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Bridging the ‘fiscal cliff’ gap over spending

at 06:02 AM ET, 11/21/2012


(Olivier Douliery/via Bloomberg)

“I’ve put forward a detailed plan that allows us to make these investments while reducing our deficit by $4 trillion over the next decade.”

— President Obama, Nov. 9, 2012

Much of the attention concerning the so-called “fiscal cliff” has focused on tax revenues, specifically President Obama’s demand that tax rates rise for the wealthiest Americans. But the other side of the ledger — spending — is equally important, if the goal is to reduce federal budget deficits.

Indeed, the fiscal cliff includes automatic spending cuts that members of both parties want to halt. But more broadly, a “grand bargain” between the two parties would likely include an effort to slow the growth of big entitlement programs such as Medicare and Social Security.

There’s one key roadblock to any agreement: Are lawmakers actually speaking the same language, budget wise, as they negotiate?

Let’s explain.

The Facts

 The first step in any budget agreement is the baseline — the point from which lawmakers and the administration measure any cuts or increases in spending and revenue. The baseline is also the source of many budget gimmicks.

For instance, should cuts in spending reached as part of the debt ceiling deal last year count as new spending cuts — or old ones? Obama’s claim that he would reduce the deficit by $4 trillion is based on the fact that he counts the 2011 debt deal as new cuts because, by his logic, many of those cuts have not yet taken place.

 But Republicans would say those cuts are old news — and so they would argue the baseline for negotiation has to assume those cuts have already taken place. Either way, it’s worth more than $1.5 trillion to the 10-year budget baseline.

Obama also wants to get budget credit for winding down the wars in Iraq and Afghanistan, thus claiming another $800 billion in savings. But Republicans view that as budget sleight-of-hand and would not want to give much credit for it.

Another big item is the arcane provision known as the “doc fix,” a leftover problem from the long-ago Balanced Budget Act of 1997, which mandates Medicare cuts to providers that no one has ever wanted to take effect. Democrats and Republicans disagree whether this should be reflected in the baseline, but it is not a trifle: it costs $400 billion over 10 years.

So already, the parties are about $3 trillion apart on spending without even breaking a sweat — and before they begin arguing about entitlements or economic assumptions. (Higher projections of growth would increase predicted tax revenue, for instance, while lower interest rates would positively affect projections for servicing the debt.)

The 10-year window allows for some flexibility, because many of the cuts can be placed far in the future. Obama’s 2013 budget, in fact, increased spending in the coming year even while it claimed ten years of spending reductions.

 

The Bottom Line

 There is no easy way to bridge these gaps, especially because both House and Senate Republicans have earlier in the year denounced some of Obama’s budget maneuvers—such as the claimed war savings — as “gimmicks.”  In ways, the gaps over spending loom as large as the conflict over tax revenues.

Still, common agreement on how to measure proposed budget savings would be a sign that both sides are seriously trying to resolve their fiscal disputes.

 

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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