November 14, 2012 | Issue Brief on Budget and Spending
Having squandered most of 2012 with posturing and delay, Congress and the President are now careening toward a budgetary precipice of their own making. The so-called fiscal cliff will be reached just after New Year’s Eve—bringing a nearly $500 billion tax hike in 2013 and a devastating 10 percent reduction in national defense spending—unless lawmakers and the White House change course.
They need to act swiftly but not hastily, nor should they overreach. Lawmakers ought to take care of the task at hand, focusing solely on stabilizing the immediate situation. They should:
A Crisis of Their Own Making
A brief review of recent history shows how Congress and the President consciously manufactured the current dilemma.
After the sweeping Republican takeover of the House in the November 2010 election, lawmakers faced the expiration of a broad set of tax policies enacted in 2001 and 2003. The result would have been across-the-board tax rate increases and a range of other economically damaging tax hikes.
Then, as now, President Obama sought to raise taxes on higher incomes, but congressional Republicans refused to support any tax hikes. During what some called the “Zombie Congress” of December 2010—due to its large group of “walking dead” defeated Members—Obama relented, citing a weak economy.
The two sides agreed to extend all the tax policies but for only two years, dropping the issue squarely in the middle of this year’s political campaign and thereby ensuring that it would not get resolved until after the election. Meanwhile, the uncertainty over tax policy sapped the economy, making employers reluctant to hire—a key contributor to slow job growth in the current recovery. Growth in real gross domestic product plunged from 3.9 percent in the first quarter of 2010 to 2.3 percent in the fourth quarter. That was still better, though, than the 2.0 percent growth in the third quarter of this year. Preventing tax hikes is just as crucial now as it was two years ago.
When 2011 arrived, leaders of the freshly minted House Republican majority targeted the government’s debt ceiling, which would need to be raised later in the year, to reach an agreement to reduce entitlement spending. After much haggling throughout the summer, no final agreement emerged, so as the August 1 deadline for a debt-ceiling increase approached, congressional leaders spawned the Budget Control Act (BCA). It contained an Administration-proposed enforcement procedure, called “sequestration,” that would automatically slash $1.2 trillion in spending starting on January 2, 2013. Half the cuts were to come from national defense—which represents less than 17 percent of total federal spending—and the other half from non-defense.
Although the House passed legislation this year replacing the across-the-board cuts with specific policy changes, the Senate refused to act, forcing any resolution to wait until after this year’s election. Now this large problem joins with other unresolved issues, such as the “doc fix” (extending Medicare physicians’ payment rates) and extended unemployment benefits—and another debt-ceiling increase looms early next year as well.
Finish the Unfinished Business
To address these matters responsibly and without further complicating the situation, lawmakers should focus on the task at hand, leaving other challenges for another day under regular budget procedures.
Fix the Problem, Then Move On
While many lawmakers like to complain that “the budget process is broken,” it is they who have broken it. The fast-approaching fiscal cliff is a product of their deliberate fiscal malpractice—and even now Congress does not have a budget resolution to guide its choices.
Congress should act but stay focused: Prevent the steep defense cuts and huge tax hikes hanging over the country and establish a stable foundation for tackling the much bigger fiscal challenges ahead through the regular order of responsible, systematic budgeting.
—Patrick Louis Knudsen is the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2010, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/117xx/doc11705/08-18-update.pdf (accessed November 13, 2012).
J. D. Foster, “Obama Could Prevent a Made-in-Washington Recession,” Heritage Foundation Issue Brief No. 3742, http://www.heritage.org/research/reports/2012/09/recession-2013-washington-policies-and-cbo-s-recession-forecast.
Glenn Kessler, “Obama’s Fanciful Claim That Congress ‘Proposed’ the Sequester,” The Washington Post, October 26, 2012, http://www.washingtonpost.com/blogs/fact-checker/post/obamas-fanciful-claim-that-congress-proposed-the-sequester/2012/10/25/8651dc6a-1eed-11e2-ba31-3083ca97c314_blog.html (accessed November 13, 2012).
J. D. Foster, “A Rose by Any Other Name: Clarity on Tax Hikes,” Heritage Foundation WebMemo No. 3232, April 25, 2011, http://www.heritage.org/research/reports/2011/04/understanding-tax-hikes-and-why-taxes-rise; Steven P. Bucci and Alison Acosta Fraser, “Fix Defense Sequestration—Without Tax Increases,” Heritage Foundation Issue Brief No. 3672, July 19, 2012, http://www.heritage.org/research/reports/2012/07/fix-defense-sequestration-without-tax-increases.