The Fiscal Speed Bumps Ahead
Although labeled as the "fiscal cliff deal," the American Taxpayer Relief Act (ATRA) enacted into law left many budget issues unresolved or only temporarily resolved. While the deal permanently addressed the expiring tax cuts and AMT patches, many other provisions were only extended temporarily. The sequester, one of the largest components of the cliff, was delayed for only two months. In addition, the debt ceiling and FY 2013 budget were left up to the 113th Congress. Beyond these short term hurdles, other issues in the coming years will also come into play, many due to our still temporary budget.
Despite some elements of the fiscal cliff being partially resolved, a series of fiscal "speed bumps" are anticipated over the months and years to come. Some of these speed bumps are a direct result of the fiscal cliff agreement, while others are linked to prior legislation or current budget projections. These speed bumps present future opportunities for lawmakers to take a holistic approach at fixing our federal budget challenges, such as taking up much needed long-term tax and entitlement reforms. Lawmakers should take advantage of these opportunities to put in place a plan that sets the budget on a downward path as a share of the economy.
To illustrate the issues lawmakers face in the months and years ahead, we've created a "Fiscal Speed Bumps" timeline (click here for a larger image). As you can see below, the expiration of temporary measures or other measures taking effect, especially in the next two years, will keep Congress busy.
Highlights in the next year include:
- Sequestration takes effect: The fiscal cliff agreement delayed across-the-board cuts of $85 billion in this fiscal year under sequestration only until March 1. The cuts will be evenly divided between defense and domestic spending.
- Extraordinary debt ceiling measures are exhausted: The U.S. officially hit the federal debt limit on December 31st, but the Treasury Department has begun taking a number of “extraordinary measures” providing $200 billion of headroom to prevent a default on outstanding obligations. The Treasury has said these measures should last for approximately two months, but the exact date when they will be exhausted is uncertain. If the U.S. hits the debt limit, it will no longer be able to borrow money, meaning it will not be able to pay all of its bills. Such a default on obligations would cause a variety of serious economic problems.
- FY 2013 Continuing Resolution expires: The current continuing resolution to fund the government will expire on March 27th, which could trigger a government shutdown if neither a budget nor another continuing resolution is passed. If the federal government shuts down, all federal programs and services, except for the most essential, will be suspended.
- Lower interest rates on student loans expire: Congress extended the 3.4 percent interest rate on federal Stafford loans last June for one year. That extension will expire on July 1, 2013 and interest rates on these loans will jump to 6.8 percent.
- “Doc Fix,” farm bill, unemployment benefit expansion, & tax extenders all expire: Many policies in the fiscal cliff package were only extended for one year. The expiration of the “doc fix” would cut physician payments by at least 25 percent. The maximum number of weeks individuals could collect unemployment benefits would fall from 73 weeks to 26. The farm bill would expire, with some laws reverting back to 1949. Additionally, many individual and business "tax extenders" would expire, although these can be made retroactive after they have expired (as the ATRA did). Once these extensions expire, doctors could stop seeing Medicare patients because of the sharp cut in payments and milk prices could go up steeply.
Not all of these are necessarily bad policies that should be avoided. For instance, lawmakers may want to gradually phase out extended unemployment benefits as the economy recovers, since it was intended to be a temporary policy. Others, like the "Cadillac Tax," are intentional, deficit-reducing policies that lawmakers set up to help control deficits, not to force lawmakers to intervene. However, many policies could be replaced with smarter and more targeted reforms.
The fiscal cliff deal was, as Erskine Bowles said, a missed "magic moment" to do something about our deficits and give some stability to our budget. But with many fiscal obstacles on the horizon, lawmakers will have more opportunities to examine our fiscal situation. Hopefully, they'll seize these chances to take meaningful action.