U.S. Budget Experts Brace for an 'Ugly' Fall on Fiscal Policy

Published Aug 26, 2013. By John Shaw. In Market News International (MNI).

WASHINGTON (MNI) - If the recent past is any guide, the White House and Congress will cobble together this fall a last minute, ungainly fiscal compromise that will avert disaster but also avoid the kind of coherent, carefully structured fiscal package the nation needs and financial markets want.

But this fall's talks are fraught with uncertainty given deep partisan divisions, sharp cleavages within the Republican party on fiscal strategy, and uncertain, even hesitant, leadership at both the White House and on Capitol Hill.

Budget experts agree the the three key fiscal issues for the fall- fiscal year 2014 spending bills, sequestration, and the debt ceiling - will eventually become joined in a complicated, high stakes negotiation.

The most pressing issue when Congress returns on Sept. 9 is passing a funding bill to keep the government operating after Oct. 1 when the 2014 fiscal year begins.

The House is scheduled to be in session for just nine legislative days before Oct. 1 while the Senate is scheduled to be in session for 16 days before the new fiscal year begins.

Phil Joyce, a budget expert at the University of Maryland, said this fall's fiscal fights will be "very messy" to observe, but will probably not lead to either a government shutdown or a default on the nation's debt.

"I think the most likely outcome is a very ugly compromise that is reached just as we hit the brink, whenever that is," Joyce said.

"If I were in the White House I don't think I would be worried about a unified Republican threat to shut the government down or default on the debt. I just don't seen any intentional strategy by Republicans to do either. But I do think there is some danger that the Republican caucus, especially in the House, is so divided and its leadership is so weak that this could happen by accident," Joyce said.

Joyce said he does not expect any fiscal plan that emerges this fall to address the nation's longer-term fiscal problems.

"It's not very hard to design a package that removes some of the short-term austerity and replaces it with more thoughtful, long-term entitlement and tax reforms. But I see no indication that either party is remotely ready to make the compromises that this kind of deal requires. The urgency to deal with our long-term fiscal challenges has disappeared," Joyce said.

Bill Frenzel, a former Republican congressman who is now a guest scholar the Brookings Institution, said he believes Congress and the White House will eventually come up with a "mini deal" that funds the government in FY'14, adjusts the sequester for several years, and increases the debt ceiling until at least November of 2014.

But he said the journey to this agreement will not be completed until November or December and will be full of contention and threats.

"I think we'll get an agreement that will avoid the worst but it won't solve our problems. It's going to be an ugly, messy fall. Real messy. But I think they will stumble through, avoiding a disaster but also avoiding real solutions," he said.

Bob Bixby, executive director of the Concord Coalition, said he is discouraged about the prospects for a carefully negotiated fiscal agreement this fall.

"As of now if both parties stick to their current positions, the federal government would shut down permanently and we would default on our debt. I assume this will change, but neither party seems to be thinking very much about its negotiating strategy this fall or how to reach an agreement," Bixby said.

"This all feels a little unreal. It's like people walking around casually for an afternoon stroll, as buildings are falling down all around them," he added.

The Senate, under Democratic leadership, has allocated $91 billion more for overall FY'14 discretionary spending than has the House under Republican leadership.

So far, the House has passed four of its 12 FY'14 spending bills while the Senate has not even completed its first FY'14 spending bill. No final versions of any bill has been passed.

House Speaker John Boehner told reporters before Congress began its August recess that he expects Congress to pass a "continuing resolution for some short period of time."

Boehner did not elaborate on the duration of a stop-gap bill, but budget experts say a month or two-month stop gap funding bill would make the most sense.

But Bixby said that even passing a one or two month stop-gap bill might be too ambitious in the current environment.

"We may very well start out by passing a series of one or two week funding bills as each party tries to figure out what it really expects to accomplish this fall," he said.

The Senate's proposed FY'14 discretionary level is $1.068 trillion while the House's is $967 billion. One idea that has been floated is funding FY'14 at the FY'13 level of $988 billion.

The fate of the FY'14 stop-gap appears linked to the across-the-board spending cuts called sequestration which began this year and are scheduled to run for nine more years.

Boehner has said that across-the-board spending cuts must continue unless they are replaced by a package of spending "cuts and reforms."

Senate Minority Leader Mitch McConnell has also indicated that he would be open to replace discretionary cuts mandated by the sequester with entitlement reforms. Democratic leaders have reacted very coolly to this idea, arguing that the sequester should be replaced by a mix of spending cuts and tax hikes.

As for the debt ceiling, the administration has been urging Congress to pass legislation to increase the limit by Oct. 11, but has said that it's not certain when its "extraordinary measures" will reach their limit and require a lifting of the debt ceiling.

Boehner has said repeatedly that any debt-ceiling increase must be coupled with spending cuts and reforms. He has said this spring that his 2011 demand that any debt ceiling increase be coupled with spending cuts of the same size remains appropriate for this fall.

President Barack Obama has said repeatedly that he will not negotiate with the GOP over the debt ceiling this year.