The news shows this weekend were filled with optimism from across the political spectrum that the congressional budget conference, which begins Wednesday, will produce a deal. I am skeptical. The aim of the conference will be to find agreement on spending for the remainder of FY14 at levels of spending above those that resulted from the 2011 Budget Control Act and the failure of the "super committee" (enforced by sequestration, or "the sequester"). All factions are united in their distaste for the sequester, which cuts too deep and too broadly across both defense and domestic areas. But there is little consensus on what to do about it, and no ideas about how to bridge the fundamental divide between Democratic calls for more revenue and Republican insistence that the focus be on entitlement reform. At this point, the most likely scenario is that a deal on spending will come in January, not December, and will be at (or very near) sequester levels of spending.
Leaders on both sides have gone to lengths in past days to downplay the prospects of a grand bargain that includes both material new revenue (probably through tax reform) and entitlement reform. I would put only a small chance, less than 10 percent, that a deal along those lines can be agreed.
Instead, the Committee’s efforts will focus on a more modest set of goals, a small deal that uses modest cost savings in the out years to ease the spending caps for the remainder of the fiscal year. This prospect—a bland bargain, in the words of Chris Krueger of Guggenheim Securities—provides a small upside risk for spending in the FY14 but is unlikely to move the needle in terms of the economy’s overall growth rate. Current law caps discretionary spending at $967 billion in FY14 and $991 billion in FY15, compared to $986 billion in the continuing resolution that was just approved and $1.058 trillion in the Senate bill. These numbers define the parameters of the debate. One area for potential savings will be in farm subsidies, and the need for a farm bill is likely to be the early focus of the talks. But the need to reconcile very different House and Senate bills for reauthorizing the nation’s farm and nutrition programs (about $35 billion apart in terms of food aid provided) should be highly contentious and may provide limited scope for additional spending outside that sector.
Still, even a modest agreement may be outside the reach of Congress, and I put the odds of a bland bargain at only around 30 percent. Many House Republicans will oppose any increase in spending above the caps without entitlement concessions that Democrats are unlikely to make. Further, the pivot away from “Obamacare” as a focus for the negotiations will make many Republicans unwilling to sacrifice the spending cuts in the sequester. If agreement is not reached by December 13, the focus shifts to January 15, when current funding for the government ends. Republicans will want to avoid the political damage another shutdown would cause. I expect a deal by that time, which means that the sequester will never formally have to be evoked. At the same time, the shadow of the sequester will hang over the talks, and negotiations will start from that level of spending. Consequently, the most likely scenario, which I put at least 60 percent odds on, would be a failure to find common ground reflected not in a shutdown but in a continuing resolution for the remainder of FY14 that locks in the sequester level of spending, though perhaps allowing more flexibility on how the money is used.