Now that the House and Senate have passed their budget resolutions, they will begin the process of trying to resolve outstanding difference in conference. Both Chambers should be applauded for sticking to pay-as-you-go, even in the face of extreme pressure to make exceptions for popular programs. However, the heavy lifting on pay-go—finding offsets for the proposed higher levels of spending, fixing the AMT, and extending some of the tax cuts—still lies ahead. A glaring shortcoming of both budgets is that neither makes any headway on the important and inevitable task of entitlement reform and the long-term budget challenges. If one were to combine the pay-go principles central to the two Congressional budgets with the types of entitlement reforms in the President’s proposed budget, there would be real progress towards fiscally responsible budgeting.

*     *     *

Each of the three budgets—the House, Senate and President’s—deserves some credit for making budget balance a central priority. Setting a fiscal goal is a useful and necessary step in getting the budget back on track and making the necessary and sometimes painful trade-offs that responsible budget demands.

Additionally, the Budget Committees should be commended for sticking to pay-as-you-go. Still, the difficult task of finding offsets for the budget policy choices has not yet been addressed. As the budget negotiations proceed, pressure to make special exceptions for pay-go will mount. There are signs that resolve may already be crumbling. For one there appears to be sufficient support to pass a fix for the AMT that is not fully offset by increases in other taxes or reductions in spending. Opening the door for one exception will open the floodgates for many. Given that the pay-go principle is the fiscally responsible glue that holds this budget together, retreating from the principle would be a huge blow for responsible budgeting.

By far the most disappointing area of both budgets is their failure to address or improve the nation's long-term budget challenges. The single largest fiscal problem facing the country is the long-term budget imbalance we will face due to promises in our major retirement and healthcare entitlement programs. The budget is on an unsustainable path. Failing to act will make the policy changes we ultimately have to adopt far more painful. We have punted on this issue year after year, and with the first of the baby boomers beginning to collect Social Security next year, continuing to ignore this looming crisis is simply unacceptable.

*     *     *

We are slightly more optimistic than we have been in a number of years that we could be nearing a turning point on the budget. The budgets we have seen so far from the White House and Congress are improvements over what we have seen in the past few years. Divided government is likely to slow actions that would otherwise worsen the budget situation. For the most part it will be difficult to pass new tax cuts or large new spending initiatives without one party or the other blocking these changes (although the AMT and the extension of the middle-class tax cuts may have sufficient bipartisan support to pass without offsets.) It would be in the best interests of both parties to tackle entitlement reform now while different parties control Congress and the White House, so that both sides can share responsibility for the inevitable difficult choices.

The budget negotiations we are about to witness, in particular the negotiations on how to fill the reserve funds, will undoubtedly prove contentious. We hope that this debate does not worsen relations on the Hill and between the White House and Congress—we desperately need Members to improve relationships across the aisle. Moreover, we hope that the final compromise is not brokered through a weakening of the resolve for fiscally responsible budget choices. The best scenario would be a budget that sticks to pay-go and the beginning of serious efforts on entitlement reform. It may well be premature, be we remain cautiously optimistic that whether through a commission, a Members working group, or individual Members showing leadership, the beginnings of crucial long-term budget reform plans could start to emerge in the coming year.