Are the Discretionary Spending Caps Sustainable?

The biggest piece of deficit reduction that lawmakers have accomplished so far is the series of caps on annually appropriated discretionary spending through 2021. The Budget Control Act specified spending caps that would reduce spending by more than $750 billion over ten years. It also put in place a sequester which would further reduce those caps by roughly $90 billion per year if the Super Committee did not agree on $1.2 trillion of deficit reduction. The Super Committee did indeed fail, and the sequester went into effect in March 2013. After partial sequester relief in 2014 and 2015, the discretionary cuts will return in full force in fiscal year (FY) 2016. As a result, discretionary spending will fall to a record low share of GDP in ten years.

With the sequester hanging over the appropriations process, the Brookings Institution held an event last week discussing the sustainability of these caps. The event brought together a panel of four experts with different perspectives on the caps, including:

• Robert Hale, Former Under Secretary for Defense (Comptroller) and Senior Fellow at Booz Allen Hamilton
• Ron Haskins, Senior Fellow of Economic Studies at Brookings
• Michael O' Hanlon, Foreign Policy Director of Research at Brooking
• Alice Rivlin, former Congressional Budget Office (CBO) and Office of Management and Budget (OMB) director and Senior Fellow of Economic Studies at Brookings

Moderator David Wessel opened the event with some background, pointing out that the caps do not necessarily have a connection to the reality of budgetary needs but are simply levels that Congress specified well ahead of time. They may decide they are appropriate or break with those levels if they find they can't live within them. Given the both defense and non-defense priorities policymakers may want to address, the latter scenario could become likely.

Hale laid out a number of possible scenarios for upcoming appropriations. They could appropriate at the higher pre-sequester level and trigger automatic cuts, which he saw as unlikely. He saw much more likely that Congress would either live within the caps, so they would make the actual choices about allocations rather than having automatic cuts do that. The last scenario which he saw as possible and hoped for would be another budget deal which provided some relief from the sequester. On the topic of Overseas Contingency Operations (OCO), he mentioned how the uncapped war category had been exploited somewhat by both Congress and the Obama Administration and said that it could be a safety valve for defense.

O' Hanlon mentioned many different developments in the world, including the rise in military power of countries like China and Russia, might put pressure on the defense caps. Later in the event, he suggested that new conflicts may be defined as within the scope of OCO to ease pressure on the defense caps.

In addition, O' Hanlon provided context for the caps, noting that our spending is above the Cold War average, but we have a much smaller military than we did then due to rising compensation costs, among other things.

The event then turned to non-defense discretionary spending. Rivlin argued that it would be a mistake to live within the non-defense cap for a long time, though it would be doable in the short term. She pointed out that this category of spending included most of the things we think of the government doing despite its relative small portion of federal spending, and it was set to decline further relative to population or GDP growth. She said that the non-defense caps were too low for her liking and that we needed to raise revenue through tax reform to pay for investments.

Haskins agreed with Rivlin that the caps were too low, but said he was glad the caps were there to show lawmakers' "one-third" seriousness about the debt. He disagreed with Rivlin that the caps would be doable in the short term and expected Congress to game the caps this year. In response to a question of whether caps could lead to better and more efficient spending, Haskins said that it didn't happen because the government simply had too many programs and too little data for Congress to perform effective oversight. Rivlin stated that the budget process didn't really give Congress time to make effective decisions about how to live within the caps, so they cut broadly to avoid alienating any one constituency. She recommended instead reviewing chunks of the budget every few years.

Hale said that the implementation of the across-the-board sequester cuts in FY 2013 was hectic for the Pentagon because they didn't believe it would go into effect. They didn't slow spending earlier in the year in preparation for the cuts, so services had to scramble to live within those cuts, doing many things he had not seen before.

Rivlin used the analogy of a family budget, arguing that with a budget constraint, maintenance was the first thing to get cut, and that was also the case for the federal government. Maintenance involving things like infrastructure and prisons has already been put off, and that would get worse as time goes on.

Wessel directed the defense panelists to ask non-defense questions and vice versa. O' Hanlon asked about how environmental protection would be affected by the caps, to which Rivlin responded that money could be spent better, but the category was very important. She pointed out that complaints about environmental protection were more about regulations than spending, and the spending needed to happen to get the job done.

Haskins asked why cost overruns happened so often in the Pentagon. Hale responded that there were often underestimates early in the process to get projects going, and responses to budget constraints led to inefficiencies. He also said that many infrastructure projects had similar problems, so he didn't see a particular solution. O' Hanlon added that cost overruns were especially problematic in a time of sequester because the Pentagon had to do things like compensation reforms and base closures just to tread water with their budget. Adding in the cuts made the situation even more difficult.

Rivlin brought up similar issues in the non-defense side. There are things that could be made more efficient, like job-training programs, but those savings were simply needed to boost much-needed investments.

The event was a very interesting dive into the tangible difficulties of living within the sequester caps. We talk frequently about how low discretionary spending will get, but the panelists gave a better idea of where they think discretionary spending will go and the adverse effects if lawmakers don't change the caps in a responsible way. Of course, with debt at record high levels and continuing to rise in the future, we cannot afford to put sequester relief on the credit card. Any sequester relief should be accompanied with policies that fully offset the costs over ten years or less and then grow over time to help improve our long-term debt trajectory.