Fiscal Follies for FY18 (Jul. 21)

Update 193 —  Fiscal Follies for FY18

GOP Tax Hopes Hang in Budget Balance

Budget resolutions don’t get passed as a rule, but the lead-up to the FY 2018 budget is taking an interesting turn with a lot at stake.  The Republicans are considering enacting tax reform via reconciliation. Recess looms — if a budget isn’t passed or a CR agreed-upon before it starts, there will likely be a government shutdown in October.  Its failure could also doom tax reform.

 

Public attention has shifted to MAGAnomics.  This budget’s increased toplines for major items like defense spending and deep cuts to social programs millions count on mean that no Democrat will support this budget.  Moderates will demur, and the hard right will be left without a win.  Six months into the Trump presidency, this is a hard pill for the GOP to swallow.  They just don’t have the votes.

 

Good weekends all,

Dana

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House Budget Topline Figures

Wednesday night, the House Budget Committee approved its FY 2018 budget, which provides for $621.5 billion for defense spending and $511 billion for nondefense discretionary spending for FY 2018.  The increase from FY 2017 is $70.4 billion for defense spending, with a $7.8 billion reduction for nondefense spending.  After ten years, nondefense discretionary funding would be reduced to a bare $424 billion.

The budget calls for over $200 billion over 10 years in cuts to mandatory spending programs across 11 different authorizing committees through the special, fast-track process called “reconciliation” (discussed more below). The budget would cut the Affordable Care Act and Medicaid by $1.5 trillion and overall contains $4 trillion in total mandatory program cuts over ten years. Such severe cuts are an effort to claim a balanced budget on paper with no contribution from revenues.

House Budget State of Play

The House budget is far from a slam dunk in the House and may indeed be doomed.  The GOP had little trouble unifying its caucus behind the Choice Act and moderate trouble whipping votes for the AHCA.  Differences within the caucus on this budget will be difficult to reconcile.

•  Internal GOP divisions on cuts — Moderate Republicans and the Freedom Caucus once again find themselves in a battle over benefit cuts.

—  House Moderates.  Nearly 30 (some say 20) Republicans in the House have committed to opposing this particular budget plan due to the severe cuts to entitlement programs.  22 Republicans would be sufficient to kill the legislation.

—  Freedom Caucus. The Caucus, consisting of 31 far-right members, is undecided on the budget measure and would like to see even further cuts on top of the $200 billion to mandatory programs.

Mini-Bus Appropriations

As a result, House GOP leaders do not appear to be moving the budget to the floor next week.  Rather, the House is expected to consider a defense minibus (as opposed to an omnibus bill that had been under discussion). The four-bill package will be put to a vote and the 12-bill omnibus is being shelved, because it was determined that it did not have enough votes to pass the House.

The four they chose to focus on in this minibus all deal with defense and security, so they’re highly popular among Republicans. The eight bills they left behind all fund non-defense programs.

Comparison with Senate

The Senate largely disregarded the appropriations levels by Trump and House Republicans.  Instead of adopting the levels put forth by the House, the Senate chose to stick to 2017 funding levels.  The House budget proposes $1.13 trillion in 2018 for defense and non-defense appropriations, whereas the Senate Appropriations Committee is developing bills using a 2018 total of $1.07 trillion.  Thus the Senate does not assume the defense increase or the non-defense cut assumed by the House.

Comparison with the Administration

The House budget closely mirrors the Trump budget in the severity of its spending cuts. Trump’s budget would chop $1.9 trillion over 10 years from Medicaid and the Affordable Care Act spending, and $272 billion from social programs, such as the Supplemental Nutrition Assistance Program, that provide basic assistance for low- and moderate-income households.  It would allocate over $600 billion for defense and just $462 for nondefense appropriations in 2018.  The budget proposal’s growth estimate comes in at 2.6 percent, lower than the administration’s pie in the sky estimate of three percent, but well above the consensus view of 1.9 percent.

 

GOP’s Procedural Choices

The GOP has three different procedural options related to reconciliation, which is a special, fast-track process that allows certain budget legislation to pass the Senate with 51 votes.  Republicans want to use reconciliation to move their tax plan.  The reconciliation process can only be activated if the House and Senate agree on a budget resolution.  The three options include:

•   Regular budget order.  In recent years, GOP budgets have called for balancing the budget within the decade.  Many conservatives have said they would only support a 2018 budget resolution if it got to balance.  Some have also called for pairing spending cuts along with tax cuts in reconciliation, which is the approach the House budget took.

•  “Shell” Budget.  This would keep spending and revenues at current law levels, reflecting no policy changes.  It would be a “shell” budget whose only purpose would be to deliver reconciliation instructions for tax changes.  (This is what Republicans did in their 2017 budget, which was a shell that included reconciliation instructions to repeal and replace the Affordable Care Act.)

•  Repurposing reconciliation instructions for Obamacare.  Republicans could re-purpose the reconciliation instructions used for the American Health Care Act and use them instead for a tax package. This would be wholly unprecedented and its use would indicate substantial desperation.

Another procedural issue could involve the period covered by the budget resolution.  The House budget covers 10 years, the traditional budget window in recent years.

But in the Senate, some such as Sen. Pat Toomey and Sen. Orrin Hatch have voiced their support for extending the 10-year budget window. The main argument for extending the budget window is that tax cuts that would be required to end outside the budget window under Senate rules could last longer than 10 years – possibly up to 20 or 30 years – essentially making them permanent and making it easier for businesses to plan. Opponents think that extending the budget window is still too temporary and would result in large revenue losses.

Backdoor Bailouts:  Dismantling DFA

The House reconciliation instructions to the Committee on Financial Services could be used to dismantle some of Dodd-Frank.  Section 201 states “The Committee on Financial Services shall submit changes in laws within its jurisdiction sufficient to reduce the deficit by $14,000,000,000 for the period of fiscal years 2018 through 2027.”

This $14 billion reduction could be realized in the form of DFA rollbacks. The Financial Services Committee would be instructed to produce $14 billion in savings — a figure that could allow Republicans to repeal large parts of Dodd-Frank.

Whither Fannie and Freddie?

The House GOP budget calls for privatizing Fannie Mae and Freddie Mac, both of which have been in conservatorship of the Housing Finance Market while being controlled and sponsored by the government since the 2008 recession.

Interestingly, Senate Banking held a hearing on Housing Finance yesterday where they addressed this very issue.  Many of the witnesses, mostly from banks in rural states, argued against privatizing Fannie and Freddie, asserting the importance of GSEs in facilitating the secondary market. Although many believed there should be GSE reform, they emphasized their reliance on them to meet local demand and participate in the secondary market as small lenders.