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Financial Planning > College Planning > Student Loan Debt

Congress’ Next Slugfest: Debt Ceiling, 3 Battling Budgets

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Now that Congress has passed a continuing resolution to fund the government through September, the next fiscal hurdles lawmakers will face include the debt ceiling, which hits on May 18, and three separate budgets, says Andy Friedman, principal at The Washington Update.

The stopgap spending measure, which funds agencies at fiscal 2012 levels and maintains sequestration cuts, dents the Securities and Exchange Commission’s budget by $66 million. SEC spokesman John Nester told AdvisorOne in an email message that because of this reduced budget, the agency would “reduce hiring, travel, training and investments in technology.”

Andy FriedmanIn his commentary released Monday, Friedman (right) notes that the CR also eliminates some of the “draconian effects” of the sequestration spending cuts that began on March 1. The “real unhappiness” with the cuts lies in the way the sequestration process operates, Friedman notes.

“Sequestration imposes an across-the-board ratable reduction in spending that does not stop at the agency level,” he says. “Rather, it goes down to departments within each agency and to spending accounts within those departments. Thus, the process robs agency heads of the ability to reallocate funds within their agencies to retain full funding for crucial programs. For instance, the Secretary of Defense cannot allocate funds from nonessential defense functions to keep the armed forces operating at current levels.”

Next Up: Debt Limit Debate

Around May 18, the U.S. will hit its borrowing limit, but by July or August the limit will have to be raised or the U.S., unable to borrow, will be unable to meet its existing obligations, including paying interest on its debt, Friedman notes.

While President Barack Obama has presented a budget and both houses of Congress have each passed one—the first for the Senate in four years—Friedman says that it will not be “politically feasible” to meld the disparate proposals into a single budget.

However, those budgets will become “blueprints for negotiations” that will crest around August when the debt ceiling must be raised again.

Joe Lieber of Washington Analysis notes in his Washington This Week letter that comments by Republican leaders signal the increasing unlikeliness that a “late July/early August debt ceiling increase can occur without yet another budget fight.” However, Lieber adds that this debt ceiling debate “may not be quite as contentious as August 2011.”

That said, Lieber expects Congress to ultimately increase the debt ceiling and avoid a default, as it did in 2011, but “that increase is not likely to resemble January’s drama-free deal.” Congressional Republicans, Lieber says, “acknowledging that the discretionary spending well has run dry, are now focusing on entitlement cuts to accompany an increase in the debt ceiling, while remaining steadfastly against tax increases,” positions that are “unacceptable” to Democrats.

Lieber says he expects this “tired conflict, largely skirted” in the CR “to rear its ugly head once more as Congress turns to the debt ceiling in the spring/summer.” Indeed, Friedman adds that the differences between the Senate’s budget, passed at 5:30am Saturday, and the House budget, drafted by Rep. Paul Ryan and passed by the House, “are stark” and the proposals are “opposite in almost every regard.”

As Friedman points out, the Republican plan does the following:

—Balances the budget over ten years through spending cuts alone;
—Contains no new tax revenues;
—Increases projected defense spending;
—Changes Medicare to a “voucher” system, which allows recipients to choose among private and public plans and provides premium subsidies based on income;
—Turns Medicaid into a block grant to the states and caps the growth in federal expenditure; and
—Repeals the Affordable Care Act (but keep the methods for financing it)

While the Democratic plan, drafted by Sen. Patty Murray, D-Wash., and passed by the Senate:

—Does not purport to balance the budget in the near or intermediate term;
—Calls for a dollar of new tax revenue for every dollar of spending cuts;
—Creates new spending initiatives for infrastructure repairs and job training;
—Cuts defense spending; and
—Makes no changes to entitlements (Social Security and Medicare)

Friedman predicts that negotiations over the spring and summer will likely follow “the tortious path we’ve seen repeatedly in past years,” as each party’s positions “don’t portend a quick compromise.”

On the one hand, he says, “the Ryan budget calls for repeal of health care reform, sure to anger Democrats who believe that issue is settled. On the other, former House Speaker Nancy Pelosi recently asserted that ‘it is almost a false argument to say that we have a spending problem’ at all. Failing to recognize the need to cut any spending will not sit well with Republicans.”

However, Friedman asserts that these challenges do not mean a “deal won’t get done, only that it will not be easy or early.”

Says Friedman: “My guess is that the debt limit will be the ‘forcing event’ that compels compromise at close to the last minute. It will be a repeat of August 2011—the last time the country engaged in the debt limit debate.”


Read Houston, We Have a Spending Problem—News Analysis on AdvisorOne.


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