Wednesday, November 6, 2013

The Battle of the Budget

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 spending

ACT TWO:  January 15-Short-term funding bill expires
Synopsis:   A short-term debt ceiling bill (H.R. 2775) to fund the government through January 15 requires Congress to pass another spending bill by then to keep the government open.
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)
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
Synopsis:  A short-term debt ceiling bill (H.R. 2775) suspends the debt limit through February 7.

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.