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Will Anyone Go All In on the Budget This Year?

This is the point in the year in Washington, D.C., when, like when the cards are dealt in Texas Hold ’Em, everything seems possible when it comes to the federal budget.

[IMGCAP(1)]In much the same way that everyone could have a royal flush at the start of a hand, budget participants often talk in early January about the coming session of Congress as the start of something big on the budget, the point of which we’ll get our fiscal house in order, when the profligate practices of the past will be abandoned, etc.

The truth, however, is that we don’t really know what’s going to happen on the budget this year. The only thing we can say for sure is that at some point during the debate everyone’s bluff is going to be called on the budget; that is, everyone who said this year’s debate is the moment for action on the deficit is either going to have to follow through on their budget promise or show their real budget colors.

In some respects the planets and stars are lining up properly for some type of successful deficit reduction effort this year. The economy likely will have grown for five consecutive quarters by the time the fiscal 2011 budget will start to be implemented in October, and there may well be a consensus that the stimulative fiscal policy of 2009 and 2010 needs to change to one that is more restrictive.

Politically, fueled in part by last year’s demagoguery on the budget, there appears to be a pent-up public demand for deficit reduction, although there’s nothing close to the grass-roots pressure that existed when Ross Perot made it an issue in 1992. The White House has indicated that reducing the deficit will be one of its highest policy priorities this year and in the process has raised expectations about what it will propose. Blue Dog Democrats have indicated that, after supporting much of what the president proposed last year, there has to be progress to reduce the deficit this year. For a variety of reasons Congressional Republicans insisted throughout 2009 that the deficit was too high and needed to be reduced.

According to the financial news channels, with the economy recovering, Wall Street supposedly is or should be increasingly concerned about the prospects for inflation and the amount the federal government is borrowing. In addition, led by the Chinese, some foreign buyers of U.S. debt have been saying for months that Washington has to turn to deficit reduction soon.

But it’s also an election year, and that will make changing from support for something called deficit reduction to going on record in favor of actual spending reductions and revenue increases difficult for most Representatives and Senators — no matter how much they talked about, insisted and pounded the table for it in 2009. And make no mistake about it, the amount needed to reduce the deficit to levels considered economically and politically sustainable cannot be achieved through growth alone unless the gross domestic product grows for a sustained period at levels virtually no one thinks possible. As a result, votes in favor of actual spending cuts and revenue increases will be required.

In addition, even though most experts agree that one of the most important budget challenges to dealing with the long-term deficit will be Medicare and Medicaid, it’s not at all clear that, after the very contentious debate that took place on health care reform in 2009, there will be much stomach for dealing with these programs again in 2010.

As a result, the two biggest budget battlegrounds this year are likely to be over revenue and domestic appropriations.

The revenue fight is easy to predict because the tax cuts enacted during the Bush administration will expire at the end of 2010 unless Congress and the White House enact legislation to extend them. The president has already indicated that he doesn’t want to extend three provisions — the top marginal rate on individuals, capital gains and dividends — and that would have a major positive short-term and long-term effect on the deficit outlook.

In other words, a revenue increase is already on the books. The budget question is whether those who have demanded action on the deficit not only will try to prevent it from happening but will denounce those who don’t actively work to stop it.

Domestic appropriations will also be a focus because after excluding Medicare and Medicaid, and after assuming military reductions mostly through a slowdown in activities in Iraq and Afghanistan, that will be one of the very few places left to find major savings. As usual, this will be a real challenge for Representatives and Senators because, not including nuts-and-bolts spending for basic federal functions like law enforcement, education will get the highest scrutiny. This will be especially difficult now when most state and local governments have their own severe fiscal problems and reductions in federal education spending are likely to have a more immediate and visible local effect than might otherwise be the case.

All this points to the budget hand that has been dealt this year. Assuming the economic recovery continues, Congress and the White House will be faced not just with hard choices but real opportunities to do something about the deficit. As a result, when it’s over, we’ll have a much better idea whether the deficit really is as important as everyone has been saying. It’s certainly possible that those who have said they want to reduce the deficit will play their cards right. It’s also possible that they’ve all just been bluffing.

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

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