Seeing the Future: the ‘FlashForward’ Version of the Budget Debate

Posted November 30, 2009 at 3:01pm

The premise of “FlashForward,— one of the new shows on ABC this season, is that everyone in the world blacks out for a little over two minutes and then wakes up having seen a vision of the future. I had that type of vision last night about the coming federal budget debate: It’s going to be the most convoluted, frustrating and torturous in U.S. history.

[IMGCAP(1)]The federal budget debate almost always seems to lend itself to this type of hyperbole, so this statement may not be as obviously appalling as it should be. But as the start of next year’s debate gets closer (the president’s budget is supposed to be sent to Congress in about nine weeks), the 2010 elections become the driving force for much of what happens in Washington, and it becomes increasingly obvious that fiscal policy needs to change to match a reviving economy, no part of the budget debate will be even relatively easy to formulate, implement, explain or complete.

We’ve actually already had a preview of what’s ahead. In recent weeks, there have been contradictory demands that more be done to increase economic growth and employment — which would increase the deficit — at the same time there have been complaints about the deficit and national debt being too high. And in many cases, the same people or groups have taken these absolutely inconsistent positions.

This is the type of inherent contradiction that will dominate next year’s debate.

For example, President Barack Obama’s 2011 budget will be sent to Congress in late January or early February and will be released at about the same time it becomes clear that the economy has grown for two consecutive quarters. The budget will include a forecast that will project continued growth through calendar 2010 and, therefore, that the U.S. economy will not fall back into a recession.

Recent statements by the president and Office of Management and Budget Director Peter Orszag have indicated that unambiguous growth will be the trigger for a change in fiscal policy that will focus on deficit reduction rather than economic stimulus. It will be difficult, therefore, for the White House not to propose spending and revenue changes to make that happen.

Those spending reductions and revenue increases would be difficult to get enacted in any year, let alone with elections only nine months away. But getting the policy changes enacted next year will be even more difficult because some on Capitol Hill will charge that they shouldn’t be put in place at the point when we’ve had only two consecutive quarters of growth.

And some of these people will be the ones who have been complaining about the deficit.

The truth is that any deficit reductions will not be implemented until 2011, that is, for the fiscal year that begins about eight months later, and they would not, therefore, have any immediate impact on the economy. In fact, they wouldn’t be felt before the 2010 elections.

There very likely will be extreme complaints about something the White House first announced as part of its 2010 budget — that three of the highest-profile tax cuts put in place during the George W. Bush administration that will expire on Dec. 31, 2010, will not be extended. This year, that proposal was almost two years away from having any impact so it attracted only relatively mild criticism. This time, however, the expiration of the changes in the top marginal rate, dividends and capital gains will be less than a year away and supporters will have to pay more attention.

One of the key criticisms of allowing these to expire will be that we shouldn’t be raising taxes given the state of the economy. The fact that the changes wouldn’t take place until Jan. 1, 2011 — that is, after six quarters of what will be expected to be continuous economic growth — will be irrelevant. Indeed, supporters of keeping the tax cuts in place will talk about the psychological impact of the proposed tax changes on immediate economic behavior.

Others will say that the psychological argument goes in both directions. Many on Wall Street and elsewhere will insist that deficit reductions put in place next year will have a positive impact on interest rates even if they’re not scheduled to go into effect for nine months. Just knowing that federal revenues will increase and that Congress has the fortitude to deal with the deficit will be said to calm the bond market vigilantes that supposedly are lurking everywhere and overseas buyers of Treasuries that have been demanding evidence the U.S. will deal with its debt when the time comes.

Because of the federal budget process, the White House will have no choice but to face these conflicting complaints on everything it proposes in its budget. Unlike what happens in the United Kingdom, where the prime minister’s budget is effectively adopted as soon as it’s sent to Parliament, the president’s budget must be submitted nine months before the fiscal year begins and Congress must approve not just the overall budget but also every individual proposal. That means next year’s budget fight won’t be just a one-time event.

It also means that the budget the administration proposes will be designed to deal with an economy and an economic mentality that will differ from the reality that exists when it is revealed. Like the characters in “FlashForward,— the question will be whether it will be able to convince others that vision is what will actually happen.

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