Articles

Setting a Budget Trap for Republicans

July 31, 2013

Sometimes politicians, like magicians, use distraction. Take President Obama's latest pivot to the economy, which began with last week's speech in Illinois and concluded on Tuesday at an Amazon facility in Tennessee.

The pivot isn't about the economy. It's a setup for two budget battles with Congress this fall.

The first will be about funding the federal government for the fiscal year that begins Oct. 1. Mr. Obama proposed the sequester, signed the July 2011 budget agreement with its hard caps on discretionary spending, and threatened to veto any attempt to repeal or mitigate it. Nevertheless, last week he attacked the sequester as "a meat clever" that "cost jobs" and later told the New York Times Sunday that he's worried about "the drop-off in government spending."

Mr. Obama and Senate Democrats want to spend $1.058 trillion in discretionary outlays next fiscal year—$91 billion more than allowed under the 2011 agreement. Republicans want to hold Mr. Obama to the $967 billion ceiling on discretionary spending in the coming fiscal year, a ceiling to which he agreed.

Spending disputes almost always work to the advantage of Republicans, since Americans believe there's plenty of waste in Washington. For example, a Feb. 18 Pew Research Center/USA Today poll found 54% felt that to reduce the deficit, the president and Congress should focus "mostly on spending cuts." Only 16% said the emphasis should be "mostly on tax increases." This was shortly after the Obama administration's dire (and false) warnings about the effects of the sequester on the economy.

The second battle will be over the debt ceiling—government's ability to borrow—that the Treasury Department says must be raised this fall, probably by November. Mr. Obama cautioned in his weekly address on Saturday against "threatening to default on the bills this country has already racked up."

Burnishing his credentials as a deficit hawk, Mr. Obama also claimed in his July 24 speech at Knox College in Galesburg, Ill., that he's "cut the deficit by nearly half as a share of the economy." According to the Office of Management and Budget, the annual deficit has indeed fallen to 6% of GDP this fiscal year from 10.1% during Mr. Obama's first fiscal year.

But the deficit is still a larger share of the economy than in 62 of the last 68 years since World War II. And the Congressional Budget Office says deficits will bottom out in fiscal year 2015 and begin climbing again. All this means Republicans will insist on further spending restraint, especially on entitlements, as part of any debt-ceiling measure.

Treasury Secretary Jack Lew said this weekend the White House wouldn't negotiate with Congress on the debt ceiling but did not demand that Congress pass a "clean" debt ceiling without spending restrictions. This suggests Mr. Obama understands he may be stuck taking further spending restraint in return for an increase in the limit on federal borrowing.

He'll try finessing this with tantalizing offers that ultimately give him more money to spend. But the "grand bargain" he offered Tuesday won't win any Republican huzzahs. Simplifying the corporate tax code to generate more revenue for what Mr. Obama called "a significant investment" (read: large increases in government spending) is a nonstarter.

This is especially the case since federal outlays this fiscal year are equal to 22.7% of GDP, higher than in all but six of the last 68 years (with four of those six on Mr. Obama's watch). The president can forget the $1 trillion in new revenue Senate Majority Leader Harry Reid demanded last week to pay for new spending.

Both sides face challenges in these looming budget fights. For Mr. Obama, it's that his latest pivot to the economy won't work.

In a June 13 CNN/ORC poll, his approval numbers on handling the economy were anemic (42% approve, 57% disapprove) and even worse on handling the deficit (34% approve, 64% disapprove). Pushing for more spending won't win support among independents who will decide the 2014 midterms.

For congressional Republicans, the challenge is to keep the upper hand provided by their strategy of passing continuing resolutions at current levels to fund the government. They must not overreach. For it's an iron law that Republicans get blamed for any government shutdown, no matter who controls the White House or Congress.

So Mr. Obama is baiting Republicans to overplay their hand by forcing a government shutdown or failing to offer a constructive conservative agenda. He must change the dynamic, or face Republican control of the House and Senate his last two years in office. No distraction can hide the president's concern about that.

A version of this article appeared August 1, 2013, in the U.S. edition of The Wall Street Journal, with the headline: Setting a Budget Trap for Republicans and online at WSJ.com.

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