08/21/2013 04:58 pm ET Updated Oct 21, 2013

A $20 Billion Wrinkle in the Upcoming Budget Battle

For those focused on the upcoming budget debate, Greg Sargent raises an important point, one that's worthy of your attention. Put on your boots -- we're going deep into the fiscal muck on this one.

At the end of next month, the current patch that's paying for government operations, called a continuing resolution (CR), expires. That means Congress either passes regular appropriation bills (won't happen), another patch, or shuts down the government. In the latter case, the stuff that's funded even without Congressional action -- mandatory programs like Social Security and Medicare -- keeps going but funding for anything else that they don't exempt stops.

The conventional wisdom is that they'll come up with a patch before the deadline but the question is, at what level will they fund discretionary spending, i.e., the non-mandatory part of the budget that funds defense and non-defense activities? Here's where it gets interesting.

You'd think that a CR for 2014 would just continue to fund these functions at their 2013 levels. But, as Sargent points out, there's a wrinkle -- a $20 billion wrinkle: that's the amount by which defense spending must be reduced in 2014 to be in compliance with the sequester.

I'll get to the "why" in a moment, but Rep Chris Van Hollen, someone who consistently not only gets these issues, but can both think about them strategically and articulate them effectively, explains to Sargent that this could provide critical leverage to Democrats and others who want to replace sequestration with a balanced plan that a) replaces the reckless cuts we write about each week here at On The Economy with a balanced plan including targeted spending cuts and new revenues, and b) is backloaded in such a way as to spare what's still a too-fragile recovery from more fiscal headwinds.

Van Hollen:

"We believe this should bring Republicans to the table...[they] will face a fundamental they care more about preventing deep cuts to defense, or protecting special interest tax breaks for big oil companies and hedge fund managers?"

Because of this, Van Hollen says, Dems can, and should, prepare to draw a hard line against more austerity in the long term budget fight.

"There's no negotiating over the principle of parity," Van Hollen said. "If Republicans want to relieve the $20 billion cut to defense, we must increase non-defense spending by $20 billion. You can't boost defense at the expense of other investments. That's got to be a very clear principle."

But why does the defense spending cap need to come down by $20 billion and isn't that unfair -- doesn't that violate parity?

It does not, because defense got a special boost this fiscal year, one which it has to give back in 2014 to stay within the caps. That boost was a function of a few gnarly budget moves in the fiscal cliff deal, e.g., instead of the usual defense/non-defense split on the discretionary side, the appropriators went with security/non-security, which enabled them to plus-up defense. "Security" is a more encompassing category than defense, so Congress just took some money from other parts of the security budget, like homeland security, and gave it to defense. So, if anything, the parity principle was broken in 2013 on the defense side and now it's time to pay the piper.

Also, we should be clear that since a lot of this capped spending stuff took hold over the past few years, non-defense has been whacked harder than defense. According to my CBPP colleague Richard Kogan, compared to 2010 funding levels, funding for non-defense discretionary programs in 2013 are down 16 percent compared to 12 percent for defense (inflation adjusted).

So again, and as Van Hollen stresses, the parity principle would support non-defense over defense here.

As Sargent correctly notes, it is no slamdunk that another $20 billion in defense cuts will provide Democrats the leverage for which they're hoping. As Chris Hayes once put it to me, the sword of Damocles that defense cuts were designed to be in the Budget Control Act turned out to be a nerf sword. But at least in the Senate, Republicans are not at all happy about this $20 billion and may be ready to deal.

Either way, the best thing for the country, the economy, the families losing Head Start slots and low-income housing vouchers, the NIH research community, and so on, would be exactly that: a deal that involves some compromise on both sides. Imagine that.

This post originally appeared at Jared Bernstein's On The Economy blog.