The budget and the election

The red ink war

Budget rows take centre stage as the mid-terms loom

Washington, dc

THE new fiscal year began in America on October 1st as it often does: without a budget. For five of the past seven election years, Congress has failed to agree on one. But even by that dismal standard, this year marks a new low. For the first time since the budgeting process was overhauled in 1974, neither chamber has voted on a budget resolution—the overall spending plan that is then fleshed out in 12 appropriations bills. The House of Representatives has passed only two appropriations bills so far; the Senate, none at all. Instead, Congress has resorted to a “continuing resolution”, which maintains spending at last year’s levels until early December, at which point the lawmakers will have to take the subject up again.

Worse, Congress has still not decided what to do about a big package of tax cuts that is due to expire at the end of the year. The Senate had already deferred the issue until its “lame-duck” session in November, after the mid-term elections but before those elected take office. And in the early morning of September 30th, the House also adjourned until mid-November without settling the matter. Should Congress fail to act when it reconvenes, America’s limping economy will be further hobbled by an extra $200 billion in taxes next year, on top of the tightening caused by the expiration of the stimulus package and an expected round of big state-level cuts.

Decisions about taxing and spending are especially fraught this year, thanks to the impending elections, in which America’s sluggish economy and huge deficit are likely to be defining issues. The root of both problems, the Republicans say, is the Democrats’ support for an overbearing state, which is too quick to spend, tax and regulate. The Democrats, mindful of the Republicans’ lead in the polls, are reluctant to take any votes that appear to confirm this image, by formally approving a big deficit, say, or allowing any taxes to rise.

The leaders of the Republicans in the House made both tax and spending cuts the centrepiece of the “Pledge to America”, a manifesto of sorts that they unveiled on September 23rd. They promised to reduce spending next year by $100 billion, permanently extend all the tax cuts due to expire at the end of the year (the president wants to allow taxes for the rich to rise), and repeal the reforms to America’s health-care system the Democrats passed earlier this year. In general, the wordy document contains much talk of restoring “fiscal discipline” and stopping “job-killing tax hikes”.

Critics have pointed out that these goals are largely contradictory. Extending tax cuts, after all, will add to America’s fiscal woes. Moreover, even as they vow to shrink the government, the Republicans also promise to spare its most expensive parts—Social Security, Medicare and defence—from any cuts. There are few clues as to what Republicans might replace the Democrats’ health-care reforms with, and therefore whether they could save the government any money that way. Erick Erickson, a prominent Republican blogger, complains that the document focuses on “mom-tested, kid-approved pablum” at the expense of “stuff that will have any meaningful long-term effects on the size and scope of the federal government.”

Most of these objections are immaterial, however, since the Republicans will not be able to turn much of the “Pledge” into law. Even if they win control of both the House (which is likely) and the Senate (which is less so) at the mid-terms, they will still be constrained by Democratic filibusters in the Senate and by the president’s veto. That will almost certainly preclude them from overturning health-care reform, though they will try to chip away at it. As for the budget, by allowing the continuing resolution to pass unhindered, the Republicans have in effect agreed to maintain spending at levels they describe as ruinous for the time being.

But the debate about whether to extend the expiring tax cuts is certain to come to a head in November. During his campaign for president Barack Obama pledged to extend the tax cuts for individuals with incomes below $200,000 and for families with incomes below $250,000, while allowing them to rise for anyone richer. The Republicans insist that this will hinder job creation by siphoning money from the owners of small businesses, and thus further dampen the recovery.

There may be some truth to this, but extending tax cuts to the rich is not a very efficient way of boosting the economy. This week the director of the Congressional Budget Office said that both a full and a partial extension, although beneficial in the short run, would do the economy more harm than good in the long term by adding to the national debt. Earlier in the year the CBO examined 11 different forms of fiscal stimulus and concluded that extending unemployment benefits—a measure that the Democrats favour—would provide the most benefit to the economy; extending the tax cuts would provide the least.

Polling suggests that most Americans would be willing to see taxes rise on the rich. Yet Republican gibes that the Democrats are planning to throttle the recovery by raising taxes are making Democrats in marginal seats skittish. On September 28th 47 House Democrats wrote to the Speaker saying they would like to see some of the tax cuts, on capital gains and dividends, extended for all. Several Democratic senators have also spoken out in favour of an across-the-board extension.

Moreover, by the time the lame-duck session begins, Republicans are likely to be emboldened by their expected electoral gains. Some have suggested that if the Democrats do not go along with their ideas on taxes and spending, they will be forced to bring Congress to a standstill until they get their way. Most observers reckon that neither party will want to foment a crisis or stiff already disgruntled voters with a big tax rise, and so conclude that some sort of deal will be struck, perhaps involving the temporary extension of all the cuts for a year or two. That could make short-term sense; but it will set the stage for more budget battles to come.