Months of Grinding, High Stakes Fiscal Battles Loom In the U.S.

Published Feb 19, 2013. By John Shaw. In Market News International (MNI).

WASHINGTON (MNI) - Those who enjoy acrimony, contention, finger pointing and blame shifting should watch Congress closely over the next six months because all of that and more will be on full display as lawmakers confront an array of fiscal challenges and specific deadlines.

A gaze at the coming fiscal landscape over the next few months shows the possibility - and even likelihood - of pitched partisan battles over sequestration, the expiring continuing resolution that is funding the government until March 27, the fiscal year 2014 budget resolution that is supposed to be approved by April 15, debt ceiling legislation that must be passed this summer, and tax reform legislation which both the Senate Finance Committee and House Ways and Means Committee are working on quietly and diligently.

Unlike almost every other item, congressional work on tax reform has been taking place in a bipartisan way, but this cooperation may collapse when lawmakers eventually confront the hugely significant issue of whether the entire effort is designed to be revenue neutral, as Republicans say, or raise revenues to cut deficits and offset other initiatives, as Democrats demand.

Budget experts agree that the current landscape looks bleak right now - like a grey, lifeless February day.

"If you can find movement toward bipartisan compromises or a sense of positive momentum you must have a pretty high powered microscope," says Bob Bixby, executive director of the Concord Coalition.

"There are not a lot of positive developments to report," he adds.

The first order of business for Congress when it returns from its Presidents' Day recess next week is the coming $85 billion across-the-board spending cuts, called sequestration, which are scheduled to begin March 1.

President Barack Obama at a Tuesday event in Washington said "we've got these automatic, brutal spending cuts that are poised to happen next Friday," adding that they constitute a "meat cleaver approach" to cutting spending.

Obama repeated his call to replace these across-the-board cuts with a "balanced" package of spending cuts and revenue increases.

But moments after Obama spoke, House Speaker John Boehner released a statement saying that while sequestration represents bad policy it should only be replaced by a package of spending cuts.

He slammed the president, saying he has offered "no credible plan that can pass Congress."

Boehner said that the sequester will be in effect until there "is a plan that will put us on the path to a budget that is balanced in ten years."

The sequestration debate will unfold next week in the Senate when that chamber considers Democratic and Republican plans to replace the sequester. Both parties are poised to present plans that have no prospect of passing the Senate.

The Senate Democratic plan would replace this year's sequester with a $110 billion package of spending cuts and revenue hikes. The plan generates about $55 billion in new revenues and $55 billion in savings.

The savings come from $27.5 billion in defense programs over the next eight years and $27.5 billion by eliminating certain direct subsidy payments to farmers.

The revenues come from a revised version of the so-called Buffett Rule in which a new 30% tax on adjusted gross income would be phased in on income between $1 million and $2 million and would be fully operational on income over $2 million. Additionally, Senate Democrats would get $2 billion in revenue by allowing oil derived from tar sands to be taxed.

Senate Minority Leader Mitch McConnell again blasted Obama and congressional Democrats Tuesday for failing to offer a credible alternative to replace the scheduled $85 billion in across-the-board spending cuts for 2013.

McConnell has derided the Senate Democratic plan as a "political stunt," a "total waste of time" and an "escape plan aimed at making Republicans look like the bad guys."

McConnell is expected to offer a Republican alternative next week, presumably one that follows the GOP's long-stated policy that sequestration can only be replaced by a different package of spending cuts.

McConnell has also said repeatedly that he won't get drawn into any last minute negotiations on sequestration, such as the talks he conducted with Vice President Joe Biden in late December to avert the fiscal cliff.

Sequestration mandates $85 billion in across-the-board spending cuts for 2013 and the $1.2 trillion for the full nine-year period. The process was triggered by the failure of Congress's Super Committee on Deficit Reduction in 2011 to agree on a deficit reduction package of $1.2 trillion.

Many budget experts assume sequestration will go forward on March 1, and that congressional leaders are not likely to enter into serious talks on restructuring the sequester until they begin serious negotiations in a few weeks on how to fund the federal government after March 27 when the current stop-gap funding bill expires.

The 2013 fiscal year began on Oct. 1, 2012 and the federal government has been operating under a stop-gap spending bill. The talks are expected to focus on extending the stop-gap bill until the end of FY'13, but the level of funding is certain to be a topic of fierce dispute. A deadlock on this matter could result in a shutdown of the federal government.

As the battle over the FY'13 stop-gap spending bill rages, both the House and Senate are expected to intensify work on their FY'14 budget resolutions. These congressional blueprints outline multi-year spending and revenue goals and and make deficit estimates.

House Budget Committee Chairman Paul Ryan has said he will unveil a FY'14 budget that brings the federal budget into balance in a decade through spending cuts and economic growth. Ryan's budget last year did not balance the federal budget until 2040, so to achieve this goal of balance in a decade will require new policies that fiscal experts will be eager to review.

Senate Budget Committee Chairman Patty Murray has been less specific about her fiscal goals in the Senate Democratic FY'14 budget resolution. She has said it will contain "pro-growth" and "pro-middle class" policies and has indicated clearly that it will include tax increases on the wealthy.

Ryan and Murray are likely to pass their FY'14 budgets this spring on party-line votes in their respective chambers, but there seems to be little chance they will be able to negotiate a compromise plan.

Consequently, the House and Senate budget resolutions this spring are more likely to be party statements of fiscal aspirations than governing documents that will chart a new fiscal course for the nation.

For those seeking common ground on the budget, Erskine Bowles and Alan Simpson, the co-chairs of Obama's 2010 fiscal commission, have drafted a revised budget plan that they hope can attract deficit hawks from both parties.

The revised Bowles-Simpson plan calls for $2.4 trillion in additional deficit reduction over a decade, with $600 billion coming from Medicaid and Medicare savings, $600 billion from additional revenues, and $1.2 trillion from a mix of discretionary and entitlement savings.

Finally, Congress must return to the always contentious issue of increasing the debt ceiling. The current $16.4 trillion debt ceiling was suspended until May 19 by legislation earlier this year. It is unclear if lawmakers will seek to pass a long-term increase in the debt ceiling or approve a series of short term measures as the broader fiscal debate unfolds.