‘Line’ Items: Downturns and Downgrades Edition A Weekly Update on Fiscal Policy Developments and a Look Ahead
Downers – Markets were down last week on fears that the European debt crisis was spreading and that the U.S. recovery was slowing down. These losses added to those from the previous week as lawmakers went to the wire to approve a statutory debt limit increase to avoid a default. Then came word late Friday that Standard & Poor’s had downgraded U.S. credit for the first time ever because of concerns that the country is not adequately addressing its mounting national debt. The recent developments highlight the impact of fiscal policy on the economy. Will Washington now be up for creating a comprehensive fiscal plan that allays creditors’ fears by charting a clear path to reducing the debt, or will it continue to lay low?
S&P Lowers the Boom – In an unprecedented action, credit rating agency Standard & Poor’s has lowered the credit rating of the U.S. from the highest AAA rating to AA+. S&P said the downgrade was due to their opinion that “the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.” S&P Managing Director John Chambers said that “the political gridlock in Washington leads us to conclude that policymakers don't have the ability to put the public finances of the U.S. on a sustainable footing.” He also said that the U.S. needs to stabilize its debt as a share of the economy and have it on a path to further decline to regain the AAA rating. Before the official announcement, the Treasury Department disputed the original numbers that S&P produced on the U.S. debt trajectory, with the firm changing its projections from the national debt reaching 93 percent of GDP to 85 percent in 2021. See the CRFB realistic baseline for our debt projections. In a statement, CRFB President Maya MacGuineas said the downgrade is “a heck of a wakeup call” and reiterated the need for a deficit reduction plan of at least $4 trillion.
Debt Ceiling Deal: Just Under the Wire and Way Below Expectations – On Tuesday, the last day the Treasury Department said it could stave off a national default without a debt limit increase, the Senate passed and the President signed legislation enacting a deal coupling a debt ceiling increase with deficit reduction. The total amount of deficit savings will depend on the results of a new bipartisan, bicameral Joint Select Committee on Deficit Reduction, which is charged with issuing recommendations to Congress that must be voted on without amendments by the end of the year. The Joint Committee is tasked with identifying $1.5 trillion in deficit reduction through 2021 in addition to the approximately $1 trillion is savings that will be achieved through spending caps over the next ten years. The $2.5 trillion total is far below the $4 trillion in deficit reduction that many economists and groups such as CRFB feel is necessary to put the country on a sustainable fiscal path. If the Joint Committee cannot agree on recommendations or if Congress does not approve of them, then automatic cuts from defense and domestic spending will be triggered. The Joint Committee will face intense scrutiny and pressure from interest groups to protect funding for favored programs and to possibly include policy riders not pertinent to budget policy because the Byrd Rule that normally bars such provisions will not apply to the recommendations produced by the Committee. The choices that congressional leaders soon will make as to who will sit on the Joint Committee (members must be named by August 16) will go a long ways in determining if the Committee will be able to come up with a broad plan with significant deficit reduction.
Appropriations Cannot Stay Below the Radar – The annual appropriations process had largely taken a back seat to the debt ceiling drama on Capitol Hill, with the House passing six of the twelve spending measures funding the federal government and the Senate passing just one. The new fiscal year begins on October 1 and all appropriations bills must be enacted by then or a continuing resolution agreed to in order to maintain government operations. The Senate has been hamstrung in its efforts because it never agreed on a budget resolution that set a top-line spending figure for the Appropriations Committee to work with. The spending caps set forth in the new debt limit deal do provide a guide for the Senate, but the spending limit specified by this year’s cap is below the top-line figure outlined by the budget resolution passed by the House earlier this year, which the House Appropriations Committee has been working from. When the House and Senate return from their current recess after Labor Day, they will have less than a month to complete all appropriations measures and reconcile their differences before the current fiscal year concludes at the end of September. Things are shaping up for potential stopgap measures and budget drama, a recurring theme in recent years as the budget and appropriations process has broken down. See the Peterson-Pew Commission on Budget Reform for some budget process reform ideas.
Congress Reaches New Lows – Congress is back home for its traditional August recess and according to recent polls, constituents won’t have many nice to say to their representatives. Surveys from CNN (84 percent) and the New York Times/CBS (82 percent) show that voter disapproval of Congress is higher than ever recorded before. These results come on the heels of the debt limit brinksmanship that brought the U.S. to the edge of default and the inability of legislators to address gaping federal budget deficits and national debt.
Presidential Campaign Starting Up in Earnest – With Congress away, focus is turning to the nascent 2012 presidential campaign. All the announced Republican candidates will participate in a debate in Iowa on Thursday and many will stay in the state with the first caucuses for the Ames Straw Poll on Saturday. Expect the debt limit deal, the S&P downgrade and ideas for addressing the debt while aiding the sluggish recovery to be high among the topics that the candidates must address.
Democrats Produce BBA Alternative – The debt limit deal also calls for both chambers of Congress to vote on a balanced budget amendment to the Constitution by the end of the year. Last week Senator Mark Udall (D-CO) introduced a version that will be the Senate Democrats’ preferred alternative to the proposal supported by Republicans. Unlike the Republican version, the Udall measure does not set a cap on federal spending as a percentage of GDP, nor does it require a supermajority vote to raise taxes. The Udall BBA does create a ‘lockbox’ protecting Social Security revenues and outlays from the balanced budget requirement and also prohibits Congress from providing income tax breaks to individuals earning over $1 million a year unless the budget is in surplus. See our Fiscal Toolbox that compares various budget process tools like balanced budget amendments.
Key Upcoming Dates
- Federal budget for July released by the Treasury Department.
- Iowa debate for 2012 Republican presidential candidates.
- Ames, Iowa straw poll for 2012 Republican presidential candidates.
- The Speaker of the House, House Minority Leader, Senate Majority Leader and Senate Minority Leader each must select three members to serve on the new Joint Select Committee on Deficit Reduction by this date.
- Debate at the Ronald Reagan Presidential Library in California for 2012 Republican presidential candidates.
- The Joint Committee must hold its first meeting by this date.
- New fiscal year begins. Legislation fully funding the federal government, or a stopgap measure with temporary financing of government operations, must be enacted by then.
- Congressional committees must submit any recommendations to the new Joint Select Committee on Deficit Reduction by this time.
- The Joint Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- The Joint Committee report and legislative language must be transmitted to the president and congressional leaders by this date.
- Any congressional committee that gets a referral of the Joint Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- Congress must vote on the bill recommended by the Joint Committee by this date. No amendments are allowed.