Budget Watch: November 1, 2012

November 1, 2012 By Tod Preston


Issue No. 2
November 1, 2012

What’s Next for the International Affairs Budget? 

Lame Duck Session: Impact on FY13 Spending and Beyond

The 112th Congress will return to Capitol Hill on November 13th for organizational meetings, leadership elections, and to deal with the looming “fiscal cliff” at the end of the year created by (among other items) the expiration of the Bush-era tax cuts, the onset of sequestration budget cuts, and another breach of the federal debt ceiling.  In addition, Congress may attempt during the lame duck to finalize FY13 spending bills, which are currently being funded through a Continuing Resolution (CR) that expires on March 27th.  How these issues are ultimately resolved – and the timing of such action – is highly contingent upon the outcome of next week’s elections.

If President Obama wins reelection to the White House and the Democratic majority in the Senate is retained, Democrats will likely push to enact a budget deal that averts sequestration and forges a compromise on the Bush tax cuts.  Republicans would likely oppose increases in tax rates, but they could agree to revenue increases (such as caps on certain deductions).  Under this scenario, lawmakers during the lame duck could adopt a framework for this larger budget deal – to be worked out next year – and agree in the interim to some initial spending cuts in order to repeal sequestration.  In addition, lawmakers would likely be receptive to finalizing the FY13 appropriations bills in the form of an omnibus bill or a series of minibus appropriations bills.

If Governor Romney is elected President and/or Republicans win control of the Senate, the lame duck session is likely to be shorter in duration with little major action.  Most likely, lawmakers would adopt a short-term extension of the Bush tax cuts and a short-term delay of sequestration, to allow for President-elect Romney and the new Congress to put together a budget deal next year that preserves the Bush tax cuts and replaces sequestration with alternative budget cuts that protect Defense programs.  Such a budget deal next year under this scenario would likely include significant cuts to both discretionary and mandatory spending.

Finalizing FY13 CR and the International Affairs Budget

Like so many unresolved issues on Capitol Hill, what the final FY13 International Affairs Budget funding level will be – and the timing of when it is agreed to – is very dependent on the outcome of the elections.  In terms of funding levels, the International Affairs Budget could be set anywhere between $55.2 billion (approximately current spending levels) and $49.7 billion (a 10% cut from current levels) or perhaps even lower.

The FY13 CR provides a total of $55.2 billion for International Affairs, slightly higher than the Senate’s $53.7 billion level and significantly higher than the House’s $49.6 billion level.  This $4 billion difference between the House and Senate FY13 funding levels is even starker for non-war related programs, where the Senate base funding is $10 billion (nearly 20%) above the House levels.  As a result, compared with the House, the Senate measure recommends:

  • 49% more for multilateral assistance
  • 36% more for global disaster and refugee relief programs
  • 21% more for Development Assistance
  • 9% more for USAID operations
  • 6% more for Global Health
  • 7% more for Embassy security
  • The Senate measure also provides $1 billion for the new Middle East and North Africa Incentive Fund (MENA-IF), an Administration proposal denied by the House.

For war-related (Overseas Contingency Operations) programs, the House matched the FY13 request while the Senate cut assistance and State Department operations in Afghanistan, Pakistan, and Iraq by 53%.

Reconciling some of these differences between the House and Senate FY13 State-Foreign Operations bills will not be easy, so efforts are already underway at the congressional staff-level to do just that — in the hopes that the lame duck session will afford an opportunity to move an omnibus appropriations package.  Again, however, the fate of FY13 appropriations ultimately depends on the outcome of the elections.  Should President Obama be re-elected, the Senate’s FY13 spending levels would have a good chance of being enacted.  If Governor Romney wins and/or the Republicans gain control of the Senate, FY13 spending levels would likely be cut below the Senate level and decisions on FY13 would likely be delayed into next year.

Fiscal Cliff Negotiations

Resolution of FY13 appropriations will be part of the larger negotiations around the “fiscal cliff.”  Over the last couple of months, lawmakers from both parties have been working on various options to avoid the fiscal cliff and forge a budget deal – or at least the framework of a budget deal – that could be adopted during the lame duck session.

Both Democratic and Republican lawmakers, as well as the White House, have all expressed strong concerns about the impact sequestration would have on both defense and non-defense programs.  A bipartisan group of Senators have taken steps toward a deficit reduction plan that would avoid sequestration.  The group, known as the “Gang of Eight” and built on last year’s “Gang of Six,” has held ongoing meetings in recent weeks, with the goal of at least agreeing on the broad parameters for a bipartisan deficit agreement that would avoid the fiscal cliff through changes to spending, taxes and entitlement programs.  In addition, a separate group of Senators – led by Senators Carl Levin (D-MI) and John McCain (R-AZ) – wrote a letter to Majority Leader Reid (D-NV) and Minority Leader McConnell (R-KY) calling for the Senate to move forward with a plan to avert sequestration, and organizations such as the Bipartisan Policy Center have recently put forward proposals for avoiding the fiscal cliff.  At the same time, leaders in the defense, business and communities such as International Affairs have been sounding the alarm about the impending “fiscal cliff.”

If a deal to avert sequestration is not achieved by the end of the year, the Office of Management and Budget (OMB) on January 2nd will issue an order to cancel (“sequester”) $110 billion in spending for FY13 and nearly $1 trillion through FY21.  More specifically, OMB will calculate how much of enacted FY13 appropriations must be cancelled and how much of the Budget Control Act spending caps for FY14-21 must be reduced in order to reach a savings of $1.2 trillion.

Half of the savings must come from Defense programs and half from non-Defense discretionary and entitlement programs, although some entitlement programs (including Social Security, Medicaid, and most of Medicare) are exempt.  For FY13, Defense accounts will be cut $55 billion (10%) and non-Defense discretionary (including the International Affairs Budget) will be cut $55 billion (8.2%).

Assuming an across-the-board cut for sequestration of 8.2% and that Congress splits the difference between the FY13 pending House and Senate levels for State-Foreign Operations appropriations, International Affairs funding in FY13 post-sequestration would total about $47.7 billion, roughly equivalent to FY09 levels.  Some specifics:

  • Global Health programs would be cut $670 million from FY12 levels;
  • State Department operating expenses (DCP) would lose $1.084 billion;
  • USAID’s development programs would fall $207 million;
  • Refugee relief would be cut $154 million; and
  • Foreign Military Financing would fall by $518 million.

After 2013, further reductions under discretionary spending caps would bring the International Affairs Budget below pre-September 11, 2011 levels (calculated in real terms) by 2021.

FY14 Budget: A Different Year

Even as lawmakers will likely still be dealing with FY13 spending, the kick-off to the FY14 budget season will get underway early next year.  If President Obama is reelected, the Obama Administration is expected to send their FY14 budget request to Congress on February 5th.  However, given the uncertainty with FY13 spending, the Administration could send a more macro budget to Congress and deal with the details in March or as part of a larger bargain.  If Governor Romney wins election, his Administration would be more likely to send their detailed budget request to Congress in March or April.

Key Dates

November 13 Congress Returns: Lame Duck Session Begins 
November 19-23      Thanksgiving recess on Capitol Hill 
December 31 Expiration of Bush tax cuts
January 2 Sequestration Applied
January 3 113th Congress Swearing-In
January TBD Freshman Orientation, House Party Retreats
January 21 Presidential Inauguration
February 5 FY14 Budget Submission to Congress
NOTE: If Romney wins, expect at least a month’s delay
March 27 FY13 CR expires