Will a Federal Budget Deal Finally Restore Economic Certainty?

On Tuesday, Congress did something that had eluded leaders in both parties for years – they came to an agreement on the federal budget. While the announced two-year budget compromise does little to tackle the nation's long-term debt problems, it would still momentarily lift the fiscal crisis cloud that's been hovering over Washington for nearly three years.

The deal has been sharply criticized by some leading conservatives in Congress, as well as outside conservative groups, whose main goal is to reduce government spending. However, the budget deal appears to have enough bipartisan support to pass both chambers of Congress and a vote in the House is expected Thursday afternoon. President Obama released a statement in support of the deal, while emphasizing that neither he nor the Republican Party got everything that they wanted.

The chief negotiators of the agreement were Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.), the House and Senate budget leaders who led the bipartisan Budget Conference Committee that was created in October within the deal to end the government shutdown. This committee had been tasked with coming up with a budget agreement by a Dec. 13 deadline, or risk the prospect of another government shutdown when the latest continuing resolution expires on Jan. 15.

What made it into the final agreement?

After weeks of tense negotiations, both sides agreed to an $85 billion budget deal that funds the government through the fall of 2015. Republicans were seeking to cap government spending at the rate locked in by the sequester -- $967 billion annually. Democrats proposed an annual spending level of $1.058 trillion. In the end, both parties finally played nice and came to a compromise – setting government spending at $1.012 trillion for 2014 and $1.014 trillion for 2015.

The agreement replaces $85 billion in scheduled sequester cuts over the next two years through $63 billion of targeted spending cuts and new fees, and by extending some sequester cuts into 2023, saving an additional $22 billion. The agreement will raise $12.6 billion in revenue through higher fees for airline passengers, and will reduce government contributions to the federal pension system by $12 billion over the next decade.

If the deal passes, it will have saved the defense budget from deep cuts in January – a reality that has led many Republicans who generally advocate for lower government spending to support the agreement. The defense budget will receive a $2 billion increase as part of the deal, and the domestic share of the budget will be increased by $22 billion. According to the Congressional Budget Office, the deal would reduce the federal deficit by $85 billion over the next 10 years.

What got left out?

To be clear, this budget deal is no "grand bargain." It is not a deal that will rein in the long-term national debt. It has no entitlement reforms, and little structural spending cuts or revenue enhancements. The deal does not raise the debt ceiling, a task that must occur in early 2014. However, it's a budget agreement, and one that has removed the threat of a government shutdown for the next two years. That part is very good.

The major piece that was left out of the deal was an extension of unemployment benefits. On Jan. 1, these benefits will expire for 1.3 million Americans and Democrats pushed for this extension to be included in the agreement. However, conservative Republicans balked at this demand, and if the Democrats had drawn a line in the sand on this issue, there very well may have been no deal at all.

Will this budget deal restore economic certainty?

If Congress can complete this budget deal, it will be a step in the right direction to restoring economic sanity. Even this small scale, two-year budget deal represents progress and would bring some certainty back to the marketplace. The deal would allow the normal budgetary process in Congress to resume, without the imminent threat of another government shutdown.

In addition, a successful budget deal could be combined with the fact that 2014 is an election year, as reasons not to have another national crisis over raising the debt ceiling early next year.

If this budget deal is finalized, and the need to raise the federal debt ceiling gets resolved responsibly, 2014 could be the first year since 2009 with no manufactured economic crisis coming out of Washington (see 2010 budget fight, 2011 debt ceiling crisis, 2012 fiscal cliff, and 2013 government shutdown and debt ceiling crisis).

This constant state of economic uncertainty has had a negative effect on our national economy as it has tried for several years to emerge from the Great Recession. While there is a debate on the exact extent of the economic harm that all of these crises have caused, a report by Macroeconomic Advisers attempted to quantify the damage.

They found that GDP growth has been lowered 0.3 percentage points each year since 2009 as a result of the governing by crisis mentality in Washington. The report also found that the unemployment rate in 2013 had increased by 0.6 percentage points due to economic uncertainty, a figure that represents 900,000 jobs.

The recent government shutdown was a case study in how a political crisis can do real economic harm. According to the White House, the shutdown had a negative effect on fourth quarter GDP by between 0.2 – 0.6 percentage points. Their report also states that the economic uncertainty surrounding the shutdown, as well as the threat of default, led the private sector to hire 120,000 less employees than they would have under normal economic conditions.

The shutdown hurt businesses with federal government contracts, as Department of Defense spending dropped by 40% during this period. It vastly disrupted export trade due to the inability of government agencies to issue standard certificates, and it closed the National Parks – resulting in a loss of $500 million in tourism revenue nationwide.

These constant budget battles in Washington have another cost – the opportunity cost of Congress not moving on from fiscal crises to solve some of the other pressing challenges facing the nation.

For example, a comprehensive reform of our immigration system is widely acknowledged as necessary, and both parties even agree on many of the elements of reform. But, constant fiscal fights have taken up the legislative calendar, and pushed the parties into their partisan corners – not the recipe for a bipartisan collaboration.

Immigration reform is projected to increase real GDP by 3.3% by 2023 and by 5.4% by 2033. It would put in place a legal pathway for high-skilled workers that are educated in the United States to stay here, and help grow our companies, or create their own. Immigration reform would also reduce the deficit by nearly $850 billion over the next 20 years – a deficit reduction figure that is substantially greater than the current budget deal.

Immigration reform is just one of the many challenges that Congress could solve if they can get past their constant budget disagreements. They could tackle comprehensive tax reform, they could fix our nation's crumbling infrastructure, and they could make needed investments in our education system – just to name a few.

It's long past the time for Congress to come together and pass a budget deal that can give the economy, and the nation, some certainty in the years ahead. Businesses all across the country make hard budget choices each day, and our elected representatives should follow the lead of their constituents and put the country on a more stable fiscal path in the years ahead.

3 stocks to succeed

It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2763188, ~/Articles/ArticleHandler.aspx, 4/19/2014 8:56:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement