We have a budget deal. Now what?

I’ll admit to being among the more surprised of people when the major budget deal between the Congress and the president was announced. Those who are active at Professional Services Council know that we were highly skeptical a comprehensive deal could be worked out, particularly given the stark philosophical, let alone numerical, gaps between the parties.

Then again, the supposition that the only road to a two year deal would require the speaker of the House to essentially abandon his far right flank (and thus sacrifice his position), did prove correct. And thus, on his way out the door, John Boehner delivered on just such a deal.

So, what now? What does this deal really mean? First, the spending levels included are remarkably close to what President Obama proposed earlier this year. While both parties were supportive of increased defense spending, the Republican congressional budget would have dropped non-defense spending to its lowest level, as a percentage of gross domestic product, in more than 50 years. Instead, under the budget deal, both domestic and defense spending will increase almost equally.

Second, the administration prevailed on the issue of how to use overseas contingency operations spending (OCO), which had been the biggest wedge between Congress and the White House with regard to defense spending. Congress proposed higher OCO funding partly as a means of supplementing the DoD base budget, while the administration wanted OCO to be completely separate and not used as an off-budget resource.

Under the budget deal, OCO funding is separately accounted for (and doesn’t count toward spending caps), while the base defense budget has been increased. Finally, the agreement postpones the debt ceiling crisis until at least March 2017.

Thus, on the surface, this deal would appear to represent a significant victory for the administration and the Democrats. The Budget Control Act caps have been busted, spending on non-defense needs is rising, and OCO is treated as OCO. But there is more.

The spending relief, which goes through fiscal year 2017, not only does not eliminate the Budget Control Act caps, it extends them for four more years to fiscal year 2025. As such, absent another deal between the next president and the next Congress, the existing BCA caps will return in fiscal year 2018. It is also predicated on the assumption that all of the bill payers in the deal are executed as planned.

 And there, according to many budget experts, lies the rub.

Stan Collender, one of the city’s most prominent budget analysts, points out that there have been times in the past that selling oil from the Strategic Petroleum Reserve or auctioning more spectrum licenses have been offered as ways to help pay for added spending. But he also notes that rarely, if ever, has the actual revenue generated come close to the projections.

Moreover, with oil trading at historically low prices, there will undoubtedly be questions raised as to the wisdom of selling oil reserves when the market is at low ebb.

The bottom line then is that the debate and battle is actually far from over. What has happened is probably the best one could have hoped for in the current environment—a multi-year deal that takes us through the 2016 elections. Should those elections result in a continued divided government coupled with the continued drifting of one or both parties to the wings, we can expect the craziness to start again.

Needless to say, if the elections result in a unified government or one in which compromise is no longer considered a four letter word, we might well see the beginnings of a return to normal order.

For the market, the implications are pretty clear. As we saw with the adoption of the Ryan-Murray spending plan two years ago, even the limited clarity and certainty offered by this agreement, coupled with the funding increases, should free agencies to plan and move forward in ways they have been unable to do over the last few years. And there is clearly pent up demand across the agencies for things they have been unable to start or complete.

But again, as important as this agreement is, it is still only a temporary deal to take us through the elections. None of us should be surprised if, in about 13 months, the debate and the rhetoric heats up all over again.