How the New Regime Will Seek to Enact its Fiscal Agenda

David Super

       The incoming Administration and Congress have broad agendas that extend far beyond fiscal affairs.  Nonetheless, the prospect of extending and expanding the 2017 tax cuts, along with judicial appointments, is a major reason why President Trump retained solid support from many affluent people uncomfortable with other aspects of his program.  On the other hand, as much as tax cuts unite President Trump’s coalition, last week’s near-miss with a yuletide government shutdown demonstrates that other fiscal issues split that coalition badly.  Understanding how the new Administration and Congress will try to reshape the fiscal landscape therefore seems important both intrinsically and for what it can tell us about the new era of politics generally.

      This post attempts to do that.  Like almost all prognostications about our country’s new political leadership, it assumes a basic procedural continuity:  that President Trump and Congress will largely follow existing rules or seek to change those rules through legal means.  Many in President Trump’s retinue have suggested a range of extra-legal means of asserting power.  This post ignores those possibilities not because they are necessarily implausible but rather because insufficient information is available to project how they might play out.

      To understand how the new fiscal agenda will move forward, one must first appreciate that several statutes and congressional rules divide the budget into two halves, commonly known as the mandatory and discretionary sectors.  The mandatory side of the budget includes virtually all taxes and other revenue sources as well as programs whose authorizing statutes do not make them dependent on discretionary appropriations to fund their benefits (e.g., Social Security, Medicare, and Medicaid).  The discretionary side includes everything else, including almost all the funds for the government’s day-to-day operations and spending programs not generating any legal rights in advance of appropriations, ranging from Head Start to aircraft carriers.  Legislation on these two sectors proceeds largely separately from one another, although the sectors do intersect at a few key junctures.

      The first step for legislating on both sides of the budget is ideally a concurrent resolution on the budget (“budget resolution”).  This sets annual ceilings on discretionary appropriations and can include provisions (“reconciliation instructions”) that authorize Congress to invoke special “budget reconciliation” procedures to change revenues and mandatory programs without being subject to the Senate filibuster.  Budget resolutions operate at a very high level of generality and are largely unintelligible to any but the most sophisticated observers:  largely just a series of function designations and dollar figures plus some highly formulaic language whose opacity would make an Old English common law judge proud. 

      When control of Congress is divided, the House and Senate often do not even attempt to pass a budget resolution; they have developed various ways of coping with that situation.  This year, however, Congress clearly will proceed with one.  Because of their inscrutability, budget resolutions rarely become controversial within a partisan coalition, and Republicans likely will hold together to pass one.  Budget resolutions are immune to filibuster, so no Democratic votes will be needed (or, likely, available). 

      The budget resolution likely will dictate draconian cuts to non-defense discretionary spending (NDD) without giving any meaningful directives as to which programs should be slashed or eliminated.  The chairs of the twelve appropriations subcommittees (the “cardinals”) will then meet in each chamber to allocate the money under that ceiling among themselves.  If they spread the cuts fairly evenly, few if any of the twelve subcommittees may be able to write appropriations bills that can win majorities.  Alternatively, the cardinals may dump the bulk of the cuts on one or a few appropriations subcommittees with weak Republican support (such as the Labor-Health and Human Services-Education Subcommittee) so that they can try to advance the other appropriations bills.  Even this strategy could fail as some Republicans will object to any appropriations bill and Democrats may be unwilling to advance an appropriations agenda that would devastate crucial human services programs, medical research, and aid to education.  The result seems likely to be few or no appropriations bills passing either chamber with a year-end bipartisan negotiation just as in every recent year.  Republicans will need Democratic votes to move the final omnibus appropriations bill in both chambers, and the price of those votes likely will be a significant amelioration of the non-defense discretionary cuts.  Depending on President Trump’s disposition and how secure the House and Senate Republican leadership are feeling, a government shutdown may well ensue until it becomes clear that Republicans cannot enact a program that many of their Members will not vote to support.  One would think this would be apparent from recent years, but the current Republican leadership seems to reject Senator McConnell’s view that there is no education in receiving the second kick of a mule. 

      On the mandatory side, the key will be budget reconciliation.  In theory, each budget resolution may authorize up to three reconciliation bills:  one each for direct spending, for revenues, and for the debt limit.  In practice, many revenue provisions generate some outlay effects so writing separate spending and revenue reconciliation bills is almost impossible.  On the other hand, because the outgoing divided Congress passed no budget resolution for the current fiscal year, the new one can pass one budget resolution with reconciliation instructions for this year (FFY 2025) and another budget resolution with more reconciliation instructions for the upcoming year (FFY 2026). 

      Republicans’ agenda on the mandatory side of the budget consists of massive upper-income tax cuts – both renewing expiring provisions from 2017 as well as adding to them – and slashing mandatory spending programs.  The former is wildly popular with their donors and invisible to most of the electorate; the latter is popular with the anti-government faction of the Republican base but broadly unpopular with the great bulk of the electorate.  If these two components become linked in voters’ minds, the threat of mandatory spending cuts could drag down the tax cuts.  Republicans’ consistent approach, dating back to President Reagan, has been to reject any connection between the two, ballooning the deficit with huge upper-income tax cuts and then calling for “shared sacrifice” (with revenues nonetheless off the table) to respond to the resulting deficits.  Figuring out how to recreate this “magic” will be central to their sequencing of this year’s fiscal legislation.

      Republicans that like to posture as “deficit hawks” would prefer to pass a budget resolution in January that mandates deep mandatory spending cuts to go with the tax cuts.  This will allow them to claim that the spending cuts are “paying for” the tax cuts.  Alas, that is precisely the argument that most of their caucus is desperate to avoid.  The cost of just renewing the 2017 tax cuts – never mind all the other cuts Republicans want to make – could not plausibly be offset without cutting Social Security, Medicare or Medicaid:  other mandatory programs are just not large enough.  Indeed, Republicans likely would have to make substantial cuts in all three of the big entitlement programs. 

      That means the January budget resolution likely will allow the tax-writing committees to slash revenues while including reconciliation instructions requiring only token spending cuts from the committees controlling important mandatory programs (and none to Social Security itself, which may not be amended on reconciliation legislation).  Leadership then would promise a second budget resolution with a second set of reconciliation instructions to make promised cuts in mandatory spending.  The question is whether the “deficit hawks” will all vote for this; my guess is that they will because most are just feigning concern about deficits to gain leverage to cut social spending programs they dislike. 

      Another question is whether Republicans take the political risks of cutting the major middle-class entitlement programs by anything remotely resembling the amounts required to offset their tax cuts.  With slender majorities in both chambers, and quite a few House Republicans having won narrow victories even in a strong Republican year, my guess is that they will instead take the easier path of trying to devastate the smaller programs aiding low-income people and allow the deficit to rise. 

      One wild card in this process is the statutory debt limit.  The federal government likely will reach the limit soon after President Trump takes office, although “extraordinary measures” (which have actually become quite routine) can allow action to be postponed several months.  A Republican trifecta enacting deep, unpaid-for upper-income tax cuts at the same time it is raising the debt limit could finally puncture the “deficit hawk” myth.  President Trump signaled awareness of this risk in trying to force a debt limit suspension into last week’s continuing resolution.  His failure to do so presents Republican leaders with serious challenges both within their own caucus and with the wider electorate.  The “handshake agreement” Speaker Johnson made last week with some of his Members that a debt limit increase would be coupled with massive cuts to entitlement programs in the spring is surely beyond the leadership’s capacity to deliver:  no Democrats would vote for such a bill, meaning that several Republicans would have never voted to raise the debt limit would have to do so. 

      Another wild card is the House leadership election.  Speaker Johnson needs a majority of the House’s membership on January 3 for re-election.  He is not remotely the sort of moderate that could attract Democratic votes, and his need to rely on Democratic votes for many appropriations bills (including last week) has earned him the ire of the very Republican renegades that forced him to turn to the Democrats.  President Trump has had little success influencing Republican congressional leadership elections.  If Rep. Johnson cannot garner the votes, no obvious candidate is waiting in the wings.  Until the House can elect a speaker, it cannot move forward on a budget resolution.  And the speaker ultimately selected, whether Rep. Johnson or someone else, may have had to make promises that commit the caucus to a fiscal plan that cannot pass. 

      A final question is what President Trump and Elon Musk decide to prioritize.  President Trump clearly cares about upper-income tax cuts but has waffled about entitlement cuts and has been blithely indifferent to the deficit.  Mr. Musk and Vivek Ramaswamy have argued that the President has inherent authority to impound appropriated funds, notwithstanding the Impoundment Control Act; beyond being legally unsupportable, the amount involved in even the most aggressive plausible impoundments pales relative to the costs of continuing the 2017 tax cuts.  Last week President Trump floated repealing the debt limit, which would certainly help his tax cuts but is also good public policy.  If he persists in that belief and can bring along enough congressional Republicans, we could finally end a recurrent threat to the country’s financial stability. 

      Mr. Musk seems to be positioning himself more as a “deficit hawk”.  If he persists, he could narrow further Republicans’ path to enacting their fiscal plans without doing severe damage to many vulnerable Members’ electoral prospects. 

      @DavidASuper1/DavidASuper.bsky.social