Taxes and spending: Two political hot button issues in Washington that become hotter by the day as Congress continues to edge closer to its debt limit deadline with no negotiation, or agreement, in sight. The U.S. is set to hit its debt limit by mid-October, according to the Treasury Department, and without an agreement by both chambers in Congress -- and both parties -- to raise that borrowing limit, the nation will begin to default on its financial obligations. If that wasn’t enough, adding to mounting tensions on Capitol Hill is the federal budget. Congress has failed to pass one for the last five consecutive years, and the nation will again require a stop-gap funding bill, or continuing resolution, by October 1 in order to keep the government's lights on until December. But with a tense environment in Washington following a heated battle in Congress over whether to pursue a strike in Syria following a chemical weapons attack there, battle lines remain deeply drawn, and negotiations appear hard to come by. And because of wasted time spent on Syria negotiations that didn’t result in a material solution, the legislative body has lost a week of valuable time that could have been used to focus on the debt ceiling and federal budget issues.
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Pair that with an upcoming recess in the House during the last week of the month -- and a threat by leadership to cancel it if no CR is agreed upon -- and you have a high-stakes, high-tension battle just waiting to explode. The Potomac Research Group argues House Speaker John Boehner and Majority Leader Eric Cantor are unable to rally their troops to secure a vote, signaling trouble in the coming days and weeks – and “full crisis mode” will have to be reached before both sides can hash out a palatable compromise. “The stridency in the House makes us even more worried the debt ceiling fight in October will go badly, with a genuine risk that Treasury will have to pick and choose which obligations it can fund,” the consultancy said in a note to clients. The threat of a government shutdown comes as a result of a desire by Republicans in the House to tie a continuing resolution to a repeal of the Affordable Care Act, President Obama’s signature health-care law. However, even if Republicans are able to muster the votes to pass a CR tied to an ObamaCare repeal, it would face a sure demise in the Senate, resulting, most likely, in a government shutdown. But Citigroup (NYSE:C) sees the situation a little differently. In a letter to clients in August, the bank noted taxes and spending in the government are a critical divide, calling it almost “theological,” and said an agreement on these issues will always be a challenge. Still, despite the flurry of activity on the Hill, the bank notes a deal is easier to reach this time around than it was with the fiscal cliff fiasco of 2012. The bank sees “heated rhetoric battles (‘noise’) and near-death experiences (‘heart attacks’) coming to eventual resolution in the short-term, minimal budget package in the form of a Continuing Resolution.”With a Sequester Comes Consequences In a note to clients on Wednesday, Goldman Sachs (NYSE:GS) said the effects of last year’s sequester are becoming clearer in economic data with each passing month. The note points to disappointing data in personal income which saw a paltry gain in July thanks to defense furloughs that reduced annual wages for the month; federal payrolls that have declined or remained flat since the sequester was implemented; and weighted effects on unemployment due to federal job losses that have become more pronounced. The investment bank said it sees continued federal job reductions, and if the sequester is renewed for another period, that trend is likely to stay on course. “If sequestration continues, more permanent adjustments will become necessary and agencies may be more willing to undertake them if Congress declines once again to reverse the cuts,” Goldman's analysts wrote. “Assuming agencies ultimately opt to make more permanent adjustments in response to spending restraint, hiring freezes are likely to be more strictly adhered to and are likely to result in additional net federal job losses.” Citigroup agrees, saying it looks increasingly likely a sequester renewal will take place, because the alternative – a government shutdown or debt default – is in neither party’s best interest. The bank said it expects a similar pattern of crisis-mode fights and negotiations of 2012 to emerge with the debate and discussions this time around as time ticks closer to both the debt limit and budget deadlines. “Without specific language to the contrary, sequestration will kick in again for (fiscal 2014). The size of sequestration will be smaller than 2013’s $85 billion, perhaps as low as the $21 billion difference in estimates,” Citigroup noted. Citi’s analysts predict another showdown fight in Congress after the current one ends, since the most likely scenario is for a continuing resolution through mid-December, and budget deal that will carry the government through the next three to six months.