or the Speaker could bring to the floor a budget deal that at least 17 House Republicans and all the Democrats in the House would vote for, in which case the final budget would closely resemble the President's position; in that case Boehner would no doubt be toppled from his leadership position by the majority of Republicans. Or Mr. Boehner could simply walk away from all negotiations and allow a vote on any budget bills  introduced by any member of the House, Republican or Democrat - in effect abdicating his role as Speaker.

If the two sides do not reach an agreement then there will automatically be sharp decreases in discretionary and military spending and sharp increases in taxes for everybody - the so-called "fiscal cliff." If these changes are allowed to take effect it would cut the federal deficit for FY 2013 in half - but it would also likely trigger another recession. Because of the danger of prolonging or worsening the recession, Democrats will offer to restore certain discretionary and military funding and agree to preserve the Bush tax cuts for middle-income earners. There would likely be enough Republican votes in the House to adopt such a bill, but it is not clear whether the Speaker would allow such a bill to come up for a vote.

Republicans and Democrats agree on several points. They both understand that the important statistic is not the dollar amount of the deficit and the debt but rather the size of the deficit and debt as a percentage of GDP. In addition, Democrats and Republicans agree that an essential part of the solution to the budget crisis is to stimulate economic growth. Both parties want to reduce the deficit and the debt as a percentage of GDP by stimulating the economy enough to "grow" out of the fiscal hole we are in. Republicans seek to do this through steep reductions in discretionary spending and additional reductions in taxes. Democrats are proposing some reductions in discretionary and military spending, some increases in targeted stimulus funding, and significant increases in taxes on higher income earners.
The principal budget plan on the table at this point is the President's budget plan for fiscal year 2013. It may be found on the budget webpage of the Office of Management and Budget at The plan as a whole is several hundred pages long, but the key documents are a  24-page paper entitled Cutting Waste, Reducing the Deficit, and Asking All to Pay Their Fair Share that describes the President's proposed budget cuts and tax increases in detail, and a set of Summary Tables that lay out the new savings and revenues in tabular form.

Under the President's proposal the federal deficit would be reduced from 8.7% of GDP to a more manageable 2.7% of GDP by the year by the year 2018. The public debt, as a percentage of GDP, would remain at the same level: about 75% of GDP. In his negotiations with Speaker Boehner the President also agreed to a proposal of the Simpson-Bowles Committee to implement "chained CPI" to reduce the cost of living increases for Social Security and other programs. This would trim another $200 billion from the budget over 10 years, reducing the annual deficit by about 3% and the public debt by about 1%.
The Committee for a Responsible Budget recently submitted their proposals in their study, What We Hope to See from the Fiscal Cliff Negotiations, dated December 10, 2012. The CFRB compares the President's plan to other budget plans (including the House Republican budget plan and Simpson-Bowles) in a series of charts beginning on page 10 of the CFRB report.

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