Budget 101

On Tuesday, Congress returns from their August “District Work Period” — a/k/a Summer Vacation.    Normally, September in Congress is about appropriations bills, but this year September is going to be even more hectic due to the U.S. nearing its debt ceiling and other budget issues.  To explain this year’s mess, a little budget 101.

Like the typical household budget, the government’s budget consists of revenue/income and expenditures/spending.  However, the government’s revenue consists mostly of taxes.  While a handful of taxes have sunset provisions (i.e. they expire at a certain point in time unless Congress passes a new law extending them), most taxes are permanent (i.e. it takes a new law to change the tax).  But how much revenue is raised by a given tax in a given year depends upon multiple circumstances (how many people with large estates die, how the economy is doing, how much of certain goods are imported).  So for budgeting purposes, revenue is always an estimate.

Similar, on the expenditure side, there are “mandatory” expenses (think the equivalent of mortgage and car payments) and “discretionary” expenditure (think groceries, you have to spend something but you can decide whether to go store brands or name brands depending upon how your finances are).   On the mandatory side, for the government are interest payments and what is commonly called entitlements.  Entitlements have gotten a bad name from conservative spinmeisters, but the term is a legal term reflecting that, if somebody meets the legal criteria for a particular program, they have a legally enforceable right to receive the payments from that program whether that program is Social Security, unemployment compensation, or Medicaid.  The discretionary side on the hand is most federal agencies.  Representing about 25-33% of total spending, Congress has to annually appropriate the money for these agencies (ranging from the military to the national endowment for the arts).

Before the early 1900s, the U.S. government functioned like most families in terms of its ability to borrow.  If the government made the decision to purchase something (i.e. passed an appropriations bill) and needed more money to pay the bills, it would simply borrow the money.  The right to borrow if necessary was contained in the appropriations bill.  In 1917, in connection with World War I, the United States, however, enacted a debt ceiling, a limit on what can be borrowed by the federal government.  Since then, that debt ceiling has been gradually increased, but every so often the U.S. bumps against the limit.

There are two significant ways that the federal government differs from the typical family that causes problems for the debt ceiling.  The first is what is commonly referred to as “trust funds.”  Several programs (with Social Security being the largest) have their own dedicated revenue source.  In many years, these programs take in more revenue than they spend.  Looking at the overall “unified” budget, those program surpluses make the total budget picture look better (larger surplus or smaller deficit).  However, the way that surpluses in these trust funds are handled is that the government borrows that surplus (issuing bonds to the trust funds).  These bonds to the trust funds count against the debt ceiling.    (Where a family borrowing against the money set aside for vacation to pay to replace the furnace would not count as additional debt for the family.)

The second problem is who holds the debt and how it is repaid.  Unlike the typical family, larger business and governments do not take out loans from a bank.  Instead, they issue bonds.  On a typical private loan (e.g., a mortgage), each month’s payment includes an interest payment and some additional money to reduce the principal.  On bonds, the debtor makes a periodic interest payment but the principal is paid as a lump sum when the bond “matures.”  And because, when bonds are issued, they are sold to multiple people, the debtor can’t just ask for an extension on the payment of the principal.  Thus, assuming that the government does not just have a spare $200 billion lying around, the government must first issue new bonds — borrowing from Sarah and Jane and thereby increasing its total debt — in order to make the payment that is due on the old bonds — eliminating the debt to Peter and Paul and reducing the total debt.  Thus, when the U.S. reaches its debt ceiling, failure to increase the debt ceiling forces the government to miss its legally required payment on its old debt.  The interest that the U.S. pays on its current debt in large part reflects the fact that bond purchasers believe that purchasing the government’s bonds is largely risk free — given the U.S. history of making its payments in full and on time.  If the U.S. starts to miss those payments due to an inability to increase the debt ceiling, the U.S. would almost certainly face a higher interest rate which (since interest payments are part of the annual expenditures of the U.S. government) would increase the deficit and require the government to borrow even more.

Because increasing the debt ceiling requires a new bill amending the law governing the debt ceiling, this process can become very political.  In the perfect world, in which everybody got along and did the right thing, the debt ceiling bill would be a “clean” bill (i.e. just altered the debt ceiling).  However, because ultimately the debt ceiling bill must pass, members of Congress and Presidents see an opportunity to force their proposal on other matter onto the bill — conditioning their vote in favor of the debt ceiling bill on their pet idea being included (whether that is increased — or decreased — funding for a particular program or a policy change).

Because of the way finances have worked out and the amount of the last debt ceiling increase, the debt ceiling is being approached at the exact same time as the annual appropriations process is nearing its deadline.  As noted above, Congress must pass annual appropriations bills for the discretionary expenditures.  In 1976, Congress moved the start of the annual fiscal year from July 1 to October 1.

In theory, the U.S. has a neat and organized budget process.  In early February, the President submits a proposed budget to Congress.  Congress gives those proposals serious consideration and, sometime around June, the House and the Senate come to an agreement and pass a budget resolution.  Congress then uses that budget resolution to draft the appropriations bills for the various departments (currently, there are twelve bills with some bills covering multiple departments) and agencies.  Those bills pass one by one with the last bill passing with time to spare before October 1.

The reality does not match the theory.  While the President’s proposed budget is somewhat considered by the two budget committees, they mostly draft their own budget resolution.  More importantly,  Congress does not manage to pass a budget resolution every fiscal year.  Finally, Congress does not complete the appropriations process on time.  Instead, at the end of every September, Congress plays chicken with shutting down the federal government (since without an appropriations bill for a department, the government can’t pay the people who work in that department to come to work on October 1) before ultimately passing, maybe a day or two later, a continuing appropriations bill that funds whatever departments still need an appropriations bill for a period of time to allow Congress to finish work on the bills for those departments.  (And in most years, after two or three continuing appropriations bills, Congress will pass an “omnibus” or consolidated appropriations bills covering the remaining departments.

This year, if I am reading the appropriations page correctly, with four weeks left to go, only the House has passed a budget resolution.  The House has also passed its version of the Defense appropriations bill.  The House Appropriations Committee has apparently sent five of the other eleven bills to the floor.  However, on the Senate side, the budget resolution and all twelve appropriations bills are still in committee.  As with the debt ceiling bill, the need to pass a continuing appropriations bill by the end of September invites gamesmanship with the President and both parties in Congress trying to get their own policy proposals added to and incorporated into whatever finally passes.

Tossed on top of the appropriations process is the impact of Hurricane Harvey.  For whatever reason, Congress almost always appropriates the minimum that FEMA needs for each fiscal year.  In many years, and this year is no exception, a major natural disaster occurs that literally swamps that appropriation requiring a supplemental appropriation.  While the ultra-conservatives squawk about the supplemental appropriation — at least when the disaster is not in their backyard — the appropriation ultimately passes.  The need for a large supplemental appropriation (and continued funding through Fiscal Year 2018) to deal with Hurricane Harvey will certainly impact some other proposed expenditures (like a swiss cheese border wall).

The budget resolution adds another wrinkle to the process because of Senate rules, specifically the “Byrd Rule.”  Under the Byrd Rule, if Congress passes a budget resolution, the Senate can bring to the floor one “reconciliation” bill per budget resolution that contains statutory changes to implement the non-appropriations parts of the budget resolution.  (Those non-appropriations parts must still impact revenue or entitlements.)  That one reconciliation bill is not subject to a filibuster, (but is limited to provisions that have a fiscal impact and are consistent with the budget resolution).  When the budget resolution expires at the end of the fiscal year, the ability to use it to pass a reconciliation bill also expires.  The Senate’s plans for this year included using the budget resolution for Fiscal Year 2017 (adopted this January) for health care reform and to pass a new budget resolution for Fiscal Year 2018 for tax reform.  If the Senate does not take up healthcare reform before September 30, it will need to pass two budget resolutions — an initial resolution and a revised resolution for Fiscal Year 2018 –if it wants to pass both health care reform and tax reform without any effort to gain Democratic support.

In short, the rules governing the budget and government spending require Congress to actually get something done this month.  They must pass a debt ceiling increase to avoid defaulting on the national debt.  They must pass some appropriations bill, if only a continuing appropriations bill to avoid a government shutdown.  And if the Republicans are not intending to give up on a partisan version of health care and tax reform, they will need to pass a budget resolution sooner or later.

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