US Federal BudgetSince the Democrats lost control of the House of Representatives in the 2010 elections, the Congress—now divided between the political parties—has largely faced gridlock over fundamental issues of taxing and spending levels, and their approaches to economic stimulus and deficit reduction. A series of high profile showdowns between President Obama and the Democrats in the Senate on the one side, and the Republicans in the House on the other, have largely resulted in decisions on long-term budget issues being continually delayed.

Both the Senate Democrats and the House Republicans have passed budget proposals for Fiscal Year 2014, and just this week the White House has released its budget. The White house plan has drawn the ire from across the political spectrum, with Democrats up in arms over changes to Social Security and Republicans calling it “dead on arrival” because of calls for new revenue.

All sides have expressed a desire to reduce federal deficits – but President Obama is demanding a combination of tax increases and spending cuts to do so, while GOP leaders want all deficit reduction to come from spending cuts, including serious reductions in Medicare and other benefit programs.

 The Republican Budget – Paul Ryan’s vision

House Budget Committee Chairman and former Vice Presidential Candidate, Paul Ryan has become the Republican Party’s primary voice on budget issues. Ryan has proposed a budget that purportedly reaches balance in 10 years – without any further tax increases – through drastic, but as yet unspecified, spending cuts.

Ryan’s budget – which is only slightly modified from previous budgets he has proposed in recent years – has become the Republican’s most sustainable policy document. One of the centerpieces of the budget is a proposal to turn Medicare, the government health plan for the elderly, into a voucher-like program that offered seniors subsidies for private health insurance, and which is generally characterized as a “privatization”.

The budget assumes that the $1.2 trillion in spending cuts over 10 years enshrined in the “sequester” remain in force. It also envisions additional revenue increases, by retaining $620 billion in tax increases on the wealthiest taxpayers that were approved in the January “fiscal cliff” deal – but in keeping with a critical Republican demand, it will not include any further revenue increases.


Senate Democrat’s budget – a “Foundation for Growth”

The Senate Democrat’s budget is in stark contrast with the Republican version, which relies solely on spending cuts while the Democrats want a mix of tax increases and spending cuts. The Democratic budget, titled “A Foundation for Growth”, conceives of a $3.7 trillion budget for FY2014 that embraces nearly $1 trillion in tax increases over the coming decade while maintaining domestic programs that House Republicans want to cut.

The Senate's budget would shrink the annual deficit to $400 billion, raise unspecified taxes by $975 billion, and cull modest savings from domestic programs. Its spending reductions come chiefly from health care savings, defense cuts, and reduced interest payments as deficits get smaller than previously anticipated. Also included in the package is $100 billion for public works projects and other programs aimed at creating jobs.


President Obama’s budget – pushing for a “Grand Bargain”

President Obama’s plan attempts to split the difference between the Senate and House versions, and offer Republicans a compromise vision that they can agree to, while not backing down on tax increases. In this sense, the President’s budget is primarily based on the $1.8 trillion “grand bargain” offer that Obama made to Republican House Speaker John Boehner during previous budget negotiations.

White House officials have sought to emphasize that this budget does not represent the President’s ideal policy, but rather a good faith effort at compromise, based on a blend of tax increases and entitlement cuts – exactly as the President has sought for years. This means that the budget will feature cuts to Medicare and cuts to Social Security that most Democrats oppose. Cuts to Social Security would come from a new inflation formula that would reduce cost of living payments (“chained CPI”) and cuts to Medicare would come from reduced payments to health care providers and requirements for higher-income beneficiaries to pay more for coverage.

The budget proposes other spending initiatives, including making free prekindergarten education available nationwide – a priority the President outlined in his State of the Union address in February. According to administration officials, the president’s budget plan would reduce annual deficits by $1.8 trillion over 10 years. In addition, it proposes more than $600 billion in new revenues, mostly by limiting tax deductions. 


Overcoming the Deadlock

President Obama has repeatedly sought a bi-partisan “grand bargain” on long term budget policy in an attempt to transcend the partisan gridlock that has ground Congress to a halt since Republicans took the House in 2010. The negotiations have repeatedly failed as Republicans have rejected any plans to reduce the deficit through revenue increases. The stakes have also been dramatically raised by Republicans’ decision to tie their negotiating strategy to the “debt ceiling”, or the congressionally mandated limit on how much the US Government can borrow. Failing to raise the debt ceiling would result in US default, and the mere threat of such a default has already led ratings agencies to downgrade the US credit rating.

The search for a grand bargain began in 2010 with the creation of the Simpson-Bowles commission, a bipartisan group created by President Obama and charged with developing a plan to reduce the long term deficit. Its plan was released in December 2010 and included dozens of proposals to cut discretionary spending reform the tax code and Social Security and rein in health care costs – but failed to win support in Congress.

Instead of pushing the Simpson-Bowles plan, President Obama instead pursued direct talks with Republicans that failed in July 2011 when House Speaker John Boehner decided not to back an approach that included higher taxes.  In the almost two years since then, Washington has seen countless budget showdowns most of which have only ended with leaders deciding to kick the can down the road.  With the elections of 2012 behind us, now is the time for Washington leaders to get real about finding an economic path forward for the United States.  To be successful, both sides have to be willing to compromise.