Fresh from victories for themselves, President Barack Obama and the Democratic Party, U.S. Sen. Bernie Sanders, I-Vt., and Congressman Peter Welch, D-Vt., outlined their priorities for the upcoming lame duck session and how to deal with the “fiscal cliff” that could threaten the nation’s economic recovery.
During a Monday morning press conference, Sanders argued that two of the main messages of the November elections are that the wealthy “must contribute to deficit reduction” and revenues must be part of any bargain. Welch made a similar case several hours later, saying that the voters have expressed a clear desire for more cooperation and a balanced approach.
If no budget deal can be reached, however, deep spending cuts identified during a 2011 debate over raising the debt ceiling will begin to go into effect in January.
The term “fiscal cliff” dramatically describes what the government faces if the terms of the Budget Control Act of 2011 go into effect.
Federal Reserve Chairman Ben Bernanke used – but did not actually coin — the ominous phrase in early 2012 when explaining the stakes to the House Committee of Financial Services.
“Under current law,” Bernanke explained, “on January 1, 2013, there is going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long run fiscal improvement without having it all happen at — at one date.”
After the debt ceiling showdown, House Republicans and the White House established a so-called “super committee” to craft a long-term budget solution. If the committee failed, almost $1 trillion in automatic cuts – half from the defense budget, half from domestic spending – would take effect beginning in January 2013 in a process called sequestration.
The basic idea behind the Budget Control Act was that the cuts would be so extreme that Congress would be forced to make a deal to avoid them. But the plan did fail, and if sequestration happens the first round of automatic cuts and tax increases will total $644 billion.
“Hope springs eternal” that a deal can still be reached within the next six weeks, said Welch. “The pressure is an opportunity to get an outcome that is beneficial.” But he admitted to being skeptical about the prospects and suggested that it might be preferable to wait for “a good deal than throw a Hail Mary pass” between now and the end of the current congressional session.
Republicans who lost their seats “won’t be that cooperative,” he quipped.
“We can start the discussion in a new framework in January,” said Welch. Once the Bush tax cuts expire they could be restored for everyone except those making more than $250,000, he added. In that scenario Congress would actually be voting for a tax cut, an outcome he says reflects the public’s preference for a “middle-class oriented policy.”
Sanders also believes that effective steps can be taken in January. “It’s not like you can’t do anything the day after,” he said.
The impacts would be gradual. Congress could also change laws retroactively after the deadline. But Sanders acknowledged that Vermont would begin to feel the cuts in education and other domestic programs if action is delayed more than a month into the new year.
Asked about the need for compromise, he suggested that the election had changed the dynamic. The voters want deficit reduction without penalizing the elderly, students, the disabled and the poor, Sanders said. Although the opinions of the minority should be respected, he added, Obama’s re-election sends the clear message that most people do not want changes in Social Security or Medicare to be part of a budget deal.
Welch agreed that Social Security “should be off the table” in future discussions of a “grand bargain.” He and Sanders reject a Simpson-Bowles debt commission recommendation that the retirement age for Social Security be raised. But they like its proposal to cut the defense budget by 15 percent, part of a proposed $200 billion annual reduction in discretionary spending.
Other key recommendations of the debt commission were $100 billion in new tax revenue, including a hike in the gas tax and elimination of certain tax deductions, reduction of entitlements like farm subsidies and federal pensions, and cutting the corporate tax rate.
One reason Sanders thinks next year will be different is that he and other senators hope to change the filibuster rules, an action they hope to take on the first day of the new session. He accused Republicans of engaging in an “unprecedented level of obstructionism” for the last two years
Minorities have the right to be heard in a debate and to offer amendments, Sanders said, “but it’s not good when a minority can have veto power.”
In addition to the expiration of the Bush tax cuts, other changes set to take effect on Jan. 1 without a congressional deal in place include the end of the 2011 temporary payroll tax cut – 2 percent tax increase for workers, loss of some business tax breaks, changes in the alternative minimum rate, and the implementation of taxes related to the new health care law. Barron’s estimates that more than 1,000 government programs would be impacted by “deep, automatic cuts.”
The effects could be felt even before 2013. For example, households and businesses may change their spending in anticipation of cuts, potentially reducing the Gross Domestic Product.
A combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion. But the Congressional Budget Office estimates that the projected reduction in GDP would likely spark a recession. Unemployment would rise and up to 2 million jobs could be lost.
“It’s not as if we need more time,” Welch said. In previous exercises of political brinkmanship Congress has just “kicked the can” down the road. But he thinks there is more support now among Republicans for including revenue as part of the budget equation, plus some acknowledgement that “my way or the highway doesn’t work. People get that.”
Welch also discussed another priority for the lame duck session – passage of the Farm Bill, which authorizes about $100 billion in food and agricultural programs. The 2008 law expired on Oct. 1, but Congress recessed for the elections before reaching an agreement on the update.
In addition to avoiding the cliff and reforming filibuster rules, Sanders mentioned climate change as his third priority for the upcoming congress, citing a new projection that the average temperature could rise by up to 8 degrees and cause “incredible devastation.”