The Dawning of the Budget Age of Aquarius

Posted May 4, 2009 at 3:38pm

Congress got far less fanfare than it deserved last week when it adopted the fiscal 2010 budget resolution. Not only was the budget resolution put in place surprisingly early in the year but, as opposed to its recent predecessors, it was adopted by very large margins in both chambers. Regardless of whether you like or dislike the policies that the budget resolution assumed, it was a triumph for Congress and the Obama administration, and the event deserved far more attention than it received.

[IMGCAP(1)]But something else was also left unsaid last week. As hard as it is to believe given that the administration is only a little more than 100 days old, the adoption of the budget resolution may well have been the end of an era as far as the Obama White House’s fiscal policy is concerned. If the administration’s projections are correct and what the president has been promising is to be believed, then increasing red ink may now be a thing of the past; reducing the deficit will soon be the new thing in Washington, D.C.

Think of it as the fiscal equivalent of a new age in Washington. On New Year’s Day 2010, “deficit reduction— could appear on the lists of what’s “in— that year. Depending on your age, you could be calling deficit reduction hip, cool, da bomb, awesome or sick. And instead of being something promised in the future, it could be happening right then.

At least that’s what we’ve been told to expect. The president’s fiscal 2010 budget indicated that, as soon as the economy is recovering, the stimulative fiscal policy that the administration has been pursuing to deal with the downturn will stop and deficit reduction will become the new primary objective.

Many, perhaps even most, forecasters are now projecting that the economy will start to grow around the beginning of the third quarter of this year — that is, about three months from now. Because unemployment and certain other indicators will reflect this change only slowly, elected officials will need more than just a few months to be convinced that the growth is real and for budget politics to change to the point where deficit reduction is acceptable.

But if it is real, the economic recovery will be an accepted fact by the end of December. That will allow, or perhaps force, the White House to submit a fiscal 2011 budget to Congress early next year that embodies the deficit reduction effort that the president is promising. That budget is supposed to be submitted to Congress by Feb. 8, 2010. In other words, the new age of deficit reduction could begin only nine months or less from now.

The new age of deficit reduction could actually begin much sooner. If it hasn’t already, the Office of Management and Budget will begin work on Obama’s fiscal 2011 budget shortly after the details of the president’s 2010 budget are released later this week. That’s when agencies and departments will get guidance about how to begin formulating their 2011 proposals with ideas that would reduce the deficit.

Assuming there are no additional financial or corporate bailouts and another fiscal stimulus bill isn’t needed, the age of deficit reduction will actually seem to begin to appear in the fiscal 2010 numbers that we see in July, when the midsession review of the budget is released. The 2010 deficit is already projected to be about a half-trillion dollars less than what is expected this year and that may well be the big story of that report. That one-third drop won’t be as significant as it will seem and as some may say, however, because it will be the result of one-time policies not being continued.

The real deficit reduction challenge for the Obama administration will be how it proposes to reduce the deficit after 2010. That’s when ongoing spending and taxing policies will have to be changed to do what the White House has promised: Get the deficit to around $500 billion by the end of 2013.

Some are suggesting the deficit should be reduced faster to a lower level, and the new age of deficit reduction may well encourage them to push for more than the White House proposes.

The truth, however, is that, even in the new age, reducing the deficit to $500 billion will require a good deal of luck as well as fiscal discipline. The Obama administration may be able to wind down activities in Iraq and Afghanistan as the president has pledged to do. But the spending reductions that come from that change won’t be realized if other similar military problems replace them. The budget outlook also depends to a great extent on whether the economy recovers as quickly and performs as well as the White House is projecting. It also requires some help from the heavens because one or more major natural disasters will wreak budget havoc. Several major pieces of the Obama legislative program — especially health care — will also need to be put in place.

I have little doubt that the Obama administration will need to try to make good on its deficit reduction promises. Blue Dog Democrats in the House could revolt if, in the face of an economic recovery, the White House tries to push the deficit even higher. Even more important, however, is the fact that many of the first-term Democrats elected from previously GOP-held, fiscally conservative districts will need to show their constituents that they share their enthusiasm for less red ink before the 2010 elections.

That leaves the president with little choice but to hope that the moon, planets and stars are in proper alignment so that the new age of deficit reduction may begin.

Stan Collender is a partner at Qorvis Communications and author of “The Guide to the Federal Budget.— His blog is Capital Gains and Games.