One Fiscal Cliff Down and Three More to Go

By Farrell, Lawrence P., Jr. | National Defense, February 2013 | Go to article overview

One Fiscal Cliff Down and Three More to Go


Farrell, Lawrence P., Jr., National Defense


* As predicted last month, the dreaded fiscal cliff was averted, but only temporarily. It was also suggested that an 11th-hour budget deal would be a "small ball" solution, and so it turned out to be.

The results are in and, if anything, that forecast was overly optimistic.

Tax rates for those making more than $400,000--$450,000 for married couples--will go up to 39.6 percent and the payroll tax goes back up from 4.2 to 6.2 percent. Everyone got a tax increase, but the additional revenues do not come close to bridging the nation's budget deficit. The marginal rate increase on "wealthy" Americans garners only $62 billion a year. In fact, the legislation actually increased spending after being larded up with pork for, among other things, NASCAR and the motion picture industry.

The Congressional Budget Office has estimated that the legislation the president signed Jan. 2 would increase the deficit by nearly $4 trillion over the next 10 years. Much was left undone as no spending cuts were made. Further, it sets the stage for three more fiscal cliffs that Congress and the White House must negotiate in a very short period.

The first cliff is the need to raise the debt ceiling sometime in late February.

In fact, the United States has already exceeded the debt limit, and the U.S. Treasury is taking action to slow outlays and make other adjustments to keep the nation from exceeding the legal ceiling until sometime in February. At that time, the debate on increased revenues will be taken up once more. The target this time will be a battle between increased revenues from adjusting the tax code--such as further reducing deductions for high-income earners--and cuts to entitlement programs.

The second cliff will be what to do about sequester.

The legislation postponed the effective date of automatic across-the-board budget cuts to federal spending until March 1. Whether this will be settled in the February battle over the debt ceiling remains to be seen. Sequestration, under the Budget Control Act of 2011, calls for $1.2 trillion in discretionary spending cuts over 10 years--half to defense and half to civilian agencies. It would take the defense budget to the neighborhood of $470 billion per year from a current spending level of $536 billion--a drop of some $66 billion.

The third cliff will be the March 27 expiration of the continuing resolution for the fiscal year 2013 federal budget.

On the surface, it would appear that the need to pass a 2013 budget, address sequester and increase the debt ceiling are pieces of the same package, but it is anyone's guess how, and in what sequence, all this will be resolved.

A key consideration will be the balance between further revenue increases and spending reductions--either through cuts on the discretionary side or through adjustments to mandatory spending on entitlements.

Whatever the outcome, it is almost certain that defense will have to surrender additional revenue, perhaps another $10 billion to $20 billion per year. The base budget will end up in the neighborhood of $505 billion to $515 billion.

It would have been hard to have intentionally constructed the mess that we now confront. …

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