Election Behind Us: Looking Ahead to the Fiscal Cliff and 2013

  • The balance of power in Washington remains intact: control of the White House and Congress remains as it was prior to the election.
  • Notwithstanding that balance of power, we are NOT in a status quo political environment.
  • There are two reasons why Cozen O'Connor Public Strategies ("CPS") thinks that the hyperpartisan logjam that has dominated Washington in recent memory temporarily will break: (1) for a short period, electoral politics are off the table, and (2) the fiscal cliff is looming and neither party wants to own throwing the country back into recession.
  • The fiscal cliff refers to the economic impact of tax changes and government spending cuts, BOTH OF WHICH ARE MANDATED BY LAW, that take effect in 2013.
  • The tax changes include expiration of the Bush era tax cuts, the payroll tax cut, and a variety of other temporary stimulative tax measures.
  • The spending cuts, known inside the Beltway as "budget sequestration," are long term across the board cuts to government spending. Most mandatory entitlement programs, with the exception of Medicare, are excluded from these automatic spending cuts. Defense spending would absorb a particularly harsh blow.
  • Early in 2013, the government also will hit the statutory limit on additional federal borrowing known as the debt ceiling.
  • The non-partisan Congressional Budget Office has stated that going over the fiscal cliff will achieve significant deficit reduction, but likely will put the U.S. back into recession and cause unemployment to spike.
  • There are two overwhelming policy imperatives in Washington: supporting economic recovery and reducing the budget deficit. There is little disagreement over the need to achieve both of these objectives.
  • There are two historical political imperatives in Washington: for the Democrats, protecting entitlements and for the Republicans, holding firm against tax increases.
  • In the election, Romney carried the senior vote and there was no broad repudiation of health care reform. CPS believes that this dynamic gives President Obama the latitude to negotiate on entitlement reform. On the other side of the aisle, the electorate did not seize upon the Republican message of economic growth through lower taxes. In the run up to the election, Republicans hinted that if they lose the Presidency they will have to consider revenue increases, so CPS believes that Republicans will now negotiate on taxes.
  • CPS believes that in the lame duck session, we will see a period of congressional brinksmanship, but Congress ultimately will pass a limited legislative package to avert the fiscal cliff.
  • CPS believes that the Republican leadership is prepared to accept short term revenue (tax) increases provided that there is a long term commitment from Senate leadership and the White House to corporate and individual tax reform. The President already has signaled a willingness to reform the corporate tax code, and there have been bipartisan discussions in the House on doing so for a number of months.
  • There is broad bipartisan support for postponing the dramatic and automatic across the board spending cuts scheduled to take effect in January. Key Republican members of Congress and the President have said that they don't want the cuts to stand.
  • CPS believes that the President and Senate Majority Leader Reid will agree to put entitlement reform on the table for 2013.
  • This legislative package that CPS expects Congress to pass in the lame duck will: (1) defer budget cuts scheduled to take effect in 2013 to later years while making an immediate deficit reduction "downpayment" in 2013; (2) allow some of the temporary tax cuts, including the payroll tax cut, to expire; (3) compromise on extension of some of the Bush era tax cuts; (4) temporarily raise the debt ceiling to enable the government to borrow through mid 2013; and (5) through legislative procedure, bind the new Congress to engage in comprehensive discussions regarding a grand bargain to address taxes, entitlements, and government spending.
  • Congress has a narrow window of opportunity to reach a grand bargain before mid-term election politics return front and center towards the end of the second quarter in 2013.

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Howard Schweitzer

Mark Alderman

Rob Freeman

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