Election Impacts:

Political Playing Field Remains the Same But Deals Must Get Done to Avoid Fiscal Cliff

By Peter Harsha, CRA’s Director of Government Affairs

Washington remains configured for political gridlock after Tuesday’s elections, a fact which seems to portend two more years like the last two. But party leaders on both sides have indicated a willingness to work together in the new Congress, perhaps softening the hard line that built the so-called “fiscal cliff” towards which the country now hurtles. That willingness to compromise will be put to the test even before the new Congress is sworn in, as the lame duck session of the current Congress has two important deadlines looming before they can adjourn: the December 31, 2012, expiration of the Bush-era tax cuts and the January 2, 2013, deadline for automatic, across-the-board budget cuts called sequestration. Failing to address either deadline could plunge the U.S. economy off the “fiscal cliff,” say economists, and perhaps into recession.

In addition, the current Congress needs to decide how it wants to resolve the unfinished work in the FY 2013 appropriations process. Because of election-year gridlock, Congress was able to finish none of the twelve annual appropriations bills required to fund all the operations of the federal government, leaving agencies — including federal science agencies — operating under stop-gap funding at last year’s levels. The congressional leadership will have to decide whether to attempt to pass the unfinished bills before they adjourn, or let the new Congress deal with them.

On top of all of that, it appears likely that the Federal government will once again hit the Federal statutory debt limit by the end of 2012, though a series of “extraordinary measures” taken by the U.S. Treasury may push that deadline until early February 2013. If Congress cannot agree to increase the debt limit before federal spending reaches it, the government will shut down and the U.S. could default on its debts.

So, despite remaining mired on a playing field seemingly designed to ensure gridlock in the legislative process (ie, a somewhat fractured GOP majority in control of the House, a narrow Democratic majority in the Senate, and a Democratic president), Congress needs to take action on a series of issues on which it could not reach agreement at any point over the previous two years, and it needs to do so over the next six weeks or risk plunging the U.S. into recession. And with relatively little change to that playing field, the new Congress will need to solve whatever unfinished business the current Congress leaves it, and address the debt limit, likely by February.

The lame duck has essentially three big decisions to make -- on appropriations, the looming budget sequestration, and the expiring tax cuts. Of the three, sequestration and the tax cuts are the most time-sensitive and potentially impact the U.S. economy the most. Congress has already passed stop-gap funding for federal agencies through March of 2013, so failing to get appropriations done before the end of the year would not force agencies to shut down.

Sequestration and the expiring tax cuts have been grouped together by congressional Democrats, who would like to extend the Bush-era cuts, but modify them so that tax rates on the top tier payers would increase. Without concessions designed to raise government revenue, congressional Democrats have been unwilling to support efforts to mitigate cuts called for in the sequester, especially on defense spending that Republicans oppose. Neither party believes the cuts in the sequester are in the best interests of the country. Indeed, the sequester was designed (in the wake of the inability of the two parties to come up with an agreement for cutting the debt during the last debt limit crisis in August 2011) with cuts that were hard to stomach to force the two parties to reach agreement on cutting the deficit on their own.

So there are a few scenarios in which the lame duck may play out. The two least likely are:

• Congress commits to a proposal for cutting the federal deficit by $1.2 trillion over the next ten years by some combination of raising revenue, cutting discretionary spending, and/or reforming entitlement programs, thereby eliminating the need for the automatic, across-the-board discretionary spending cuts called for in sequestration, and agrees to an extension of the Bush-era tax cuts, with some modification;
• Congress does nothing, allows the tax cuts to expire and the sequestration cuts to take place.

More likely, according to many Congressional observers and staffers, is that Congress will agree to delay the sequestration cuts for a period of a few months to maybe as much as a year so that Members have more chance to evaluate different solutions, and will either reach some agreement on the tax cuts, extend them for a short period for more debate, or allow the tax cuts to expire with the expectation that the new Congress will act on them immediately, hopefully causing no impact to taxpayers. Because this scenario would not reduce the uncertainty in the market, which is concerned whether sequestration or the tax cut extensions will eventually happen, Congressional leaders may elect to “send a signal” of their seriousness about controlling spending by passing a FY2013 omnibus appropriations bill with some significant across-the-board cut — but not as significant a cut as the sequester would have made.

This would be a marginally better, but still pretty poor, outcome for those concerned about federal investments in science. Research accounts at the National Science Foundation and National Institute of Standards and Technology appeared to be on a path to fare well in the FY 2013 appropriations process, and computing accounts at the Department of Energy would hold their own or grow slightly. An omnibus with across-the-board cuts would mitigate those gains in part, or perhaps completely. However, the alternate scenarios look even worse. Any cut through sequestration (on the order of 8 or 9 percent) would far outstrip the gains science agencies were likely to see, and sequestration followed by an omnibus in March might make a bad situation even worse.

The science community will also find itself without some key allies in the new Congress, as a number of “champions” for the sciences have retired or lost election battles in November. We will have more detail in the next issue of Computing Research News, but retirements like Sen. Kay Bailey Hutchison (R-TX) and Sen. Jeff Bingaman (D-NM) and losses like Rep. Judy Biggert (R-IL) mean that there are fewer Members of Congress with experience making the case for federal investment in fundamental research.

In any scenario, science agencies and programs, and all other federal agencies, will find themselves under increased budget pressure over the next two years, and probably into the foreseeable future. About the only positive change in the dynamic is a President who will no longer have to run for office, freeing him, potentially, to make politically “riskier” compromises on things like entitlement and tax reform.
The deals Congress will make over the next several weeks and months are likely to resonate in federal budgets for years to come. We will have all the details.