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My Federal Budget Crystal Ball for Next Year

Although I’ve written them myself from time to time, more often than not I’ve found “year in review” stories to be a snooze. And given that December is only three months into the federal fiscal year, they’re not really appropriate when it comes to the budget anyway.

So rather than remind everyone about what did or didn’t happen in 2010 when it comes to revenues, spending, deficits and debt, it’s far more interesting and fun to predict what’s likely to happen next year.

1. In general, 2011 is going to be very disappointing as far as the federal budget is concerned. Anyone who thinks there are going to be major changes in the outlook for federal spending and revenues will be very unhappy. Gridlock and stalemate are going to be the words most often used in 2011 to characterize every step in the fiscal 2012 budget debate. With tea party types defining compromise as a four-letter word and negotiations increasingly seen as collaborating with the enemy, especially on budget issues, it’s hard to see how much of anything — process or substance — will get done on the budget next year.

2. The only reduction in the deficit will come from improvements in the economy. One of the most important budget developments next year will be the economic forecast included in the Obama administration’s fiscal 2012 budget, which must be sent to Congress by Feb. 7. As much as the White House might like to grab a few headlines early in the year by being as optimistic as possible, its better strategy will be to stay at the low range of optimism in February and then produce a steady series of better-than-expected economic and budget results as the year goes along.

With Wall Street and others starting to predict faster economic growth than was expected only a month or so ago, continuing improvements in the deficit outlook are definitely possible and perhaps even likely. Even if that’s not the case, a conservative early forecast could still benefit the White House. How much different would the political situation be if, instead of predicting that unemployment would rise to only 8 percent in 2009, the administration had blamed Bush policies for unemployment and then had predicted the rate would rise to 12 percent before starting to fall? Because it was too optimistic, the Obama administration took a beating for every 10th of a point the unemployment rate rose above its original estimate.

3. The Bowles-Simpson deficit reduction commission will quickly fade into oblivion. Other than an occasional reminder that a particular deficit reduction option was in the commission’s final plan or a panel discussion at an economic or budget conference, Bowles-Simpson won’t be discussed very much in 2011. Someone may offer the final Bowles-Simpson plan as an amendment to the budget resolutions considered by the House and Senate next year (see Prediction 4), but no one should think it is going to be supported by a majority or will have any impact.

4. A fiscal 2012 budget resolution will not be adopted. The House and Senate will likely pass a budget resolution next year. House Republicans will want to capitalize on their majority status to advance their agenda, and the largely symbolic budget resolution will be the politically safest way for them to appear to reduce spending without actually cutting anything. Because it’s one of the very few pieces of legislation that can’t be filibustered, the Senate will be able to pass its own budget resolution, if for no other reason than the leadership will be able to use the vote to show that it’s in control. But given the very strong possibility that compromises on budget issues will be impossible next year (see Prediction 1), it’s hard to see how the House and Senate will agree on the very substantial differences that will exist. As a result, no budget resolution conference report will be adopted.

5. Forget what we’re being told: Earmarks will thrive. Given the contortions and gyrations that tea party types and others are already doing to redefine earmarks, no one should be surprised when Congressional spending directives not only remain next year but also grow in numbers and dollar amounts. They may take different forms — for example, as letters or phone calls to departments and agencies rather than language in bills or reports — but they will be earmarks nevertheless.

6. Government contractors will be the 2011 version of bond market vigilantes. With their payments and profits on the line, companies that do business with federal departments and agencies will be the most vocal opponents of take-no-prisoner tactics like government shutdowns and rapid, large cuts in federal spending. They’ll also have support from their institutional and other investors who won’t want profits, cash flow, dividends and stock prices to suffer. While a shutdown will be threatened and is likely, it will be difficult to keep one going for more than a few days once the contractor community starts protesting.

7. Don’t be surprised if financial markets are surprised by Predictions 1 through 6. There’s no indication that Wall Street has a clue about what’s ahead as far as the federal budget is concerned. Because of this, equity and fixed-income prices are more likely to swing quickly in response to Washington next year than at any other time over the past decade.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”

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