Navigating the 2025 Fiscal Cliff: Challenges and Risks Ahead

1. The 2025 Fiscal Landscape: A Perfect Storm of Challenges

The fiscal year 2025 is shaping up to resemble the drama of the 2012 fiscal cliff, but with even greater complexity and risk. As of October 1, 2024, the federal government is grappling with multiple budget-related issues simultaneously, including securing funding to keep the government operational, addressing expiring tax cuts, mitigating the impact of a looming sequester, and extending the national debt limit. Unlike the 2012 fiscal cliff, where a last-minute agreement between the White House and Congress provided some relief, the sheer number of competing priorities this year makes finding a solution far more challenging. If left unresolved, these issues could plunge the government into a fiscal and operational crisis.

The 2012 fiscal cliff was averted through a combination of tax cut extensions, reductions in automatic spending cuts for discretionary programs, and a suspension of the debt ceiling. However, the current landscape is more volatile, with no clear path forward. The stakes are high, as failure to address these issues could lead to widespread disruptions in government services, economic instability, and long-term damage to the nation’s fiscal health.

2. The Budget Resolution: A Divided Congress and Competing Priorities

A critical step in resolving the fiscal chaos is the adoption of a budget resolution for FY 2025. While progress has been made, the House and Senate remain sharply divided over their respective versions. One of the most significant points of contention is the inclusion of provisions to extend expiring tax cuts in the House bill, which are notably absent in the Senate version. These differences highlight the broader ideological and policy divides between the two chambers, making it difficult to reach a unified approach.

Once a budget resolution is agreed upon, it will serve as the foundation for the appropriations and reconciliation processes. The resolution provides two key instructions to congressional committees: one for appropriations committees to set discretionary spending levels and another for authorizing and revenue-raising committees to propose legislation that aligns with the resolution’s spending and revenue targets. However, both tracks of this process are fraught with obstacles, setting the stage for a contentious and unpredictable budget season.

3. Track One: FY 2025 Appropriations and the Risk of a Government Shutdown

The federal government is currently operating under a short-term continuing resolution (CR) that expires on October 1, 2024. If a new funding agreement is not reached by then, much of the government will be forced to shut down, leaving only essential staff in place to perform critical functions. Shutdowns are not only disruptive but also expensive. The longest shutdown in U.S. history occurred in FY 2019, costing approximately $3 billion and leaving 300,000 federal employees furloughed for five weeks.

The appropriations process is further complicated by the lack of a budget resolution, which typically provides a top-line spending level for discretionary programs. Instead, lawmakers are negotiating full-year appropriations based on spending levels agreed upon last year, with significant revisions. Relying on a CR rather than detailed appropriations is a risky strategy, as it can lead to budget anomalies and unintended consequences. For example, during the 2024 appropriations process, Congress cut $20 billion from the additional funds allocated to the Internal Revenue Service (IRS) in 2022 for modernization. If the House-passed CR for FY 2025 becomes law, another $20 billion reduction could occur, further undermining the IRS’s ability to modernize its operations.

Adding to the complexity, Congress must also address automatic funding cuts, known as a sequester, which are scheduled to take effect if the government is still operating under a stopgap CR by April 30, 2025. However, if full-year funding is enacted by that date, the sequester will be avoided. Additionally, lawmakers must decide how to handle ongoing budget actions by the Trump administration, which has the authority to propose spending reductions and rescissions. These actions could target enacted funding for later this year, requiring only a simple majority in Congress for approval.

4. Track Two: FY 2025 Reconciliation and the Battle Over Taxes and Spending

The second track of the budget process involves reconciliation, a legislative tool that allows Congress to pass measures affecting spending, revenue, and the debt limit with a simple majority. However, reaching agreement on how to use this tool is proving difficult. While President Trump has called for “one big, beautiful bill,” there is disagreement over whether to advance one or multiple reconciliation measures. The House has proposed one bill, while the Senate has suggested two.

Key issues that Congress is likely to address through reconciliation include extending tax cuts from the 2017 Tax Cuts and Jobs Act, increasing or suspending the debt limit, and funding Trump administration priorities such as border security and military spending. At the same time, there may be efforts to cut spending for certain entitlement programs. However, these proposals are deeply controversial and will likely face significant opposition.

One critical issue in the reconciliation debate is the use of a “current policy baseline” to measure the fiscal impact of legislative proposals. This approach would effectively mask the true cost of extending the 2017 tax cuts by ignoring the scoring benefits of their scheduled expirations. Critics argue that this would undermine Senate rules against increasing deficits and further harm the nation’s fiscal position. Despite these concerns, some policymakers are pushing for this approach to make the tax cuts appear more affordable in the short term.

5. The Delayed Start to the 2026 Budget Process

Even as Congress struggles to address the challenges of FY 2025, the next fiscal year’s budget process is already on the horizon. Like most incoming administrations, the Trump White House will likely delay its budget request for FY 2026 by several months. While executive branch negotiations over next year’s funding levels are ongoing, the formal request to Congress is not expected until late April or early May 2025.

Once the president’s budget is submitted, Congress will begin the arduous process of debating and passing a new budget resolution, appropriations bills, and reconciliation measures. This cycle of budgeting is a recurring reminder of the dysfunction that has come to characterize the federal budget process. Over the past decade, the process has become increasingly unpredictable and contentious, with shutdowns, continuing resolutions, and last-minute deals becoming the norm.

This dysfunction has significant consequences. It undermines the ability of federal agencies to plan for the future, creates uncertainty for businesses and individuals who rely on government services, and perpetuates a cycle of fiscal instability. Addressing these challenges will require more than just short-term fixes; it will demand fundamental reforms to the budget process and a commitment to putting the nation on a sustainable fiscal path.

6. The Road Ahead: Avoiding the Fiscal Cliff and Building a Sustainable Future

As the federal government navigates the treacherous waters of the FY 2025 budget, avoiding a fiscal cliff remains the immediate priority. Shutdowns, sequesters, and debt limit brinkmanship are all potential flashpoints that could derail the economy and disrupt critical government functions. While avoiding these outcomes is essential, it is equally important to address the underlying drivers of fiscal instability, including rising entitlement costs and skyrocketing interest expenses.

The path forward will require difficult choices and bipartisan cooperation. Lawmakers must find a way to balance competing priorities, such as extending tax cuts, funding national security initiatives, and addressing the growing burden of mandatory spending programs. At the same time, they must work to restore the integrity of the budget process, which has been eroded by years of dysfunction and political gridlock.

Ultimately, the success of these efforts will depend on the ability of policymakers to put aside partisan differences and work toward a shared goal: ensuring that the federal government is equipped to meet the needs of the American people while maintaining a stable and sustainable fiscal foundation for the future.