Fiscal matters have taken center stage in Washington and important deadlines are approaching. Although President Obama will release his much-anticipated fiscal year 2012 budget proposal next Monday, Congress will be focused on more immediate budget and deficit concerns in the coming weeks. Government operations for the current fiscal year 2011 are only funded through March 4. The national debt is expected to hit its limit between early April and the end of May.
My friends at DCTipwire forecast that Congress will raise the debt limit, when and by how much remain open questions. The battle over a government shutdown and debt default is escalating as Democrats and Republicans are intertwining the two in a game of chicken over their respective fiscal positions. Republicans are pushing for immediate cuts, the more conservative among them are looking to rollback spending to fiscal year 2008 levels, or $100 billion less than current spending. With unemployment still at a 9 handle, congressional Democrats are arguing that cutting too much too fast would choke off the economic recovery. While the drama will begin to intensify later this week, expect things to come to a head in March. And the end game and ultimate compromise -- and associated negotiations process -- will be very telling about the new power dynamics in Washington.
Senate Republicans continue internal negotiations on what legislative initiatives they will seek to tie to raising the nation's debt limit. A debt limit vote could come as early as March, although the nation is not projected to reach the current debt limit until April or the end of May.
Some Senate Republicans will seek to tie one of several balanced budget amendment proposals to the debt limit increase, although other senators have advocated for spending cuts or other fiscal proposals they deem to have a more realistic chance of passage, since passage of any of the balanced budget proposals would require 67 Senate votes. In 1995, the Senate came within one vote of passing a balanced budget amendment, but in 1995, Republicans held six more Senate seats than they do now (53 vs. 47) and had actively and specifically campaigned on the proposal only months before. Per DCTripwire, Republicans would need to convince 20 Democratic Senators to vote with them -- almost half the Democratic Caucus.
Tea Party Power
An internal Republican divide has further complicated their Party's negotiating position. Some Republicans are unlikely to vote for increasing the nation's debt limit no matter what victory Republicans might secure in exchange. A number of Republicans have argued that increasing the nation's debt limit is unnecessary because Treasury receipts are more than enough to cover current debt payments; to meet the nation's debt obligations without increasing the debt limit, deep spending cuts in other budget items would become necessary--an outcome many fiscal hawks support and have been unable to accomplish through other legislative means. In an ominous sign, legislation has been filed in both the House and Senate to prioritize debt payments to creditors over other Federal spending should the debt limit not be increased before it is reached.
In the House, budget negotiations have also exposed a rift within the Republican Caucus between those proposing steep budget cuts for FY11 and those who advocate a starting position closer to where the Senate is likely to end up.
One practical difficulty confronting House Republican Leaders who a few months ago spoke of freezing FY11 discretionary spending at FY08 levels is that the fiscal year will be almost half over by the time any spending cuts would be put into place. This means cuts which would ordinarily be averaged over a year's time frame will appear twice as steep to agencies having only around half that time in which to absorb them.
In order to try and shield fiscal conservatives from this difficulty, House Republican leaders will attempt a two-track approach where conservatives will be able to offer spending cut amendments to a bill making more moderate cuts. House leaders are also deviating from the typical procedure whereby the House Rules Committee determines which amendments may be offered to a bill and instead will use an "open" amendment process--meaning that Members of both parties will have free reign to attempt to advance budget savings ideas.
Young Guns Not So Fast
Some leading Republicans are also recalibrating their promises in the context of the shortened fiscal year. House Budget Committee Chairman Paul Ryan (R-WI) is floating the idea of cutting spending in the base House Republican budget proposal by around $32B instead of the $100B Republicans promised in their "Pledge to America" released shortly before the 2010 elections, arguing that the $32B in savings is almost twice as large as it appears given the shorter time frame in which cuts to Federal agencies would occur. Other Republicans though are pushing back against the idea of prorating FY11 spending reductions, including Rep. Jim Jordan (R-OH), Chairman of the Republican Study Committee and lead sponsor of the recently-released "Spending Reduction Act," which would cut $2.5 Trillion from Federal budgets over a 10-year time frame. Jordan has powerful voices in his camp, including House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises Chairman, Scott Garrett (R-NJ), who as an ally of House Speaker Boehner, recently secured a term-limits waiver to continue in the informal leadership of the Budget Committee which Ryan chairs.
The base Republican proposal will come in $32B under the current Federal budget, based on the continuing resolution funding the government until early March. House Republicans have attempted to make this cut sound more significant by comparing it to President Obama's FY11 budget request. Compared to the President's request, the base Republican plan would save $74B ($58B in non-security discretionary spending and $16B in security-related discretionary spending), although it is unclear that the President would have secured his full funding request in this legislative environment. Conservative lawmakers hope to use the House's open amendment process to tack another $42B in non-security discretionary spending to the base House bill. Complicating enactment of further savings is the distinct possibility that lawmakers will extend the current continuing resolution, forcing Federal agencies to absorb any cuts in an even shorter time period than anticipated. Democratic leaders in both chambers have already blasted the Republican savings proposals, but the large number of Senate Democratic Caucus Members (23) up for re-election in 2012 swing states, may provide Republicans needed votes to enact savings compared to the continuing resolution.
While House Republicans continue to decide how to implement their pledge to freeze discretionary spending at FY08 levels, President Obama endorsed a five-year FY10 discretionary spending freeze. In the Senate, Senate Budget Committee Ranking Member Sessions (R-AL) has intimated his belief that any cuts lower than FY09 levels will not be enacted into law (discretionary spending was about $75B higher in FY2009, not including stimulus and other "emergency" spending). By some estimates, a freeze of discretionary spending at FY08 levels going forward would represent a 20% cut from FY10 levels, when adjusted for inflation. This, however, is not completely unprecedented; in President Clinton's second term, a similar spending freeze amounted to real dollar cuts of approximately the same magnitude -- but over a four-year period. The current baseline Republican House budget proposal would instead shave an estimated prorated 9% in discretionary spending from Federal agency budgets compared to the current spending levels.
BOTTOM LINE: Fiscal hawks will attempt to secure additional cuts during the budget amendment process which House Leaders hope to begin during the second week in February -- coinciding with the release of the Obama Administration's FY12 proposed budget. From there, the Senate will have to work quickly -- and reach an agreement acceptable to the House. More likely, Congress will have to extend the current continuing resolution funding the government that expires March 4. If spending cuts requisite to satisfy House Republicans do not emerge from the Senate -- where Democrats control the budget process -- the negotiations on any debt limit increase will become more complex as Republicans hope to use that vote for further fiscal reforms.