The Battle
of the Budget:
Upcoming Fiscal
Battles 2013-2014
It seems that the markets and the public have very short
memories, with the budget and debt ceiling debacle behind us, having been
effectively kicked down the road to January.
However, we have the makings of a Greek three-act drama (the allusion to
Greece is intentional, I assure you).
Each act plays out, the first an exposition (establishing the main
characters), the second act rising actions (where the protagonists try to
resolve the situation), and a climax (where it comes to a head). Here’s our impending drama and our critique: [Note:
C Indicates positive outlook; D indicates negative outlook; Nspeaks
for itself].
ACT ONE: December 13- FY2014 budget
blueprint
Synopsis: A
joint committee is tasked with establishing a top-line spending level for
fiscal year 2014 by December 13. The current top-line spending level is $967
billion, which some in Congress think is too low, particularly compared to
current spending of $986.3 billion. Agreement on an overall level of spending
will pave the way for completion of a year-long spending bill. The 2011 Budget
Control Act requires sequestration if spending exceeds $967 billion for 2014.
FY13 spending was $988 billion. The cuts are set to occur two weeks after the
end of the first session of the 113th Congress, so roughly January 15.
Risk: Conference
Committee Fails; Sequestration sticks N
Risk probability: Medium
CD
Economic impact
associated with the event: CD
Momentum in the event
of occurrence: CD
Rationale: To
avoid sequestration, the $967 billion cap on spending will need to be raised.
But, in order to raise spending above the $967 billion cap, negotiators would
have to find a mix of spending cuts and tax increases that would be hard for
both Democrats and Republicans to swallow. Another option would be to raise the
cap for 2014 and lower the cap in future years, easing the short-term impact on
the military and non-defense agencies.
What to Watch:
Budget Conference Agreement that sets 2014 top-line spendingACT TWO: January 15-Short-term funding bill expires
Risk: Government Shutdown NN
Risk probability: Low C
Economic impact
associated with the event: D
Momentum in the event
of occurrence: DD
(depending on term of shutdown)
(depending on term of shutdown)
Rationale: A January shutdown is not likely because
of the political fallout Republicans endured during the October shutdown. The
short-term debt ceiling bill required budget conferees to finalize a budget
blueprint by December 13. This would establish a top-line spending number for
fiscal year 2014 ahead of the January 15 deadline, paving the way for a year-long
funding bill and avoiding a government shutdown. If the conferees fail,
Congress could pass a continuing resolution through the end of the year.
What to Watch:
Budget conference agreement settles this problem.ACT THREE: February 7-Debt limit suspension expires
Risk: Default on U.S. Government debt NNN
Risk probability: Very
Low C
Economic impact
associated with the event: N
Momentum in the event
of occurrence: DDD
Rationale: Treasury can use extraordinary measures to
keep from breaching the debt ceiling after suspension of the limit ends February
7, which likely means Treasury won't need another debt limit boost until at
least mid-March 2014.
What to Watch-
Letter from Treasury saying when extraordinary measures will be exhausted.
I’m not thrilled at all about this play. In fact, I’d like to see it resolved after
the first act. This whole Committee
arrangement is exactly what was done in 2011, which got us into
sequestration. Don’t get me wrong about
sequestration, its done more to reduce the deficit than our elected official
have by acting. But I’d like to offer
the time-honored strategy of compromise.
Go watch films of Tip O’Neil and Ronald Reagan. The Tip and the Gipp were miles apart, but
worked together. In the meantime, watch
the conference committee and December 13.
Leon
