Tightly Held Purse Strings

By Steve Kopperud, SLK Strategies

Nearly as certain as death and taxes is the reality that every new presidential administration comes into office pledging to slash the federal budget to the bone. Almost as certain is the fact such publicly pledged thrift will not happen, yet it never stops the newly minted bureaucrats from trying.

Such is the case with the United States (US) White House budget “blueprint” released in March, an ambitious proposal to cut discretionary federal spending across the board by $54 billion in order to increase military investment by that same amount over the next 10 years. No conservative worth his or her salt would argue with the overarching goal of beefed-up defense; however, there is a universal naiveté among the freshly elected that Congress will go along because the president shares the same party registration as those who control the House of Representatives and Senate.

Philosophically, the White House and Republicans on Capitol Hill are on the same page: cut spending, reform the tax code, and get the economy roaring. However, whether and how to achieve those things is the issue, and when it comes to spending, whose ox is gored when budgets are cut is the overriding concern.

The federal budget process is arcane, complex, and illogical because it is first and foremost political. President Donald Trump’s blueprint, which highlighted cuts to all the right political targets (e.g., the Environmental Protection Agency), is particularly naïve because it is clearly the work of a White House that believes the federal government can be financed like a business.

It is unclear whether the Trump administration yet understands or cares about the reality of the Capitol Hill budget/spending game. The president’s numbers are dramatic, but most analysts contend they are not politically realistic. Will the Pentagon see a major fiscal year (FY) 2018 spending increase? It is likely, but not at the level the president wants and certainly not at the fiscal expense of the rest of the government, at least to the degree the president recommends. Trump’s “good intentions” collide head on with elected members of Congress and their dedication to bring the bacon home to the folks who elected them. Senators and House members will ignore party philosophy in their zeal to protect hometown projects, particularly those to which the government has directed federal checks for years, if not decades.

Politically, the White House may need a reality check. First, Congress controls the purse strings, not the White House, and this is a power Congress will never surrender. Even if the party controlling the White House controlled 90 percent of both chambers of Congress and all elected members believe Trump can walk on water, never will an administration budget plan be embraced even by half.

Second, the administration’s budget never replaces House and Senate appropriations deliberations; the president’s spending plan is effectively seen by lawmakers as a guide to priorities rather than a serious game plan. When it comes to money, members of Congress embrace the fact they are the elected entrusted with the key to the treasury. When the final appropriations documents are printed, they will carry a comparison among what is going to be spent in the coming fiscal year, what was spent last fiscal year, and how the new spending numbers compare to what the president “recommends.” That final White House number is pretty much irrelevant.

There are those who contend Trump and his lieutenants fully understand exactly how the budget/spending process works. They see March’s blueprint announcement slashing the Environmental Protection Agency’s budget by 31 percent and US Department of Agriculture’s (USDA’s) budget by just less than 30 percent – with the resulting loss of federal jobs – and shifting those savings to the Department of Defense as just a bit more campaign rhetoric. The document gives physical proof Trump is fulfilling a campaign promise.

However, those industries that have successfully won big pots of money for their parochial projects over the years are nervous and the media is fanning those flames of anxiety. The media is afraid moderation will prevail and its portrayal of the Trump administration as leaping to the armaments side of the guns-versus-butter debate will evaporate. Those who have won the spending battles over time are afraid their programs will be defunded or, at the least, underfunded. At the same time, withholding funding is the easiest way to block an unwanted or competing federal project.

The Trump White House has yet to actually propose a formal detailed FY 2018 budget to Congress, which was due to be sent at the end of May but will more likely be June. When it does publish, bind, and ship to the appropriations committees, it should appear even more ambitious than the blueprint would imply.

The White House has a tripartite goal: cut overall spending, with particularly deep cuts in means-tested entitlement spending (e.g., food stamps, nutrition programs, etc.); use this spending cut to jump-start economic growth through investment beyond the mediocre one to two percent annual rate of the last several years; and then successfully balance the federal budget over the next decade.

Spending cuts cannot do it alone; there will also need to be comprehensive federal tax reform, at least on the corporate side, including the closing of loopholes, repatriation of overseas profits, and so on – all moves estimated to generate $1 trillion-plus over 10 years. If all goes well – and it never does in these things – the White House formula is assumed to generate over $2 trillion in additional tax revenues over the next 10 years.

Evidence the Trump budget scenario is more wishful thinking than reality is the recently enacted $1.1-trillion omnibus spending package covering the remaining five months of FY 2017. Almost none of the White House priorities were included in that package. This is more likely because to get bogged down in policy debate would have forced a GOP-controlled Congress to shut down the federal government, or at the very least that part which relies on discretionary spending. Democrats would have been dancing in the halls as they pointed at Republican insensitivity and ineffectiveness.

The Trump budget plan also assumes that if everyone is equally feeling the pain of lost federal dollars, then it must be a good thing, as in no one can cry too loudly if all feel the same degree of discomfort. However, this is the lazy politician’s approach to budgeting. Instead of using a meat cleaver to cut spending, more attention should be paid to surgical reductions so as not to lose programs or slow progress in existing programs just to claim victory on the spending front.

USDA’s Market Access Program (MAP) and Foreign Market Development (FMD) program – so-called “cooperator programs,” both of which benefit rendering’s overseas marketing – are good examples of how ill-advised cuts in spending can result in much broader losses overall. If these programs disappeared, millions in gained domestic and overseas economic benefit would be lost, along with about a quarter of a million jobs.

These market development programs are perennial targets for budget hawks, mainly because they are misunderstood or not understood at all. Lawmakers over time have gone after MAP and FMD funding reduction or death because these programs are incorrectly viewed as benefiting rich private companies rather than broad industry.

Federal funding for MAP has not increased since the 2002 farm bill and now sits at $200 million annually; funding for the FMD program was last increased in the 2002 farm bill to $34.5 million a year. Every fiscal year, the National Renderers Association and various other groups fight as a coalition to just preserve their relatively small share of USDA’s spending pie.

MAP and FMD are successful partnership market development programs, meaning industry puts up dollars matched by USDA with the goal being to build exports for qualifying products and commodities. Under MAP and FMD, run by USDA’s Foreign Agricultural Service, private sector groups contributed an estimated $468.7 million in 2014 to international market development and promotion. MAP/FMD funding generated a 1977-2014 return on investment of $28.30 in export gains for every additional $1 spent on foreign market development, returned an average annual increase in farm net income of $2.1 billion in 2002-2014, and created 239,800 new full- and part-time jobs between 2002-2014.

The FY 2018 appropriations process has begun but it is likely not going to yield much in the way of major cuts, though there will be an effort to increase defense spending. Monies will be shifted but overall the picture will remain much the same – unless one or both of the following occur.

If the House of Representatives is successful in getting some form of tax reform across the goal line and the Senate is willing to go along, then it is a game changer. Right now, insiders speculate the notion of comprehensive tax reform – both personal and corporate tax code reinvention – is unlikely because it is just too heavy a political lift. However, while Trump wants the current 35 percent corporate tax rate cut to 15 percent and House leadership keeps pointing at a new 20 percent rate, politics suggests it will come in closer to 22 to 25 percent.

If a one-time repatriation of all or part of the estimated $2.5 trillion in US company profits held oversees is successful, say at a one-time tax rate of 10 percent, then there will be an extra $1 trillion or so in the bank. If all of the stars align and a personal tax reform package cutting the number of tax brackets from seven to three, the highest being around 25 percent, kicks in – with an assumed massive closing of existing loopholes – then appropriators are faced with the enviable task of figuring out how to spend all that new-found money.

However, those are big “ifs.” For now it is assumed the federal cash pot will remain generally unchanged, at least through the end of FY 2017 on September 30. The Trump White House will continue to blow the trumpet of massive spending cuts, but the power of the purse will remain firmly in the hands of the lawmakers on Capitol Hill, and it is a safe bet that grip will not loosen.

June 2017 RENDER | back