Hurdles Exist for the Prospects of Any 'Grand Bargain' on Sequester, Defense Spending

President Barack Obama and congressional Democrats would like to get rid of the sequester. Many Republicans want more money for defense. That would seem to offer a potential formula for a budget agreement.

But substantial hurdles stand in the way of any deal, partly because the budget and political environments are very different from those leading up to the last budget deal, in 2013.

“Sequester replacement is a tougher lift this time than last time,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. He notes the discretionary spending caps for fiscal 2016 will allow spending to increase by about $3 billion over current spending, rather than forcing a cut.

In 2013, discretionary spending was set to fall by almost $20 billion when new discretionary caps took effect for fiscal 2014. The deal (PL 113-67) negotiated by then-House Budget Chairman Paul D. Ryan, R-Wis., and then-Senate Budget Chairwoman Patty Murray, D-Wash., raised the caps for fiscal 2014 and 2015, allowing discretionary spending to rise rather than fall.

But for fiscal 2016, the defense cap would rise by $1.8 billion to $523 billion, while the non-defense cap would go up by $1.1 billion to $493.5 billion, according to the Office of Management and Budget. Overall discretionary spending would be held below $1.017 trillion. Even though the increase is less than the rate of inflation, it is still an increase.

The political climate has also shifted.

With control of both chambers, Republicans have newfound clout in negotiating with the administration. Many in the GOP, particularly on the far right, support the sequester as an imperfect but effective way to control discretionary spending.

Obama also appears to recognize this new political reality.

In his fiscal 2016 budget, he proposes raising the defense and non-defense caps by a combined $75 billion and offsetting the increase with a mix of mandatory spending cuts and revenue from closing tax breaks. The budget also would repeal and then raise the discretionary caps through their expiration in 2021, and end the across-the-board cuts of mandatory programs that are set to expire in 2024.

But in what could be a sign of flexibility, the administration has not summarily ruled out a deal that would bypass new revenue, as it did in past years.

Indeed, the Ryan-Murray deal did not close tax breaks. It relied on revenue from fee increases combined with changes in mandatory spending programs.

Asked whether the president would support a deal without tax revenue, OMB Director Shaun Donovan was noncommittal at a breakfast with reporters last week.

“I’m not going to get into negotiations here,” he said. “I would just repeat it defies logic if we’re serious about this that we shouldn’t be looking at the tax side.”

Donovan said there is “real potential” to do another budget deal.

“Do I think there’s going to be a grand bargain that achieves $2 trillion in one dollop? Probably unlikely,” he said. “But we have a bunch of different places where we can continue to make progress. If we can invest more on the discretionary side, do some of these longer run savings on the mandatory side, and on the revenue side we start to move in that direction, whether it’s incrementally or in a more accelerated way, that is the right model and we’re going to stay focused on it.”

The White House has insisted, however, that any increase in defense spending be accompanied by a dollar-for-dollar increase in non-defense spending.

Pushback From the Right

While many Republicans believe defense needs more resources, conservatives largely reject proposals for higher non-defense spending.

The new GOP chairmen of the Budget panels appear to be in no mood to write a budget resolution that increases defense spending without finding offsetting spending cuts.

House Budget Chairman Tom Price, R-Ga., has stressed the need to stay within the overall caps, though he has said defense spending could be increased by lowering the non-defense caps by a commensurate amount or offsetting higher defense spending with cuts in mandatory programs.

GOP pressure to raise the defense cap is coming primarily from defense hawks, including South Carolina Sen. Lindsey Graham and Armed Services Chairman John McCain of Arizona, as well as appropriators.

“I just want to be in the camp of saying that I’m not going to support a budget that continues to gut the military,” said Graham, who favors offsetting discretionary spending increases with a combination of mandatory spending cuts and revenue.

But the architecture of the 2011 debt limit law (PL 112-25), which created the sequester and imposed discretionary spending caps through 2021, also mitigates against another budget deal this year.

Though discretionary spending limits only rise about $3 billion in fiscal 2016, the overall discretionary limit takes a more substantial leap in 2017, increasing more than $20 billion to $1.039 trillion. Some expect Congress will choose to wait it out until 2017, when some relief will be on the way.

If there is a sequester replacement agreement, it is unlikely to appear until later in the year.

“Is there the basis for a small deal here? I think probably the answer is yes, probably not early but maybe later,” said Jim Dyer, a principal at the Podesta Group and former GOP staff director of the House Appropriations Committee.

Dyer thinks the most likely agreement would offset increased discretionary spending with cuts in mandatory programs. He also thinks it’s possible, if not likely, that Price and Senate Budget Chairman Michael B. Enzi, R-Wyo., could put together such a package as part of their budget resolutions.

“The issue becomes could you ask the budget committees to come up with a package of mandatory reductions that would allow you to adjust the caps? And I would think that would be the most workable way to go about doing it,” he said.

To Goldwein, the most likely prospect is that Congress lives with the caps through 2016.

But, he adds, it’s also possible a budget deal would emerge out of difficulty in passing appropriations bills. He said that could result from a budget resolution that raises defense spending at the expense of non-defense spending.

“If the budget resolution goes down the road of having defense go up and non-defense go down, they may then find it difficult to pass appropriations — all 12 appropriations bills — at those levels,” he said. “In which case, it might just be that the best way out, the best way for everybody to win, is to increase those total discretionary levels, and that opens the door to another Ryan-Murray type deal.”