The federal budget process is incredibly complicated. With a population of more than 327 million, nearly four million square miles of land area, and the largest economy in human history, sheer size is one reason for the difficulty.
Add to that partisan politics, a long history of deficits, some genuine and pressing needs, and a large and growing debt level, and the challenge escalates further.
In addition, the majority of spending is already spoken for, with about half going to entitlements such as Social Security and major health programs (such as Medicare, Medicaid, and subsidies) and significant proportions going to other mandatory categories (including interest on the debt).
Many of these items cannot be dealt with in the absence of major legislation outside the budgetary process. The amount that is discretionary is relatively small, which leads to particularly intense debate and disagreement about how it should be spent.
Over the past few weeks, we’ve seen a bipartisan spending bill (signed by the President) as well as a new budget proposal by the President (which includes an infrastructure spending proposal which has been in the news as well). Passage of the spending bill dealt with funding the federal government in a more lasting way, avoiding some potentially big problems. In particular, we will be able to avoid the drama of a series of continuing resolutions with a potential shutdown looming every few weeks, thus calming the financial markets and bringing some sense of stability in this arena. More importantly, the measure “suspends” the debt ceiling until next March, thus removing the remote, but devastating possibility of a default.
As a brief note of explanation on the latest silly semantics, Congress has periodically raised the debt ceiling over the past century (it was originally set up to allow the U.S. to meet the needs of World War I during recess periods). It is a completely artificial device that literally involves paying for things for which the spending has already been approved. Until recent years, it was sometimes the subject of harmless politicking by both parties but of late has led to severe financial disruptions as the possibility of default has become very real on a couple of occasions. Because for some reason passing understanding it has become too controversial to actually raise the ceiling (again, just paying for things that they had already bought), Congress just suspends it and pretends it is not there.
The two-year budget agreement increases spending and the deficit by about $300 billion. The additional dollars will help with domestic priorities such as disaster relief from last year’s devastating hurricanes; it will also add to the defense budget. Neither side of the political spectrum was happy with the measure. Some felt it did too little to rein in spending. Others were reluctant to pass any measure which didn’t deal with immigration issues. From the perspective of the economy, the bill helps reduce uncertainty. Congress still needs to pass a spending bill that actually appropriates the money for the rest of the year as agreed upon, but with the agreement in place that task becomes pretty routine (at least it should be). The good news is that we actually have a bipartisan budget that calms things down a bit and stops the hurling from one short-term patch to another. The bad news is that we got there by giving both sides pretty much all the spending they wanted with no meaningful discussion of priorities and no provision at all to pay for it despite a recent massive tax cut. Given the environment, that is likely the best we can hope to achieve for the time being, but it is not sustainable.
In the midst of all of this, the President released his budget proposal for fiscal 2019. It calls for massive increases in defense spending, massive cuts and reforms to Medicare, housing, food, and other safety net programs, and still more deficit spending. While these documents are always interesting, they have little to do with the actual budgetary process. That task is almost totally within the purview of Congress.
One of the most interesting aspects of the budget proposal relates to infrastructure spending. The proposal involves about $1.5 trillion in much-needed infrastructure investment across the country, but only about $200 billion of it would be in the form of federal funds. The idea is to use the $200 billion to encourage State, local, and private investments. There would be a $100 billion incentives program and $50 billion (mostly allocated to State governments) to be used for rural infrastructure. Other aspects of the proposal include streamlining the decision process and investing in workforce training. Without a doubt, the need for infrastructure improvement across the United States is becoming critical, and public-private partnerships could well be part of the solution. Unfortunately, Texas doesn’t seem to want to find additional revenue sources for transportation and is increasingly eschewing private investment and toll roads. A program based on this model would do little to help urban congestion or rural accessibility in the state without policy changes in Austin.
I hope this bit of sausage making has not been too painful. The new budget certainly doesn’t accomplish everything that we need for a sound fiscal future. That requires a serious, bipartisan conversation that takes a holistic look at spending, taxes, and national priorities and views the role of government over a period of decades rather than a single election cycle. We are not there yet (not even close), but having a real blueprint not subject to bi-weekly gyrations is a major step in the right direction.