(Blair Tomlinson / Staff)
Between now and Jan. 2, when automatic spending cuts are set to slash up to $54 billion from the Pentagon’s 2013 budget, there is only one date that truly matters: Nov. 6, Election Day.
That is practically the only thing that people watching the U.S. government’s budget battle can agree on.
“Barring an earth-changing event, it’s hard to see any political agreement before the election,” said David Berteau of the Center for Strategic and International Studies.
How Democrats and Republicans fare at the polls will determine whether some kind of deal on deficit reduction and a slew of other issues can be achieved during the final weeks of the 112th Congress.
For people with a stake in defense spending, sequestration — the process by which automatic spending cuts will take place — is the most significant problem that needs to be solved. However, it is just one of several divisive issues that will be on Congress’ plate in December.
Around that time, the U.S. Treasury is expected to ask for another extension of the debt ceiling or risk defaulting on U.S. debt. The tax cuts that were first signed into law by President George W. Bush are set to expire at midnight on New Year’s Eve. Appropriations bills for fiscal 2013 will need to be passed, or at the very least a temporary spending bill to avert a government shutdown. Reauthorization is needed for the farm bill and transportation funding. Plus, the so-called “doc fix,” a temporary measure by which doctors are paid by Medicare, will also require legislative action.
While the number of items is astounding, the fact that so many are on the table could mean a grand bargain is within reach, according to former budget officials and defense analysts.
With months to go and so much at stake, speculation is running rampant in Washington: What are the chances a lame-duck Congress will solve any of these problems?
In the meantime, the Pentagon and other federal agencies under the sequester gun are beginning to consider their options as they begin building their 2014 budget requests.
When Congress returns to work after the November elections, some members will have lost their re-election bids and will know that come January, when the 113th Congress begins, they will not be returning to Capitol Hill. This is what’s called a lame-duck Congress.
Speaking March 27 in Washington, Rep. Barney Frank, D-Mass., predicted this December would be the most powerful lame-duck session in history, with the results of the November elections shaping everything.
While a decisive win for either party would remove any incentive to tackle these big problems in December, the consensus is that divided government is here to stay.
The likelihood that either side will receive a mandate to act from the election is very low, said Mackenzie Eaglen, a fellow at the American Enterprise Institute.
While the White House or one of the congressional chambers could flip, the government will likely remain divided between the two parties, she said.
For that reason, the results of the election may not matter all that much, Berteau said.
“I have cautious optimism that the lame duck might be able to solve this, almost regardless of the outcome of the election,” he said.
For now, Berteau is not alone in his optimism.
“There is a genuine desire on the part of members of both parties for a deal that goes big,” Eaglen said.
A large-scale debt deal was within reach last summer before negotiations between the White House and House Speaker John Boehner, R-Ohio, collapsed.
It was also the goal of the bipartisan congressional supercommittee before it announced it had failed to reach an agreement on deficit reduction in November.
The list of issues that are up in the air until after the election is getting long. That could be a recipe for a train wreck or the opportunity to make a deal, said Gordon Adams, who oversaw national defense budgeting at the Office of Management and Budget (OMB) during the Clinton administration.
“It’s not definitive, but the opportunity for a deal is enormous when you get to November and December,” Gordon said.
According to an April 2 report by Credit Suisse, the items that are realistically going to be in play in December are the upper-income Bush tax cuts; the lower payroll tax rates and unemployment benefits; and sequestration cuts.
It is an unlikely scenario, but if the automatic cuts to discretionary spending go forward and all of the Bush tax cuts are allowed to expire, the U.S. Gross Domestic Product (GDP) will take a 4 percent hit, according to the analysis. “Until Congress acts, the economy will still technically be on a collision course with the largest fiscal hit in modern times.”
That could serve as impetus to act. Or, Congress could choose to avert the crisis and kick the can down the road with some kind of temporary fix, “as there won’t be enough time or political will to deal with big changes to policy,” according to the Credit Suisse report.
Todd Harrison, an analyst at the Center for Strategic and Budgetary Assessments (CSBA), said he agrees. “I think the most likely outcome is that the lame-duck Congress punts on the big issues and lets the next Congress deal with it.”
While full-blown sequestration remains an unlikely outcome, the pressure is on the Pentagon to consider its options if further cuts to defense spending are called for.
For now, DoD officials maintain they are not planning for sequestration. However, Defense Secretary Leon Panetta has told Congress that the Defense Department will begin planning this summer if there is still no deal within sight.
To do so, DoD will need to know the baseline from which sequester cuts will be made and the amount of flexibility it will have in administering those cuts.
Berteau said there is “vigorous internal debate” over what the baseline would be in the case of sequestration.
The Budget Control Act mandates that roughly $500 billion be cut from the defense budget over the next decade if Congress fails to identify $1.2 trillion in deficit reduction.
According to analysis by CSBA, sequestration would take an extra $54 billion from the 2013 budget, dropping the base budget to $472 billion from the Pentagon’s request of $525 billion.
However, the Budget Control Act (and the 1980s Gramm-Rudman-Hollings legislation on which it is based) is ambiguous about what the baseline should be.
Depending on the baseline, the Pentagon may have to ax anywhere from $30 billion to $55 billion, Berteau said.
Adams said he doesn’t think it is quite that uncertain.
“My understanding is that the baseline will be whatever action has been taken by the appropriators at that point in time,” he said
Before the Pentagon or the rest of the government can plan for sequestration, it needs guidance from OMB about how these cuts will be administered.
The cuts could hit at the title level — for example, DoD-wide procurement. Or they could target the account level, the sub-account level or the program element level, which would be the most restrictive.
Many expect OMB to issue guidance to plan for the most painful, least flexible cuts possible in an effort to spur Congress to act.
Giving the Pentagon flexibility to administer the cuts makes sequestration more acceptable, and that was never the point, Berteau said.
There is no incentive for OMB to announce that decision now, without seeing what the cards will look like when they are dealt in November, Adams said.
In the meantime, it is possible the Pentagon will start drafting alternative budget scenarios like it did last summer in preparation for the Budget Control Act, Berteau said.
This type of planning has become the norm inside the Pentagon. However, under sequestration, it’s not an alternative budget that will be needed, but a brand new strategy, Eaglen said.
Testifying before the House Armed Services Committee in February, Panetta said, “If you take another $500 billion out of this defense budget, the strategy I just presented you, I’d have to throw out the window.”