18/03/2014 07:10 GMT | Updated 18/05/2014 06:59 BST

Are the Fiscal Battles Over in Washington?

Last month, the U.S. Congress - faced with an impending snow storm and a desire to get home for holiday - hastily passed legislation permitting the federal government to continue to borrow funds through March 15, 2015. Coupled with the agreement reached last December to fund the government through September 30, 2015, this action eliminates the prospects of additional fiscal showdowns for at least the remainder of 2014.

While Congress can congratulate itself for keeping the government open and functioning (something it has not always been able to do), the fact is that these actions fail to addresses the fundamental fiscal issues facing the country. In particular, the compromises do not:

  • Change the growth of entitlement spending: A new report from the non-partisan Congressional Budget Office makes clear that mandatory spending (spending on entitlements such as Social Security, Medicare, and Medicaid as well as interest payments on the federal debt) continue to compose almost two-thirds of all U.S. spending. The Budget and Economic Outlook: Fiscal Years 2014 to 2024, Congressional Budget Office (Feb 2014). And that percentage will increase as the baby boomers age, the costs of Obamacare begin to accrue, and (at some point) interest rates rise. Indeed, the rate of increase is a considerable concern; the CBO estimates mandatory spending to grow at a rate in excess of seven percent annually - double the projected growth rate of the economy.
  • Bring in additional tax revenue or close tax loopholes: Tax reform remains on the agenda, but there has been no groundswell in Congress or encouragement from the Administration to move forward in a serious way.
  • Meaningfully reduce the deficit: The compromise did not reduce the near- or intermediate-term federal deficit beyond the sequestration spending cuts approved in 2011.
  • Change the trajectory or amount of outstanding federal debt: Outstanding debt continues to climb inexorably as the United States borrows more money each year to cover that year's deficit. Debt as a percent of GDP does fall for a few years due to the sequestration cuts, but then that measure too rises as the increased entitlement costs kick in. See the CBO report above.
  • Replace the bulk of the sequester cuts: The indiscriminate across-the-board cuts to discretionary spending are unpopular with both parties, yet the compromise does little to replace them.

Some believe that the Republican agreement to extend the borrowing authority without a corresponding concession from the Democrats marks the end of the budget battles going forward. That is not my view, however. Although the fiscal battles will be quiescent this year, by the time next year that the debt ceiling has to be raised and the government funded again, a new class of House Republicans - likely fortified by new Tea Party members - presumably will want to take up the cudgel again to fight for fiscal restraint.