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12/14/2012

What Will the Fiscal Cliff Deal Look Like?

This week, President Obama and House Speaker John Boehner (R-OH) have been trading secret offers on the fiscal cliff. Last night, they met for nearly an hour, and emerged with zipped lips about what progress—if any—they made on averting tax hikes across the board and automatic, deep budget cuts that would devastate America's defenses.

While action is necessary to avoid the "cliff," that is all they should do at this late date. Patrick Louis Knudsen, Heritage's Grover M. Hermann Fellow in Federal Budgetary Affairs, warns against a "grand bargain" involving tax hikes in the short amount of time available:

[H]istory shows that broad bipartisan compromises between the White House and Congress have typically just yielded higher taxes, while the promised spending restraint (except in national defense) and deficit reduction have failed to materialize.

In fact, Knudsen says, "Such agreements tend to produce higher taxes and higher spending with little or no deficit reduction."

Knudsen's educational retrospective on budget deals is a sobering reminder that even President Ronald Reagan agreed to tax hikes when he became embroiled in congressional budget "summits." Though these tax hikes were in the name of reducing the deficit, the deficit actually increased because the deals leaned toward spending increases, not spending reductions.

The "spend now, save later" approach is one of the ways that budget deals hide their true costs. And as details start to emerge—whenever they do—about the deal that President Obama and Speaker Boehner are putting together, it will be vital to examine the budgeting gimmicks they are using.

To hide the true cost of budget deals, leaders in Washington get away with things that we could never do in our household budgets.

For example, imagine you are planning your family budget for the new year. You decide, "I'm not going to take a $2,000 vacation. So that means I just saved $2,000! Now, I think I'll spend my savings on new furniture."

What happened? You spent $2,000. Where did it come from? Your regular budget—not some magical pot of extra "savings" money that you somehow accessed.

Yet this is exactly what President Obama is claiming—that there is a magical savings pot, and that he's going to take money out of it to spend on other things. Some of his magical savings come from winding down the war in Iraq and Afghanistan. Instead of winding down those operations and therefore not spending that money any more, he claims that these "savings" can now be spent again on something else.

Of course, it also bears mentioning that the Senate hasn't passed an actual budget in three years. So while you're counting your household pennies and figuring out how to pay the rent or mortgage, buy groceries, and pay off your Christmas spending, Congress is just charging up more spending with budget gimmicks. When they're not claiming the phantom "savings" described above, they're declaring a need for "emergency" spending.

As Knudsen puts it, "Spending and tax policies have been ad hoc, piecemeal, and temporary, fostering constant, nagging uncertainty in the economy."

This practice has to be corrected. But now is not the time for a complete budget overhaul. Now is the time to extend current tax policies and prevent all Americans from suffering the largest tax hike in American history. Then, Congress and the President can duke it out over a grand budget.

LEARN MORE:

The Fiscal Cliff and the Perils of Grand Budget Deals by Patrick Louis Knudsen

Fiscal Cliff: Five Budget Tactics to Reject by Patrick Louis Knudsen

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