It’s been a few months since the last "fiscal crisis" roiled Washington, D.C. But all of the pieces are in place for a battle royal this fall as Congress mulls approval of a 2014 budget, raising the U.S. debt ceiling and allowing sequestration to continue for another year.
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Similar to the string of recent budget battles, Congress and the White House had (and still has) plenty of time to get out ahead of these issues and to negotiate agreements well before deadlines approach and panic sets in. That’s not likely to happen, however.
“I’m expecting the federal budget bedlam to last through the fall and into next winter,” said Stan Collender, a partner at Qorvis Communications and a former staffer to both the House and Senate budget committees.
Here’s what we can expect: After weeks of name-calling and finger-pointing, the combatants -- Congressional Democrats and Republicans and the Obama administration -- will hammer out last-minute compromises that satisfy each faction’s short-term political goals but do little to solve long-term problems such as an out-of-whack tax code and escalating entitlement spending.
“I’m expecting the federal budget bedlam to last through the fall and into next winter.”
In chronological order, Congress must first approve a 2014 budget that will fund the government beyond Sept. 30, the last day of fiscal year 2013. Without an agreement by Oct. 1, the U.S. faces a partial or complete shutdown of the federal government, a situation not seen since the winter of 1995-1996.
The two warring factions in Congress are separated by a $100 billion gap in federal spending. Two budget proposals bandied about last month show how far apart the two sides remain.
The Democrat-controlled Senate proposed a 2014 budget that ended sequestration, the mandated across-the-board budget cuts initiated in March because Congress couldn’t agree on targeted budget cuts. The Senate would have used the extra billions of dollars to fund infrastructure programs and to replace funds slashed from health and education programs under the 2013 sequestration cuts. Meanwhile, Republicans in the House of Representatives countered with a budget that maintains sequestration as a guarantee that federal spending will shrink in 2014.
Neither plan got anywhere.
Democrats, led by President Barack Obama, have also called for higher taxes on wealthy Americans, or in lieu of that, changes to the U.S. tax code that would eliminate loopholes that benefit the wealthy and large, powerful companies. Republicans are opposed to tax increases of any kind and, what’s more, many Republicans have said they won’t approve any budget that provides funding for ObamaCare, the sweeping health-care reforms set to go into effect next year.
These are significant rifts.
A government shutdown is unlikely, but if it happens, it would mean the closure of many non-essential services such as government offices, museums and federal parks. Thousands of employees would be furloughed, which could add another drag to an already stumbling U.S. economy.
Kicking the Can Down the Road
In all likelihood, Congress will not settle their differences by Oct. 1, forcing passage of a temporary funding bill known as a continuing resolution that will prevent a government shutdown but kick the can down the road in terms of passage of an actual 2014 budget.
Next on tap is another fight over raising the U.S. debt ceiling, which is currently set at $16.7 trillion, a figure that was reached in May. In order to continue paying off the U.S.’ debts the Treasury Department has employed a series of “extraordinary measures,” such as temporarily halting the issuance of special securities to state and local governments.
Treasury has estimated that these “extraordinary measures” can be maintained until November. After that, if Congress doesn’t approve raising the ceiling, the U.S. faces defaulting on its debts, an unprecedented predicament.
Budget hawks in Congress, especially Tea Party-affiliated members of the House, have demanded matching budget cuts to offset any increase in the debt limit. A similar debate in the summer of 2011 led to a downgrade of U.S. credit by ratings firm Standard & Poor’s, a move that shocked securities markets and sent stocks into a temporary tailspin. Prolonged political dysfunction this fall could raise the specter of additional downgrades.
President Obama has said he won’t negotiate terms of a debt limit increase, but Republicans are widely expected to hold off on any agreement until the very last minute if only for the sake of maintaining public awareness of spiraling government debt.
“That’s not to say that Congress and the White House couldn’t work something out on the debt ceiling in September,” noted Collender. “But the likelihood of them doing a deal before its absolutely needed is as small as me not needing my air conditioner in Washington this month.”
Elusive 'Grand Bargain'
Sequestration is the final piece of the puzzle. Established during the debt limit fight in 2011 as a sort of doomsday alternative if no broad agreement on budget cuts could be reached, sequestration does what Congress and the White House apparently can’t – it cuts federal spending across-the-board over a period of 10 years.
While Congress’ work schedule means the planned 2014 sequester cuts probably won’t take effect until January, how to implement those cuts is already playing a significant role in gumming up budget negotiations.
Republicans are content to allow the entire $91 billion in sequestration cuts allotted for 2014 to take effect with the provision that none of those cuts come out of the Defense Department’s budget. Democrats are seeking to scrap altogether the mandatory across-the-board cuts required by sequestration and replace them with targeted cuts that would include reductions to defense spending.
Of course, all of these battles could be avoided if the White House and Congress could hammer out a long-elusive “Grand Bargain” that achieves the long-term goals of deficit reduction primarily through reforms to popular but costly entitlement programs such as Social Security and Medicare.
But no one’s holding their breath for that.