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The Grand Bargain's dead. What now?

President Obama dropped Social Security cuts from his 2015 budget and wants to hike spending on other programs instead.
A protester listens at the rally outside the Social Security Administration offices in Baltimore, Maryland, July 25, 2011.
A protester listens at the rally outside the Social Security Administration offices in Baltimore, Maryland, July 25, 2011.

Hopes for a Grand Bargain between the White House and Congress to overhaul entitlements and taxes disappeared many months ago. But President Obama is making the end of that era official in his 2015 budget.

Obama is dropping cuts to Social Security that he first proposed last year, which would have reduced benefits by tying the entitlement program to a different index of inflation known as "chained CPI." And he'll propose increasing discretionary spending by $56 billion, boosting both defense spending and domestic programs like education, job training, and manufacturing, among other initiatives. It's an attempt to end the age of austerity that has governed Washington's budgeting decisions for the past three years. 

The full details of Obama's 2015 budget have yet to be released, but these two major changes are telling. The president had originally included the Social Security cuts in last year's budget in hopes of keeping alive a major budget compromise with Republicans, to the dismay of the party's liberal base. 

But last year made it clear that Congress was only willing to do the bare minimum on the budget, as Republicans refused to budge on tax increases (after the so-called fiscal cliff deal) and Democrats were unwilling to cut entitlements. Since the short-term deficit has been rapidly shrinking—due to a slowdown in health-care costs and trillions in discretionary cuts that Congress has passed since 2011—the urgency for any major deficit deal ebbed as well.

Ultimately, the small-ball budget brokered between House Budget Chair Paul Ryan and Senate Budget Chair Patty Murray in December only reversed a fraction of the discretionary cuts imposed by sequestration and did even less on entitlement spending. The dealmakers trumpeted the bill's $6 billion in military pension cuts, but those were reversed by Congress only weeks after it passed -- largely replaced by Medicare provider cuts that take effect so many years out that future lawmakers could easily reverse those, too. 

With no prospects of a Grand Bargain and with midterm elections just around the corner, Obama seemed to have little practical or political motivation to stick with a Social Security cut that liberals hate. 

"They weren't going to make any kind of deal anyway. And this points out the futility of the budget—they use whatever you do to hit you over the head with it," says Stan Collender, a former Democratic budget aide. 

Republicans said the president's new proposal proves he was never serious about reducing the deficit in the first place. They're likely to attack it on other grounds as well: Obama's 2015 budget would alter the Ryan-Murray deal by increasing discretionary spending. It's likely the proposed increases will be offset by new tax loophole closures and changes to other entitlement programs, but those could prove similarly unacceptable to Republicans who've refused to increase taxes.

Douglas Holtz-Eakin, the chief policy adviser to John McCain's 2008 presidential campaign, agrees with Obama that Congress needs to bolster discretionary spending on key initiatives. But he said he doubts the president will address what Holtz-Eakin believes is the real threat to discretionary programs—rising entitlement spending—particularly given Obama's abandonment of chained CPI for Social Security.

"My concern for years has been letting discretionary account—for infrastructure, education—get pushed out by rising entitlement spending," says Holtz-Eakin. If Obama wants tax increases instead of major entitlement cuts to pay for more spending, "that's not very compelling," he added. 

With the shadow of both the 2014 midterms and 2016 election already looming over Congress, no one is expecting these fundamental disagreements to change any time soon. The 2015 budget is expected to be yet another small-ball agreement that essentially preserves the status quo. And Obama's budget, at most, will hearten his base and give his party's more talking points on the campaign trail. "It allows Democrats to say what they're going to do," says Collender.