Deficit hawks, bond market vigilantes, congressional Republicans, Blue Dog Democrats and a few others are about to start publicly agitating for deficit reductions this year. When Congress returns to Washington after the Easter/Passover recess, they are all very likely to be disappointed because there will be action on the budget, but little will be done on the deficit.
The April 15 deadline for Congress to adopt a budget resolution almost certainly will be missed. (As of today neither the House nor Senate Budget Committees have posted a markup schedule.) That by itself will create a budget-related discussion inside the Beltway where the way things are done -- or in this case not done --- is often far more important than the policy being considered. In Washington, process sometimes trumps policy.
Given the large federal deficits, many fervently hoped that reducing red ink would be a major component this year’s debate. That assumption ignores the realities of both the economy and election-year politics.
Despite criticism, the deficits of the past two years have been economic policy triumphs. With the Federal Reserve’s low interests rates creating far less economic activity than had been hoped, consumer spending and business growth have been sidelined, and housing prices and mortgages remain a problem. Stimulating the economy and therefore increasing the deficit from $1.4 trillion in 2009 to a projected $1.6 trillion for 2010 was and is the correct fiscal policy.
With 5.5 percent GDP growth in the fourth quarter of 2009, the expected 3-4 percent growth in the first quarter of 2010, and new highs in stocks, a more restrictive policy would seem inevitable. But the still high unemployment rate, which has far more political impact, means cost cuts and tax increases will likely be put on hold until there's job growth. The reason: employers may defer hiring if they think federal cutbacks will negatively affect business or if they believe the economy will grow slowly.
The White House knows that deficit reduction on the scale required will negatively affect some group and that even discussing possible solutions can negatively affect Democrats in the midterm elections.
Congressional Budget Office projections show that, under current spending and taxing policies, the deficit will fall substantially from 2010 to 2011, perhaps by as much as $300 billion. This short term win may be enough to mollify some of those who will be pushing in the days ahead for more to be done.