Back on August 18, I suggested that the Budget Control Act (BCA) contained two traps, one for the Obama Administration and the other for Republicans in Congress, particularly the new “Tea Party” faction. The traps are built into the automatic cuts that will be triggered by a failure of the so-called super committee to achieve budget savings of at least $1.2 trillion. Half of the required cuts would have to come from defense spending.
The trap facing the Republicans is the need to accept tax increases as the price for protecting defense spending. The issue of defense spending versus tax hikes could fracture the Republican Party. The trap looming before the administration is having defense spending gutted on its watch, forcing the White House to accept a budget deal without tax increases. The President would face the prospect of going into the 2012 election cycle with one of two negatives: either his hard won credibility on national security undermined by massive defense budget cuts or his newly articulated campaign theme of taxing the rich rendered incredible.
Since the BCA was passed, both sides have “doubled down” on their respective positions. The President is in campaign mode, calling for tax hikes on millionaires and billionaires. His deficit reduction proposal envisions approximately one dollar in budget cuts for each dollar in tax hikes. On the other side of the aisle, influential Republicans, most notably HASC chairman, Rep. McKeon, have drawn the line on deep defense budget cuts. The committee staff published a grim analysis of the impact on the military of absorbing an additional $600 billion in budget cuts. At the same time, the Republican Party is running hard to the right in tax increases. In the first candidates’ debate, every participant signed up to the wacky idea that they would not accept a deficit reduction deal even if it provided ten dollars in spending cuts for every dollar in tax increases.
However, in the end it appears more likely that the administration will be the one caught in the trap. It is called the executive branch of government for a reason. It is responsible for running the nation’s affairs, of which national security is the most important. It is increasingly evident that the White House recognizes not only that it cannot accept the degree of pain associated with defense spending cuts of the magnitude that would occur if the BCA trigger is pulled. Senior administration representatives, including the new Secretary of Defense, Leon Panetta, have gone public with warnings that deep budget cuts would break the military. In fact, it is not clear that the Pentagon could successfully manage reductions of any significance beyond those already imposed by the BCA, approximately $350 billion over the next decade. The Chairman of the Joint Chiefs of Staff has stated that deeper spending reductions would “break the force.” That is not a phrase the President wants associated in any way with his name in an election year.
There are secondary effects of deep budget cuts that could be equally negative for the country and the White House. Deep spending cuts result in the loss of several million jobs, most of them relatively high paying. Economic growth could be cut by a half a percentage point or more. The impact of such reductions on the budgets of swing states in the 2012 presidential election such as Colorado, Ohio, Pennsylvania and Virginia could be significant.
The question is, will the Republicans on the super committee force a showdown on tax increases? Frankly, it looks increasingly as if they hold the stronger hand in this Fall’s negotiations over the debt ceiling.
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