Beyond the 'cliff': Why spending cuts are next on the agenda

The "fiscal cliff" deal reached over the holiday weekend lifted an immediate cloud of uncertainty over US taxpayers in the new year, but it didn't resolve the longer-term question of how to significantly reduce federal deficits.

That's why the next round of fiscal policy talks is already in the works. And because the just-completed round centered heavily on raising tax revenue from the rich, the dominant issue in the next round promises to be spending cuts.

The question for President Obama and Congress will be how to pare back the projected rise in federal spending in a sensible way – so that deficits come down without doing undue harm to the economy and to important voter priorities.

In recent days, Mr. Obama hasn't seemed eager to lead the way on this. He has signaled firm opposition to linking the approval of a higher public-debt limit to commitments on spending cuts as demanded by conservatives, saying the ability of the US to pay its bills should be nonnegotiable.

A White House fact sheet on this week's fiscal deal, meanwhile, didn't put urgent emphasis on the spending issue. Instead, the statement lauded the Jan. 1 fiscal plan as providing "greater economic certainty for families and businesses," while acknowledging the need for more progress.

Yet the spending questions can't be easily avoided, for several reasons:

• Politics. Republicans are pushing hard, and they control the House and have filibuster potential in the Senate.

“President Obama declared the other night that those he calls ‘rich’ are now paying their ‘fair share.’ So it’s time to move on," Senate minority leader Mitch McConnell (R) of Kentucky said Thursday. "The president got his revenue, now it’s time to turn squarely to the real problem, which is spending."
 
• Economic reality. Bringing the deficit under control will require restraint on the spending side, as well as the new tax revenue that Obama has won. Here's a reality check: This week's fiscal deal includes an estimated $650 billion in deficit reduction over 10 years, compared with a "baseline" in which all Bush tax cuts and some other key policies were extended. But over the next 10 years budget deficits were on track to total $7.9 trillion, according to the nonpartisan Committee for a Responsible Federal Budget (CRFB).
 
So the Jan. 1 accord cuts deficits over the next 10 years by less than one-tenth. Few budget analysts are hoping for policymakers to bring deficits down to zero, but a widely voiced hope is that further bargaining could bring total deficit reduction to $4 trillion. That amount could make the difference between the national debt continuing to rise or falling somewhat, as a percentage of the year's gross domestic product (GDP).
 
For the economy, stabilizing or reducing it can pay big dividends. It would maintain investor confidence, a key enabler of job creation, whereas economic research suggests that the pace of GDP growth slows when debt is high and rising.
 
• Deadlines. Americans may be tired of the "cliff" metaphor that abounded in news reports leading up to Jan. 1, but now a new day of fiscal reckoning looms, in early March. The agreement just passed by Congress postponed sizable automatic spending cuts, which had been scheduled for January, until March 1. Neither side likes that automatic approach, called "sequestration." But to avoid it, they'll need to cut a bargain on spending.
 
Adding to the pressure: In early March, the government will start having trouble getting by without borrowing more money by issuing Treasury bonds and notes. For the government to borrow more, Congress must approve a hike in the official debt limit. Republicans don't want to agree to that unless a spending-restraint deal is reached, perhaps including some reforms of Social Security or health-care programs.

The debt-ceiling debate is a big one. If it isn't raised, the risk is that the US would begin to default on financial obligations, resulting in a credit-rating downgrade. Just the political foot-dragging around the last debate on raising the limit, in the summer of 2011, resulted in such a downgrade.

In late March, there's yet another hurdle: A "continuing resolution" in Congress expires, meaning lawmakers must agree to approve new legislation to fund government activiities like air-traffic control and federal courts.

All this puts pressure on both parties, Republicans as well as Democrats. If headlines about "default" start piling up, neither side looks good.

Obama has some leverage in the fiscal fight. He won the presidential election, and has higher approval ratings than Congress. He knows that, in the past, Republicans have taken a hit in public opinion when it looked as if they were holding up a debt-limit hike for political reasons.

But Republicans have their own leverage. Opinion polls suggest that the public embraces the idea of spending cuts, as well as tax hikes for the rich, to deal with deficits. They can argue, as Senator McConnell is doing, that Obama has got the tax hikes that he campaigned for, and it's time to address the growth of discretionary and entitlement spending.

In addition to spending cuts, the two sides could tangle over wider tax reform. They might embrace the idea of simplifying the tax code to promote economic growth, but with Democrats seeking to raise additional tax revenue and Republicans seeking to hold the line against any increases.

But with tax rates set to revert to Clinton-era levels for the wealthiest taxpayers, changes on the spending side of the federal ledger appear likely to have the bigger dollar signs attached when the next fiscal deal is agreed.