Business Ethos Blog

A Good Deal?

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University

Dr. David MielkeCongress passed a budget deal last week to avoid a possible government shutdown over the debt ceiling and next year’s budget.  Some critics say the only thing worse than passing this budget is not passing it.  Does this deal merely defer serious issues until the next administration takes office?  Does the deal clear the slate for Congress to now concentrate on other important issues such as tax reform and an infrastructure bill? Is this bill the “Right Thing to do?”  Let’s look at some issues:

1. The federal government was due to hit its debt limit on November 3rd which had been suspended since last March.  The Treasury has been using emergency cash management measures to remain below the $18.1 trillion borrowing ceiling since then.  Some in Congress saw the debt limit extension as an opportunity to negotiate budget cuts or changes in entitlements, while the President said he would only sign a “clean bill.”  That is, raising the limit with no contingencies.

2. The agreement would suspend the debt limit until March 15, 2017.  After that, the debt limit would be reset to include any borrowing done before then.  There is no dollar limit on the debt before that date and the debt will continue to rise—some estimate to over $19 trillion.

3. The deal also sets the top line numbers that lawmakers will use later this year to craft spending bills before government funding expires December 11.  You may remember that Congress was unable to pass next year’s budget by October 1st and instead used a continuing resolution to set the budget at the same level as last year, hoping to agree to a new budget by December 11.  The deal also sets the overall budget spending limits for next year’s budget which expires September 30, 2017.

4. The new budgets boost spending above the caps set in the sequester, and insures that spending rises equally for defense and domestic spending.  It increases both domestic and military spending by $50 billion this budget year and an additional $30 billion next year.  In addition, the Pentagon and State Department will get $16 billion in each of the next 2 years for emergency war funds not included in the sequester and subject to the annual budget.

5. The government will pay for the extra spending by a grab bag of budget gimmicks like subsidies on crop insurance purchased by farmers, pension smoothing, spectrum auctions, more IRS audits allegedly to improve tax compliance and sales of oil from the Strategic Petroleum Reserve which could raise $5 billion over the next 10 years.  These sales will occur at a time when oil prices are at modern lows.

6. In addition, discretionary spending will be cut by $14 billion from current levels in 2025 and certain cost cuts for Medicare are extended 2 years from current law, through 2024.

7. The deal will also divert money from the Social Security retirement fund to supplement the Social Security Disability Fund which is set to run out of money next year.  Eligibility rules for disability would be tightened to screen out able-bodied adults and the renewal of benefits would be restructured with the objective of moving people back into the work force.  These and other structural changes could save $168 billion over a decade.

8. The deal also fixes the quirk in Medicare Part B that would have raised the premiums for about 52 million people by 50%.  The premiums will go up 15% instead.  The cost is $8 billion.

9. It also repeals an Obamacare mandate for businesses to automatically enroll employees in health benefits regardless of the cost.

Is this agreement a good deal?  Should there have been more specifics as to how the additional $80 billion discretionary money will be spent?  Is it possible that Congress will agree by December 11th as to how the discretionary money will be spent?  Is this another example of spending today with the promise of saving money in the future?  Is this the “Right Thing to do?”  There are definitely some good things in the agreement along with some questionable components.  There is no question that the Social Security Disability enrollment and continuation of benefits had to be tightened.  However, taking money from the Retirement Fund to supplement disability is questionable.  It is a good thing that the Medicare Part B premium issue has been addressed.  But, does it make sense to sell oil from the Strategic Reserve at a time of low prices?  There should have been some outline of how the discretionary money will be spent.  This seems like an open checkbook problem.  It is a positive to have the debt ceiling issue and next 2 fiscal year budgets set to allow Congress to concentrate on the remaining issues–the highway trust fund, the reauthorization of the Export Import Ban, tax reform, the resolution of multiple temporary tax provisions due to expire at the end of the year and of course, how the new discretionary money will be spent.  Given this Congress and President, it is probably the best deal we can get.  As Paul Ryan said, it is a deal that he will agree to while holding his nose.