A Difficult Four Years For The 113th Congress.

Today a new Congress is sworn in. It will be more Democratic in both the House and Senate. In principle, this can lead to a more facile legislative agreement than we saw in the 112th Congress. Most likely this Congress will make better decisions that the last one, but one does not anticipate smooth sailing. In the next several months the new 113th Congress is likely to make useful decisions reducing expenditures. Some will consider what is done as a useful step in the right direction, yet others are likely to regard that as not enough. As the economy is improving, we have every reason to believe that things will look better by summer.

On the revenue side it is reasonable to assume that no new tax bills will come forward until the Congress decides on revision of the tax code. One can expect this to occur either late this year or in 2014. Most likely this process will tax 2-3 years to accomplish, but the Congress should take some time to do this since it the 112th Congress has just revised the tax laws in a way that should raise revenue, and will think that it’s time to back off a bit and determine if present tax revisions actually affects revenue. It is likely that a number of subsidies will either be reduced or eliminated. Some regard this spending simply as lost revenue. I would not be surprised to see significant reduction or elimination of certain subsidies. Normally subsidies are highly politicized, but while many of these items could be cut from the budget, the Congress will feel somewhat immunized against problems associated with instituting such changes.

Expect to see significant but not draconian cuts in entitlement programs such as Social Security and Medicare-Medicaid. This outcome seems unavoidable. Co-pays should increase particularly for those are who engage in behaviors that are counter to  good health. This is already occurring in state-supported insurance systems through increased assessments for those who smoke or use tobacco or who are excessively overweight. One should be be reminded that tobacco users and overweight-obese citizens cost the health care systems thousands of dollars more each year compared to non-smokers and those who are at most only mildly overweight.

Even with cuts in benefits in both the Social Security and Medicare-Medicaid systems it is likely that more will be collected as part of payroll deduction to pay for anticipated increased costs down the line. Still, one anticipates that the Congress will take a reasonably soft approach that will allow both systems to survive and thrive for a longer period into the future. Then in 8-10 years or whenever we anticipate having reduced the current sizable federal debt to more manageable proportions, later Congresses will have to return to the issue of longer term solvency.  There is considerable pressure against both parties from current senior citizens who are not in particularly good shape, and increasingly overweight. If efforts can be made to improve the general health of the populace and also change attitudes toward maintaining health through preventative strategies, then the problem of costs associated with these entitlements can become more manageable with time. It is unlikely that the 113th Congress can solve the whole problem now.

The other major expenditure costs in the federal government’s budget is the defense budget. Having left Iraq and in the process of leaving Afghanistan, we should appreciate a small “peace dividend.” It may be that this is all that the new Congress will do to the Defense Budget, that is, it may just allow expenditures for the Afghanistan war to decline through 2013-2014. However, the next defense budget could decline still further as the department is in the midst of examining new directions in the department. These new directions are, in fact, expected to allow further reductions in defense expenditures.

The Congress, working with the Executive, is expected to evaluate budget changes in other federal departments. Some of these could lead to significant budget reductions. We will have to see whether reductions in expenditures can be arrived at amicably. If the Congress and the Executive branches of government take a two phase approach, that is to take what is easily available in the short term while leaving at least some of the heavy lifting for later, it is possible that we can, within a year or two, move to balanced annual budgets and then later address longer term issues to resolve accumulated debt.  It is probably too much to expect that this process can be accomplished amicably, but it is a hope.

We have one to two years to work our way through to the midterm elections. Then, depending on what is accomplished in the subsequent 4-6 months, arguments over future directions may be complex and tied into whatever complexities arise as part of the beginning primary campaign to get ready for the 2016 presidential election.

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