Senate Majority Leader Harry Reid (D-Nev.) is expected to bring both the House H.R.1 bill and a separate Senate option to the floor for a vote on Tuesday.
The House bill proposes $61 billion in spending cuts over current levels, while the Senate version, proposed by Appropriations Chairman Sen. Inouye (D-Hawaii) includes $6.5 billion in new cuts.
The House bill calls for a 14.3 percent cut across of the board on non-defense discretionary spending.
The House bill would reduce support for children helped under Head Start programs, reduce student Pell Grants, and target planned parenthood centers, choices that most Democrats find unpalatable.
The bill could lead to job losses. A number of economists predict losses in the hundreds of thousands if it becomes law.
Last week, in front of the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said the $61 billion in cuts would reduce GDP by about 1–2 percentage points, and likely cause the loss of “about a couple hundred thousand jobs.”
“It’s not trivial,” he said.
Mark Zandi, an economist with Moody Analytics, has warned that too much cutting, too soon, would be counterproductive.
“The economy is much improved and should continue to gain traction, but the coast is not clear; it won’t be until businesses begin hiring aggressively enough to meaningfully lower the still-high unemployment rate,” he wrote in a published analysis.
Steve Bell, senior director, Economic Policy Project with the Bipartisan Policy Center, and a former Senate Budget Committee staff director, said it was very likely that the majority of jobs lost through H.R. 1 would be government jobs.
He said, under the current circumstances, the main way the government can achieve savings this year on discretionary spending, is on salaries and expenses.
It is very expensive to cancel contracts that have already been started because there are penalties, he said.
The most likely scenario, according to Zandi, is that policymakers will reach a political compromise that splits the difference between the two proposals.
Senate Democrats, who appear to have worked with the administration to offer a counterproposal, are offering $6.5 billion in cuts, which target earmarks, grants to state, and local police departments, and Federal Emergency Management Agency money.
White House Economic Adviser Gene Sperling suggested to reporters last week that the White House has already met Republicans “halfway,” toward their election promise and goal of cutting $100 billion dollars in spending this year.
Sperling’s assertion takes into account $40 billion in cuts agreed to in last year’s plan, and the additional $4 billion included in the most recent two-week continuing resolution, which is set to expire next Friday.
On Tuesday, March 8 the Senate votes on both measures. Neither is likely to pass. It is expected that politicians on both sides of the aisle will go back and discuss greater compromises, since the only alternative, if they cannot agree, would be a government shutdown.
Government Shutdown
A government shutdown would be triggered by a failure to pass another CR for the remaining seven months of fiscal year 2011, or by a failure to raise the government debt ceiling, a vote that will need to occur within a few weeks.
The last time a series of shutdowns occurred was in 1995–1996.
Back then, government workers stayed home rather than go to work, but were later reimbursed for wages, according to Bell, who remembers the time well.
“In the short-run most Americans will not notice there is a shutdown, unless they go to a national park or have direct interaction with a government agency,” Bell predicted.
Social Security and Medicaid authorities have already said that they would continue to issue checks in the event of a shutdown, and other crucial departments, like Defense, will also have some short-term fall-back options.
But there won’t be anyone issuing food stamps, so if weeks pass by during a shutdown, people will be affected.
A Better Way
Last December’s flourish of recommendations to the government on putting the country’s fiscal house in order offered a rare bright spot in a highly polarized political landscape.
Both the National Commission on Fiscal Responsibility and Reform, ordered by the president, and the Bipartisan Policy Center’s Debt Reduction Plan, underscored the country’s two immediate challenges: recovery from the recession while restraining soaring federal debt. Both plans offered suggestions involving short-term stimulus, followed by long-term restraint.
Carrying on some version of an overarching plan behind the scenes, are the “Gang of Six,” a group of senators who are working hard on a package that includes reforms to entitlements and the tax code, both of which most agree are key components of any serious attempt at reducing the debt.
When you are talking about a $1.6 trillion debt, the $61 billion, or $6.5 billion in cuts, is a trivial amount, said Bell, who is also a spokesperson for the Bipartisan Policy Center plan.
That plan puts policies in place to address costs in Medicare, Health Care, and Social Security, and stabilizes the national debt by 2020.
The key is that changes take affect gradually, starting in four to six years, and 95 percent of the changes do not impact current beneficiaries. It is the kind of long-term thinking that budget hawks have been advising, but politicians find difficult to do.
Bell said the current mix of budget problems—the fact that the country doesn’t have a budget for 2011, and is still arguing about funding for the year, while facing the debt ceiling crisis—has never been seen before.
At a time when legislators should be focused on the 2012 budget, and looking into the future, staff on the Hill are going to be overwhelmed within the next 60 days, predicts Bell.
The Gang of Six has indicated that they will propose their plan sometime this month.
