Discretionary spending, the potion of the budget Congress controls on an annual basis, is just 40% of the federal budget. More than half of that goes to defense. "Auto pilot" spending (interest on the debt and entitlements such as Social Security, Medicare and Medicaid) consumes 60%.
Photo credit: Congressional Budget Office
After coming within hours of a government shutdown, on April 8 the president and congressional leaders reached an agreement and backed away from the brink of mutually assured political destruction. Both ends of Pennsylvania Avenue grumbled about not getting everything they wanted in the deal, but there was also a palpable sense of relief that neither the House GOP nor President Obama would have to endure the uncertain political backlash from the government closing its doors.
As acrimonious as the fight over federal spending for the remainder of fiscal-year 2011 may have seemed, it was just the first skirmish in a much bigger battle. Within days of the appropriations deal (and before it had passed either the House or Senate), House Republicans and President Obama fired the first salvos in the next round by laying out competing visions for federal spending in 2012 and beyond. Here's the Associated Equipment Distributors' take:
What does the CR mean for construction markets?
The $1.049 trillion continuing resolution (CR) brokered earlier this month and approved by the House and Senate on April 14 funds the federal government for the rest of fiscal year 2011 (through September 30). It will result in an overall reduction in government spending of close to $40 billion from last year. While AED generally applauds the House GOP leadership and Obama administration for reaching a deal that trims the budget deficit and puts the nation on more responsible fiscal footing, it's important for distributors to understand what the CR means for construction markets in the near term.
- Highway funding rescission. Despite the chaos surrounding highway reauthorization and Highway Trust Fund (HTF) revenue shortfalls, the road and bridge program emerged from FY 2011 budget negotiations relatively unscathed. The CR rescinds $2.5 billion in highway contract authority. Congressional appropriators claim that because states don't have enough obligation authority to use all their contract authority, the rescission won't affect their ability to invest in roads and bridges this year. The CR also confirms that the HTF won't be getting a special $650 million transfer from the general fund like the one in FY 2010 and rescinds roughly $630 million in older transportation project earmarks that were never used.
- 28% cut in water infrastructure funding. Water infrastructure lost big in the budget deal. The CR reduces water infrastructure investment by $997 million in FY 2011. That's a 28% cut from the $2.1 billion and $1.4 billion that the Clean Water and Safe Drinking Water State Revolving Funds (SRFs) respectively received in FY 2010 ($3.5 billion total). Based on AED's estimate that each dollar spent on water infrastructure construction yields 12 cents in contractor spending on equipment purchase, rental, and product support, the $997 million cut could mean $120 million in lost equipment market opportunity. Given the hundreds of billions of dollars in water infrastructure needs nationwide, the cuts reinforce the importance of attracting more private money for investment (e.g., by lifting private activity bond caps) and creating a new, sustainable funding stream to support investment in this critical area.
- Other federal construction cuts. The CR also slashes several other federal construction programs. Among the biggest cuts are $414 million from the Army Corps of Engineers' construction budget, $812 million from the General Services Administration's building program, and $6.514 billion in combined Department of Defense and Veterans Affairs construction.
- No money for high speed rail. While there's no doubt that high speed rail (HSR) projects would drive additional demand for construction equipment in some parts of the country, most AED members we've spoken to are dubious that the economic benefits to the overall economy justify the enormous costs. One major criticism: Unlike roads, HSR only carries people, not goods. The 2011 CR eliminates all funding for HSR for 2011 (a $2.9 billion savings from FY 2010). From AED's standpoint, the HSR discussions were a distraction from the more important issue of stabilizing the HTF and getting a new multiyear highway bill in place, so we're not shedding any tears.
To take a closer look at the cuts, go to:http://appropriations.house.gov/_files/41211ProgramCutsListFinalFY2011CR.pdf
For a summary of the CR from the House Appropriations Committee, go to:http://appropriations.house.gov/_files/41211SummaryFinalFY2011CR.pdf
Drawing new battle lines
Whereas the recent spat over FY 2011 will affect government spending for just the next five months, the next budget battle could echo for a generation.
On April 15, the House approved a bold proposal developed by Budget Committee Chairman Paul Ryan (R-WI) that starts to tackle the issue at the heart of the budget crisis: entitlements.
The report paints the budget debate as a fight for the nation's sovereignty and character:
"A government that loses sovereignty to its bondholders cannot long guarantee its people's prosperity – or secure their freedom. A government that buries the next generation under an avalanche of debt cannot claim the moral high ground in the world. A government that allows economic destinies to be determined by political considerations rather than merit cannot lead the world in productivity and growth. A government that promotes dependency and undermines the institutions of faith and family will inevitably weaken the Nation's greatest strength: the exceptional character of its entrepreneurial, self-reliant, and hard-working citizens."
The theme of the Ryan plan is that discretionary spending (the part Congress controls on an annual basis) is just 40% of the federal budget. More than half of that goes to defense. "Auto pilot" spending (Social Security, Medicare, Medicaid, and interest on the debt) consumes 60%. To eliminate budget deficits and bring down the debt, Congress must confront entitlements. The report accompanying the legislation describes in vivid terms how these programs threaten to overwhelm the budget:
"Medicare, Medicaid, and Social Security will soon grow to consume every dollar of revenue the government raises in taxes [see chart]. At that point, policymakers would be left with no good options. Making do without any Federal Government departments, including the military is not really an option, and neither is raising taxes to a level that no free and prospering economy could sustain.
"Of course, if Congress continues to delay, it will lose even the ability to make its own choices on its own terms. The foreign governments and institutional lenders that finance America's debt would cut up the Nation's credit cards before things got that far. That would mean sudden, steep cuts in entitlement benefits to current seniors, less help for the poor, and a crushing tax burden on young families."
To address these challenges, the Ryan plan proposes to:
- Bring federal spending to below 20% of gross domestic product (GDP), which is consistent with the post-war average, and reduce deficits by $4.4 trillion;
- Bring spending on domestic government agencies to below 2008 levels and freeze this category for five years;
- Replace Medicare starting in 2022 with a premium supported model that gives beneficiaries a choice of health insurance plans like those available to members of Congress and providing subsidies to pay insurance premiums;
- Convert the federal share of Medicaid into a block grant that would let states design health care options for low-income Americans; and
- Focus on growing the economy by reforming the tax code, consolidating brackets, and fixing the top individual and corporate tax rates at 25%.
The boldness of the Ryan plan forced the Obama administration to reconsider and restate its own budget priorities in a speech by President Obama on April 13.
Although the president identified a few opportunities to reduce spending (e.g. finding additional savings in the defense budget and reducing health care costs), he spent considerable time discussing what he didn't want to cut. One major contrast with the House plan was the focus on tax increases to close the budget gap. For example:
"[W]e cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can't afford it. And I refuse to renew them again," Obama said. "So my budget calls for limiting itemized deductions for the wealthiest 2% of Americans -- a reform that would reduce the deficit by $320 billion over 10 years."
To read President Obama's remarks, go to: http://www.whitehouse.gov/the-press-office/2011/04/13/remarks-president-fiscal-policy
What would the budget resolution mean for infrastructure?
While many AED members would likely agree with Chairman Ryan's positions on deficits, entitlements, and tax reform, the House budget resolution would have some harsh consequences for government programs that affect equipment markets.
In recent years, annual federal highway appropriations have exceeded the highway user fee revenues to the HTF. As a result, $35 billion has been transferred from the general fund to the HTF over the life of SAFETEA-LU (the most recent multi-year highway law). Republican leaders are determined to limit annual highway spending to the level the HTF can support.
Thus, according to House Transportation & Infrastructure Committee Ranking Member Nick Rahall (D-WV), the GOP budget proposal would provide only $219 billion in HTF spending over the next six years, about $100 billion less than the current budget baseline investment level (which assumes $316 billion in contract authority from the Highway Trust Fund and $15 billion from the General Fund.) By some accounts, this could cause annual federal highway investment to drop from $41 billion to $27 billion. In his speech, Obama also expressed his concern about cuts to transportation funding.
AED maintains that the proper and responsible way to increase infrastructure spending is to increase the user fees (e.g., the gas tax, diesel taxes, etc.) that support the HTF. The House GOP leadership, however, has steadfastly rejected user fee increases for the highway program. We were therefore surprised to find buried in the resolution's "Function 400" transportation section this statement on airport security user fees:
"Require Airports to Fund a Larger Portion of the Cost of Aviation Security. Taxpayers currently subsidize more than half the cost of aviation security for the travelers who use and benefit from the system. This burden could be eased by shifting greater responsibility to those who fly. One way to do so would be by applying a simple flat fee of $5 per one-way trip for security system users – instead of a $2.50 fee for a one-way trip with no stops and a $5 fee for a trip with one or more stops." [Emphasis added]
Increasing security fees for travelers from $2.50 to $5.00? That sounds like a user fee increase to us. And, we're hard pressed to see the difference between raising user fees for people who use airports to pay for security and raising user fees on people who use roads to pay for better infrastructure.
The bottom line
In the final analysis, the budget resolution's practical near-term impact is limited. The version crafted by the GOP House leadership is likely dead on arrival in the Democrat-controlled Senate and even if the House and Senate were, by some miracle, to come to an accord, it wouldn't have the force of law and would only serve as a blueprint to guide appropriations and authorization bills in the years ahead.
The longer term impact will likely be more profound. Chairman Ryan has defined in concise terms the fiscal crisis the nation is facing and he's started to put forth bold and realistic solutions. For this, he is to be applauded.
To read more about the House budget proposal and watch a video explanation by Chairman Ryan, go to:http://budget.house.gov/fy2012budget/