Budget Endgame: Closing a $330 Billion Gap

“Katrina changed everything” is almost a trite saying in DC now, but even unoriginal sayings can be true. Before Hurricanes Katrina, Rita, and Wilma slammed into the U.S., the federal budget environment was bad but improving. Now intraparty politics have pushed the GOP to negotiate among themselves on deep budget cuts over the next five years — from roughly $40 billion to $370 billion in cuts. Congress won’t be able to close that gap, but in trying IT research and development (R&D) funding is likely to face painful cuts. However, other technology programs might actually get a one-time boost from Congress because of another budget bill. Let’s take a deeper look at what is going on.

Just before hurricane season, the Congressional Budget Office (CBO) projected that the fiscal year 2005 deficit would be almost $100 billion lower than 2004 and Congress was starting to work on finding $35 billion cuts to specific “entitlement” programs. Then Katrina hit and Congress immediately passed $62 billion in aid, almost entirely wiping out the lower deficit. Rough estimates floated around town that rebuilding the Gulf States would cost upwards of $200 billion (which now appears to be grossly over exaggerated).

At first the White House and Congressional leadership stuck with the roughly $40 billion in the previously mentioned cuts, but the fiscal conservatives revolted. They launched “operation offset” putting $370 billion in cuts over five years on the table. This forced both the White House and Leadership to consider further cuts this year and retroactive ones. It is certain that Congress will fall short of $330 billion of cuts, but cuts to both mandatory and discretionary programs (such as research) will likely be deeper than we expected at the beginning of the year.

(Quick primer on budgets: there are basically two types of spending, mandatory and discretionary. Mandatory is slightly less than 2/3 of entire budget — about $1.27 trillion — mostly consisting of Social Security, Medicare and Medicaid. Discretionary makes up the difference.)

It is in this context that Congress is debating two different budget packages. The first is the budget reconciliation package that both cuts and increases mandatory spending for various programs (and some discretionary ones). The second is wrapping up the remaining fiscal year 2006 appropriation bills that fund the discretionary side of the budget where most of IT R&D resides. To pare back spending even further, Congress is looking at increasing cuts to the mandatory programs (beyond the $40 billion mentioned above) and passing an across-the-board cut for discretionary programs.

Reconciliation

The reconciliation package touches on a lot of federal programs, but I’m only reviewing the relevant technology ones here. This package is largely good news if you are selling or working on certain technologies. Congress is going to force broadcasters to switch from analog to digital TV around 2009 (the final date is still being negotiated), which will generate about $10 billion in budget “savings” from auctioning off vast swaths of newly opened spectrum. The Senate has proposed skimming $4.7 billion off that for various telecommunications and technology programs:

  • $3 billion to subsidize the purchase of converter boxes to permit analog TV sets to receive over-the-air digital signals
  • $200 million to help low-power television stations and television translator stations make the digital transition
  • $1.25 billion to help first-responders buy better communications equipment, of which $1 billion would go to interoperability (which would probably include research), $250 million to implement a national alert system, and $50 million for a tsunami warning and coastal vulnerability program.
  • $250 million to upgrade emergency 9-1-1 call centers.

The House proposal is much more austere, skimming off $990 million for converter boxes and $500 million for interoperability grants. Using the admittedly crude predictor of splitting the difference, the final package might look something like:

  • $2 billion for coverter boxes
  • $750 million for interoperability (probably including some research)
  • $150 million for other first responder funding
  • $125 million for upgrading 911 systems

Because of the nature of the revenue source, this is new funding but is only a one-time allocation.

While Congress will look to increase the overall size of the cuts to the mandatory side of the budget, it isn’t likely to impact programs that USACM focuses on because they reside on the discretionary side of the budget. This is where any potential good news ends.

Appropriations

Turning to the research funding side of the budget, the outlook is much bleaker. The initial fiscal year 2006 funding proposals from Congress for most of the IT R&D agencies had increases below the rate of inflation. Now the entire discretionary side of the budget may face across-the-board reductions. Congressional leadership has not specified what the percentage cut would be, but using last year as a guide it could be around one percent.

Peter Harsha at the Computing Research Association (CRA) has detailed tables capturing the more subtle aspects of this issue and the respective House and Senate positions for the primary civilian IT R&D funding agencies. I’ve summarized his data and again taken the really crude, but often correct, “split the difference” figure reflecting what a one percent cut would look like.

Agency (Figures in Billions) “Compromise” w/1% ATB cut “Compromise” vs. FY05
National Science Foundation $5.53 1.06%
NIST $.69 -1.35%
Department of Energy Office of Science $3.65 1.31%
NASA $16.27 0.43%
NOAA $3.91 -0.43%

It isn’t certain that Congress will approve an across-the-board cut, but there is probably better than a 50/50 chance that it will. Should this happen, NSF’s budget would increase slightly, but it would still be less than the Agency’s budget two years ago.

At the same time Congress is struggling with the budget, several high-profile policy reports have been released that argue the economic importance of basic research done at agencies like NSF (Peter blogged one here). A consensus seems to be coalescing around what governments can do to foster an innovation ecosystem, and two pillars are funding for basic research and a strong education system. The juxtaposition of these reports and the current budget environment is striking, but that topic is worthy of another post at a later day.

Update: Dave Patterson pointed out that the table above is confusing as it shows increases to agencies while talking about across-the-board-cuts. Let me try to clarify. The dollar amounts represent a crude estimate of where Congress might arrive at, and then it factors in an across-the-board cut of one percent. This may yield a number that is higher than last year, because the compromise number before the cut was higher than a one percent increase over last year. Put more simply, the across the board cut could mean still mean an increase in funding, just not as high of one as it would have gotten otherwise.

Update (11/3/05): It struck me that I’d be remiss without mentioning Congress is working on two parts to budget reconciliation. The first (mentioned above) resolves spending issues. The second resolves $70 billion in expiring tax cuts. In reviewing this post, I realize how byzantine this entire process must to the public, but systems that deal with almost $5 trillion dollars ($2.5 trillion on the revenue side, $2.2 on the tax side) tend to be complex.

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