New normal returns to DC this fall: Fiscal chaos
There's nothing a Washington politician loves these days more than a crisis.
And while it's been awhile since Congress set the country on a crisis course over the federal budget and debt, this fall is ripe with opportunity for fiscal chaos.
"This ratcheting up of the threat level every time we go through this is a terrible way to do business," said Robert Bixby, executive director of The Concord Coalition, a nonpartisan budget watchdog. "But it looks like were headed there again. The new regular order is chaos."
The next shot at a man-made fiscal disaster comes Sept. 30, when the government's annual spending authority is set to run out. With a little more than a month left to pass a budget, neither the House or Senate has come up with its own plan—let alone begun the painful process of reaching some kind of consensus.
Both sides have already taken up well-worn positions.
GOP budget hardliners in the House want to continue the deep "sequestration" budget cuts enacted in January. "This year the federal government will bring more revenue in than in any year in our history," noted House Speaker John Boehner (R, Ohio). "We have a spending problem in Washington. It has to be addressed."
(Read more: Deficit fears fade on Wall Street: CNBC survey)
President Barack Obama and Senate Democrats, meanwhile, are pushing to raise more revenues with higher taxes, and to restore spending to levels before the sequestration cuts.
"Democrats know we must do more to reduce the deficit," said Senate Majority Leader Harry Reid of Nevada. "We believe in a balanced approach that pairs spending cuts with having those that can afford it pay more."
The good news is that the federal deficit is steadily shrinking—the goal both sides say they share as common ground. But that's where consensus begins and ends.
"The lower deficit certainly will take the pressure off immediate action," said Bixby. "But it doesn't really change the difficult choices that Congress is going to have to make fairly soon. It just changes the mood music and the atmosphere."
For the current fiscal year, which began in October, the federal government's spending gap has narrowed by more than a third, dropping to $607 billion from the $974 billion in red ink during the same period a year earlier. As the economy has grown, the deficit as a percentage of gross domestic product has fallen even further.
Part of the improvement comes from this year's compromise package of tax hikes and spending cuts, which slowed the growth of federal spending by $85 billion (and it is set to trim another $20 billion for the next fiscal year beginning in October.)
The debate on extending those cuts will be colored by this fall's data on the U.S. economic recovery, which most analysts agree has been held back somewhat by tighter federal spending. The Congressional Budget Office recently estimated that canceling the 10-year austerity measure would increase federal spending by $104 billion through fiscal 2014, adding roughly 0.7 percent to annual GDP growth and spurring creation of an additional 900,000 jobs.
Tax increases and spending cuts, though, account for only part of this year's smaller deficit. The rest was a series of more or less of lucky breaks, including a series of one-time windfalls that were hard to see coming.
The Treasury enjoyed something of a windfall, for example, from a surge in taxes late last year as investors sought to book profits before this year's increase in the capital gains tax rate. Uncle Sam also benefited from a surprise, one-time dividend from mortgage giants Fannie Mae and Freddie Mac, which the government bailed out after housing bust and had all but left for dead.
All of these factors have helped shrink the deficit in the short term. But deficit watchdogs say they're the budgetary equivalent of finding quarters and dimes under the couch cushions.
"We haven't really shrunk government so far," said Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget. "What we've done is furlough people and found ways to defer and delay payments and investment and found hidden money in accounts. That's not a sustainable strategy."
There's also been little progress in fixing the political machinery that relies on budgetary brinksmanship to reach agreement. Even if a budget deal is reached by Sept. 30, Congressional crisis-lovers will get another chance at chaos in November, when the government is once again set to reach its legal borrowing limit known as the debt ceiling.
The exact date is unclear. If the economy picks up speed this fall, for example, that would boost tax receipts and postpone the day the government hits its current $16.7 trillion credit limit. The Treasury also has some cash management juggles that could postpone the day of reckoning as the deadline approaches, but not for very long.
Two years ago, when deficit hawks in Washington threatened to send the U.S. Treasury on a path to default, the backlash from the financial markets helped shape a last-minute deal. That self-inflicted crisis —and the prospect of it happening again—cost the U.S. government its Triple-A credit rating.
Ironically, that downgrade could help take some of the sting out of the next threat to crash the Treasury into the debt ceiling.
"I hope they do take this to the wall," said Brian Westbury, chief economist at First Trust Advisers. "The federal government is way too big. It needs to cut itself back. If it can't do it on its own, with political debate and voting, then maybe we need to take away the credit card."
Even if the economic recovery and further belt-tightening brings spending closer into balance in the next few years, Congress and the White House will still have dodged the truly heavy lifting of reforming the tax code and preventing Social Security and Medicare from foundering under the coming wave of retiring baby boomers.
"Nobody who looks at it really thinks that the problem has been solved," said Bixby. "The real spending pressure—on boomers in retirement—is clearly evident when you look beyond the next five years. That's just a matter of demographics."
—By CNBC's John W. Schoen. Follow him on Twitter @johnwschoen.