New Life for a Grand (or Petite) Bargain?

With both the Senate's and House's Transportation-Housing and Urban Development (THUD) appropriations bill stalled, it seems unlikely Congress will be able to agree to a package of appropriations for FY 2014 by the October first deadline. In the Senate, Democrats have been unable to pass funding in excess of sequester levels while in the House Republicans have been unable to pass funding which meets them.

The recognition that neither pre- or post-sequester spending levels have sufficient political support on Capitol Hill may have an upside, breathing new life into the idea of enacting a comprehensive set of tax and entitlement reforms to replace at least some portion of the sequester.

According to the Wall Street Journal, OMB director Sylvia Mathews Burwell views this impass as a possible "inflection point" to begin negotiations on a sequester replacement deal. And encouragingly, Hosue Republicans leadership appears to be open to the idea as well. In a press conference Thursday, House Speaker John Boehner (R-OH) opened the door to replacing the sequester, rightly arguing that "sequestration is going to remain in effect until the president agrees to cuts and reforms that will allow us to remove it" and arguing for any replacement "to get serious about our long-term spending problem."

House Majority Leader Eric Cantor (R-VA) reiterated interest in replacing the sequester with long-term reform in a Fox News Sunday interview over the weekend. He said:

What we have said in the House as Republicans, leadership and members alike, is that we want to fix the real problem. The real problem is entitlements. We've also said sequester is not the best way to go about spending reductions. It was, as you know, a default mechanism because Congress couldn't do the job it was supposed to a couple of years ago... this fall is going to give us a great opportunity I think to all come together and try and tackle the real problem which is the entitlements.

Encouragingly, some policymakers aren't waiting for the fall to get started. President Obama and a small group of Senate Republicans continue to discuss a possible framework for a "grand bargain," according to The Wall Street Journal. One of the participants, Sen. Bob Corker (R-TN), confirmed the intentions of the group, saying "I think we’re looking at something larger than [replacing] the sequester," though there has also been talk of a smaller deal to replace a few years of sequester.

We've written many times before that sequestration is the wrong way to do deficit reduction. It cuts too abrupty on too narrow a slice of the budget in a way that could hurt short- and even long-term economic growth without addressing any of the long-term drivers of the debt.

A petite bargain which replaces several years of sequesteration with more structural reforms that save just as much in the medium term and far more over the long-term would likely improve our fiscal and economic picture. However, with the White House unlikely to cut entitlement spending without revenue and Republicans unlikely to pay for sequestration repeal with revenue, a bigger deal might be the best way to make sure both sides get what they want, as we showed in our report. The big deal could replace sequestration with spending cuts and generate revenue from comprehensive tax reform -- all while putting the debt on a clear downward path relative to the economy.

To be sure, even achieving the petite bargain is an uphill battle. But this week, the hill just got a little bit less steep.