Issue No. 1
July 30, 2012

With lawmakers set to return home later this week for a month of campaigning and party conventions, USGLC is launching a “Budget Watch” series that will provide up-to-date, in-depth analysis of the major budgetary issues that will confront Congress through the end of the year and their implications for the International Affairs Budget.

The unfinished business for the four remaining months of the 112^th Congress is daunting, and decisions made during this period will have a significant impact on resources for U.S. development and diplomacy programs in the coming year — and perhaps well beyond.  The unfinished business includes:

• The October 1^st start of the new fiscal year and need to resolve FY13 Appropriations;
• A $4 billion gap between the House and Senate funding levels for International Affairs programs; and
• The looming threat of deep cuts to discretionary programs next January under sequestration.

As each of these milestones approaches, our “Budget Watch” series will provide updates on the state of play and the implications for the International Affairs Budget.

Issue #1: FY13 Appropriations 

The FY13 appropriations processes in both the House and Senate have proceeded slowly this year, but both the House and Senate Appropriations Committees have approved appropriations bills that include all International Affairs spending for FY13.  However, like most of the FY13 appropriations measures, none of these bills are likely to see additional action by either chamber before October 1^st when the new fiscal year begins.  Consequently, passage of a Continuing Resolution (CR) to keep the government functioning is a high priority for both chambers.

There are two key questions that need to be addressed before October 1^st: the top-line discretionary spending level and the length of the Continuing Resolution.  Both decisions will have real implications for the International Affairs Budget.

Top-line Discretionary Level

The first issue to be resolved is getting both chambers and the Administration to agree on the CR’s top-line discretionary spending level.  A short-term CR often continues programs at current year spending levels and contains few, if any, adjustments to specific accounts.  This year, the funding levels for the CR are less certain because the House and Senate FY13 appropriations levels are using very different top-line discretionary spending levels.

The Budget Enforcement Act of 2011, adopted last August as part of the compromise to raise the debt ceiling, set a top-line cap for FY13 discretionary spending at $1.047 trillion, $4 billion above current (FY12) levels.  While the Senate adopted this level, House Republicans are using a much lower cap – $1.028 trillion – a level based upon their FY13 Budget Resolution that was adopted in March.

Duration of CR

In addition to agreeing on what the funding level should be for the CR, Congress and the White House will need to reach agreement on the duration of the CR.  Until recently, conventional wisdom was that the CR would last until just after the election, when a lame duck session in mid-November would negotiate final spending levels and (like last year) pass them as part of an omnibus appropriations measure.  However, there is growing momentum behind a plan to pass a longer-term CR that would last into early next year.

The idea for a longer-term CR originated with some conservative Republicans, particularly in the House, who believe the GOP will be in a much stronger position next year (including potentially controlling the Senate) that will enable them to insist on lower spending levels in any final FY13 spending agreement.  A group of 20 Congressional conservatives, including Senator Jim DeMint (R-SC) and House Republican Study Committee Chair Jim Jordan (R-OH), recently sent a letter to the House and Senate GOP leadership urging adoption of such a CR before the August recess.  Discussions since indicate that Republicans in both chambers would agree to adopting the Senate’s higher top-line spending cap as part of such a move – and Democratic leaders are warming to the idea.

Issue #2: Finalizing FY13 International Affairs Level 

Whatever the makeup of the CR, Congress will eventually need to reconcile significant differences between the House and Senate FY13 International Affairs Budgets.  The Senate’s State-Foreign Operations appropriations bill is nearly $4 billion (7.7%) above the House’s State-Foreign Operations appropriations bill. The difference between the two bills is even more stark in terms of funding for non-war related programs.  Excluding Overseas Contingency Operations (OCO) funding, the Senate measure is $10 billion (nearly 20%) above the House.

State-Foreign Operations Appropriations Snapshot:

While both the House and Senate Appropriations Committees, with a strong degree of bipartisanship, cut assistance and State Department operations in Afghanistan, Pakistan, and Iraq, the Senate went much deeper in proposing 53% less for the Frontline States compared with the Administration’s request.  In doing so, the Senate re-allocated much of these reductions to other foreign assistance accounts.  Specifically, compared with the House, the Senate measure recommends:

• 92% more for the National Endowment for Democracy and other democracy programs
• 49% more for multilateral assistance
• 36% more for global disaster and refugee relief programs
• 21% more for Development Assistance
• 9% more for USAID operations
• 8% more for UN contributions and UN peacekeeping operations
• 6% more for Global Health
• 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.

As result, the fate of program funding levels in the International Affairs Budget is very much contingent on use of the Senate’s top-line cap of $1.047 trillion in a final FY13 spending agreement.

Issue #3: Sequestration 

Reaching agreement on final FY13 appropriation bills will hardly be the only challenging matter facing lawmakers later this year.  Other significant budgetary matters requiring action by the end of the year include the trigger of deep cuts to discretionary programs under sequestration, as well as the expiration of the 2001 and 2003 Bush tax cuts and more recently enacted reductions in the payroll tax.

Sequestration, passed as part of last year’s Budget Control Act, was intended to serve as the ultimate incentive for Congress and the White House to agree on a long-term deficit reduction deal.  The Act also created a bipartisan “Super Committee” that would hammer out a plan acceptable to a majority of lawmakers and the President, and once enacted sometime in late 2011, would take the place of the automatic cuts under sequestration.

With the failure last year of the Super Committee and with no other deficit reduction plan in place, sequestration remains in force.  Under the terms of sequestration, the Office of Management and Budget (OMB) on January 2^nd will issue an order to cancel (“sequester”) $110 billion in spending for FY13 and nearly $1 trillion over the period 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-FY21 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 entitlements programs (including Social Security, Medicaid, and most of Medicare) are exempt.

Implications for International Affairs

The Congressional Budget Office (CBO) estimates that FY13 Defense accounts will need to be cut by 10% and non-Defense (including the International Affairs Budget) accounts cut by 7.8%.  By all estimates, the impact of this size of cuts will be significant across the federal budget.

Assuming that Congress splits the difference between the FY13 pending House and Senate levels for State-Foreign Operations appropriations – an assumption that is not certain – International Affairs funding in FY13 post-sequestration would total about $47.7 billion.

Just how dramatic would these reductions be?

• In 2013, the International Affairs Budget would be 13% less than current levels — and roughly equivalent to the average of FY08 and FY09 funding levels.
• After 2013, further reductions under sequestration to discretionary spending caps would bring the International Affairs Budget below pre-September 11, 2001 levels (calculated in real terms).

Impact of Sequestration on the International Affairs Budget

For months, lawmakers and activist groups have been raising attention to the dire consequences should sequestration take place.  For example, the Defense community and several Members of Congress have sounded the alarm that sequestration would force the cancellation of weapons systems and pose grave risks for future combat operations.  Defense contractors say they will need to begin issuing layoff notices to their employees in early November in anticipation of sequestration.

Adding to the concern over the impact on defense and non-defense programs is frustration among some policymakers with the lack of information coming from OMB about how the across-the-board cuts would be applied.  As result, both the House and Senate recently approved legislation (H.R. 5872) that requires the White House to report within 30 days of enactment on what the impact of sequestration will be at the “program, project, and activity level.”

Looking Ahead

A range of scenarios later this year surrounding sequestration are possible.  Some remain cautiously optimistic that a “grand bargain” on deficit reduction can be achieved after the elections, something that eluded the Super Committee a year ago.  Various efforts over nearly two years – from the Simpson-Bowles Commission recommendations in late 2010 to the bipartisan Senate “Gang of Six” (now the “Gang of Eight”), to talks led by Vice President Biden with congressional leaders last year – produced agreement on some of the necessary building blocks for a “grand bargain,” including changes to mandatory entitlement spending and revenues.

A more likely scenario is that a long-term agreement will not be reached at the end of the year.  Lawmakers would then need to either delay sequestration until sometime in 2013 or allow the cuts to go into effect January 2^nd with the possibility of rolling them back retroactively when a broad deal is in place early next year.  Needless to say, the outcome of the elections will be a major determinant of the path forward.

Stay tuned for further updates on these and other matters in the next edition of “Budget Watch.”