The Coming Fiscal Derailment - Why FY 2019 Will Sink The Casino

Still, there are at least two more budget shoes to drop just around the corner, as well. The first is the House GOP leadership's plan to bust the sequester caps for defense via a rider on the Christmas Eve CR, but to leave the cap on domestic appropriations frozen at existing levels.

Needless to say, it won't fly. The Dems have already rejected what they are calling Ryan's defense and disaster plan----yet the sheer vote math in the GOP caucus is prohibitive on a strictly partisan basis. This means that to raise defense spending by about $75 billion per year or 12%---either in the current CR extension or the next one in early January---will ultimately require at least a $25 billionor 5% increase in domestic appropriations in order to obtain at least some democratic votes.

Like in so many other cases, the Speaker will lose votes from among the 40-50 member Freedom Caucus owing to the lack of off-sets for the giant disaster relief rider and would simultaneously face defections from the 50-member Tuesday Club if defense appropriations are raised by 12% while domestic appropriation for education, community development, health services and research etc are kept frozen at sequester levels.

So we expect that he will end up cobbling together a majority by pacifying the GOP moderates and buying off the requisite Dems to obtain the needed 218 votes to keep the government open----even if only a few weeks at a time.

That baleful outcome is more or less baked into the cake based on how McConnell auctioned off the votes for the tax bill in the Senate. Specifically, he made an ironclad promise to Senator Collins to fund the ObamaCare insurance subsidies at around $20 billion per year.

Yet given that his majority will dwindle to just 51-votes after Alabama, he has no way to renege. That's because the RINO from Maine was negotiating for Senator Alexander and a handful of other GOP Senators who insist on "stabilizing" rather than repealing ObamaCare. But when the insurance company bailout comes back to the House, there will be huge defections by the anti-ObamaCare stalwarts of the Freedom Caucus.

In all, then, we expect FY 2019 outlays to rise by upwards of $200 billion from CBO's most recent baseline projection. That would include $75 billion for defense, $65 billion for disaster aid, $25 billion for increased of domestic appropriations above the sequester cap, $20 billion for the ObamaCare subsidies and another $15 billion for interest on higher spending and lower revenues.

Those kinds of spending increases are now virtually certain, and will take total FY 2019 outlays to around $4.575 trillion. That happens to be nearly 20% more than the $3.85 trillion spent during FY 2016 during the run-up to the presidential election----when the GOP politicians loudly denounced the runaway spending of the Obama Administration.

And that get's us to the tax bill and what the Wall Street Journal has dubbed "Sunset Boulevard". What that means is the biggest tax cut occurs on the front-end in FY 2019. Thereafter, the tax bill devolves into an endless sequence of gimmicks, sunsets and implausible out-year revenue raisers that were designed to shoehorn the 10-year cost into the $1.5 trillion deficit allowance which enabled a 51-vote reconciliation process.

So the Sunset Boulevard depicted below amounts to the most blatant and dishonest abuse of the budget reconciliation process since its enactment in 1974, and we will elaborate on that in greater detail tomorrow.

But suffice it to say here that the "cliffs" built-into the graph below are not going to happen in the real world. Instead, they will soon lead to political conflicts and fiscal food fights that will make the 2012-2013 tax expiration "cliffs" look like small potatoes in comparison.

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