By Ryan Boyle

Working through a home renovation has reinforced the lesson that tearing down is easier than building up. The early phases of a construction project show rapid progress and can even be fun, excavating and swinging sledgehammers.  But when the project moves on to the building phase, plans must be meticulous and precisely executed in order to avoid expensive mistakes.  

Washington is in the midst of a rehabilitation project as well.  Sledgehammers are being wielded by the executive branch at the same time that Congress sets to work designing a budget plan.  Living through this construction project will be stressful for all involved – including U.S. taxpayers.

The fundamental framing of the U.S. fiscal situation has not changed: the nation has not balanced its budget since 2001.  The many strengths of the American economy have allowed the nation to continually issue debt, which has been used to finance the budget gap.  Demands on government programs are rising, but tax revenues have not kept pace.  A fully balanced budget may no longer be achievable, and the trajectory of ever-increasing deficits is a stability risk.  Solutions are easy to describe and hard to achieve.

This year, the urgency around these issues has grown.  Tactically, the nation faces urgent deadlines this year to fund the government, set a budget, lift the debt ceiling and amend the tax code.  Strategically, the new administration is making a novel effort to cut costs.

The new Department of Government Efficiency (DOGE) has moved rapidly and unconventionally to scrutinize and halt government expenditures.  The focus in these early days has been on reducing federal government headcount, first through voluntary resignations and then with layoffs. Most DOGE actions have been met with immediate litigation, as they appear to contravene the appropriations authority that the Constitution vests in Congress.  Some actions could be overturned, and jobs could be reinstated.

Reviews to halt frivolous expenditures should be a routine part of governance, but they have proven politically difficult.  DOGE is seeking to cut through this resistance, and claims savings of over $100 billion.  Even if their actions survive legal challenges, this is below the magnitude required to close an annual deficit approaching $2 trillion.

More meaningful reductions in spending will need to come through the appropriations process.  The outline passed by the House in late February offers a hint of the difficult discussions ahead.

A fiscal reconciliation bill starts with a set of instructions from the House Budget Committee, setting high-level spending and revenue targets for each appropriations bill.  The House’s recent outline calls for a total deficit increase of $3.3 trillion over ten years: $4.5 trillion has been set aside to accommodate lower taxes, while partial offsets come from decreases to the budgets for the Departments of Energy, Commerce, Education and Agriculture.

Medicare, Medicaid and other social safety net programs like nutritional assistance are the largest share of government spending, making them prime targets for cuts. But any reductions would be politically consequential.  Reducing healthcare and food funding for the lowest-income populations would cause pain to voters across the country and across parties.

Reconciliation bills cannot result in a deficit any larger after ten years than it is upon signing.  This creates a window to expand the deficit, so long as expenditures are wound down or tax revenues rise at the end of the decade ahead.  House leaders hope to create fiscal space to fund other priorities, especially tax cuts.  A Trump campaign pledge included eliminating income tax on tips, overtime and Social Security; this lower revenue will need to be offset by some cost reduction.

Debate will also center on the baseline forecast used to determine whether a bill meets deficit requirements.  The current Congressional Budget Office (CBO) scoring shows moderate deficit growth, because it includes higher tax rates after the expiration of the Tax Cuts and Jobs Act next year.  Advocates of a more generous tax plan would prefer to treat the current tax regime as permanent, which would set the baseline deficit outlook on a higher trajectory.  Though fiscally burdensome, a forecast of a larger deficit would afford more space for reforms and tax cuts in the reconciliation package.

Sorting all of these questions and priorities will be a months-long process, and Congress does not have time on its side.  On Friday, March 14, the current continuing resolution (CR) that extended last year’s budget will expire, and the government will enter a shutdown.  Passing a “clean” extension of the CR through the full fiscal year will meet resistance on many fronts.  Some representatives are eager to see lower spending immediately, while Democrats will withhold their support for any Republican proposal unless efforts like DOGE are curtailed.  A government shutdown looms.

Past shutdowns have not been economically consequential.  Essential government workers, like those in defense and law enforcement, continue to work, while others are furloughed.  This time could be different, as agency leaders have been asked to create plans to reduce their staffing levels, including “positions not typically designated as essential during a lapse in appropriation.” Temporary furloughs could become permanent reductions in force. 

Home renovations inevitably encounter an unforeseen problem, challenging the architects and contractors to find a quick solution.  The demolition and remodeling of the federal government is moving fast; we might advise Congress to come to work in hard hats.