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Web Chat: The Federal Budget and Prospects for a Government Shutdown

On March 2, expert Isabel Sawhill took your questions on the latest developments in the federal budget negotiations and the prospects for a government shutdown in a web chat moderated by POLITICO’s Seung Min Kim.

12:30 Seung Min Kim: Hi everyone. An exciting last 24 hours in the world of budgets -- Congress has approved a spending bill that will keep the federal government funding for another two weeks. Brookings's Isabel Sawhill, a former associate director at the Office of Management and Budget, is here to answer your questions. Welcome, Isabel.

12:31 Isabel Sawhill: Thanks, Seung Min. looking forward to it.

12:32 [Comment From Eric: ] Is a shutdown a foregone conclusion, or is there still time to resolve the outstanding issues?

12:34 Isabel Sawhill: As the intro to this chat suggests, we've dodged the bullet for now. The new extension will take us to March 18. Two weeks isn't long to resolve the big differences between the parties in Congress and with the White House. But I don't think anyone wants a shutdown so the pressure is on.

12:34 [Comment From Richard P.: ] Is there anything the president should be doing to help avoid a shutdown?

12:36 Isabel Sawhill: He's asked VP Biden to be his negotiator on the Hill suggesting he gives this high priority but recognizes it's a political and not just a substantive problem for him. I give the administration high marks for trying to discriminate between spending that's needed and effective and spending that's not. I wish, however, in his budget the President had said more about the need for tax reform and entitlement reform.

12:36 [Comment From Marie: ] What are the main sticking points where Congress and the President can't agree?

12:39 Isabel Sawhill: The Republicans in Congress want to cut $61 Billion in this fiscal year alone. That's a huge amount for a year that's already almost half over. Not only would that cut spending more than the Administration would like, they also argue that it would hurt the economy. Studies by Goldman Sachs and by Mark Zandi suggest this level of cuts could cost us 700,000 jobs or more and really slow the recovery. Republicans disagree with this analysis although I think most economists would agree that we are playing with fire -- even though the magnitude of the risk is uncertain.

12:40 [Comment From Steve Abramson: ] You have previously commented that the budget deficit cannot be closed by cuts a[...]lone and that a VAT would be the least-worst method of raising tax revenues. How would you feel about initially introducing a VAT as a revenue-neutral replacement for the CIT and payroll taxes? Do you think that would have a stimulative effect by making exports cheaper and making imports shoulder an equal tax burden? Alternatively, what do you think of using a dedicated VAT to pay for health care vouchers to be used in an exchange, such as recommended by Dr. Ezekiel Emanuel?

12:42 Isabel Sawhill: Yes, I like a VAT and I think the key word in your question is "initially." We need more revenue so revenue-neutrality might be O.K. in the first year or two while the economy was still recovering but we need a tax that will grow revenues over time. I am not wild about the idea of it's replacing payroll and CIT taxes but I love the idea of dedicating it to health care expenditures. This would make clear to the public how much health care costs and the need to rein in those costs unless we are willing to pay much higher taxes.

12:43 [Comment From Terrence: ] Somehow, Bill Clinton managed to come out on top after the government shutdown in the 90s. How do you think a shutdown might impact support for President Obama?

12:46 Isabel Sawhill: Yes, you're right and I think it's because people didn't like the fact that the national parks were closed, they couldn't get passports, etc. -- in other words, once government wasn't an abstraction and they saw what they could lose it made a difference. But I also think it just seemed irresponsible to people and Clinton was able to lay the blame at the feet of Gingrich and the Republicans. Right now, we have a similar effort underway by both sides to blame the other for not finding a solution.

12:47 [Comment From Tom: ] When will we get to the real issues: tax reform, Social Security and Medicare?

12:49 Isabel Sawhill: This is the right question! Domestic discretionary spending is a small slice of the spending pie -- and right now all the emphasis on on cutting this small slice. For more on what I think about this see Budget Cuts in All the Wrong Places: Too Much from Too Little Too Soon.

12:49 [Comment From Susan: ] What does yesterday’s short-term reprieve do for the longer-term spending plan?

12:53 Isabel Sawhill: We don't have a long-term plan and that's the problem. Bear in mind that we're still talking about 2011 but the President has submitted a budget for 2012 and Congress isn't even discussing that yet. Most hopeful signs that I see is that there is continuing discussion around the Bowles-Simpson deficit commission's plan -- both by a bipartisan group in the Senate and as part of a follow-on effort by the co-chairs to inform the public and keep the discussions going on these issues. I think both this commission and several other plans that have been put forward are worth debating and have been very constructive. For more on this see Brookings commentary at Around the Halls: The Fiscal Commission Vote.

12:55 [Comment From Mark, Greenbelt, MD: ] Anybody who looks at the budget at all seriously understands that cuts won't be enough. Don't we have to have revenues as well? And is this Congress willing to take that step?

12:57 Isabel Sawhill: I very much agree that revenues have to be part of the solution. But the best way to raise new revenues is not by raising rates but by broadening the tax base by eliminating or curtailing a lot of existing deductions. These deductions and special preferences cost us over $1 trillion a year in lost revenue. The politics of tax reform, of course, are not easy. No one wants to give up the mortgage interest deduction, for example.

12:58 [Comment From Ben J.: ] They can't really shut down the government -- that would mean no border security, no FBI, no air traffic controllers, no airport security, no Social Security checks. If they keep all these "essential workers" on the job, isn't the point - and the pain - lost? What's really at stake in a shutdown?

1:00 Isabel Sawhill: Your point is well taken. I suspect that everything you mentioned will be considered "essential" and that the pain would be limited for this reason. But I think the effects on the public would still be quite dramatic. People applying for Social Security or for passports or for patents or whatever would be told that they had to wait indefinitely. It's no way to run a government and I think the public would be frustrated and angry.

1:01 Seung Min Kim: And that's all the time for today -- thank you to all for joining us and a special thank you to Isabel for the answers.