The Four Pieces of the Great Spending Debate

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Starting this week deficits and spending will take center stage in Washington. And barring a total meltdown in the Middle East, they will hog the stage for the next three months. The stakes are high. Odds of a government shutdown are getting better as are the chances the U.S. could default on its debt. Odds that President Obama will succeed in passing a deficit reduction passage, meanwhile, are falling. A lot will depend on how much control Speaker John Boehner can exert on his freshmen class. If last week’s dramatics proved anything, it’s that the freshmen are the ones in control. They rejected the first two budget cutting plans, sending the leaders and the appropriators scrambling. “Boehner tried very hard to show that he can get things done, that he can lead,” says Jim Thurber, head of American University’s Center for Congressional and Presidential Studies. “But he has to appeal to the far right. It’s a fine line and these are indicators that he’s not doing well.”

The boiling debate over the size and reach of government is coming to a head and lines are being drawn in the sand. The President says he wants to cut overall while adding targeting spending in crucial areas like education and science. The Tea Partiers want to see massive cuts and no new spending and are looking to prove their credibility on this issue. Caught in between is Congress. Deals reached now could impact budgeting, government funding and even taxation for years to come. There are four main pieces of the puzzle. Here’s an overview:

1. The 2012 Budget. President Obama today is unveiling his spending plan for the next fiscal year. Budgets are inherently partisan documents. They are, essentially, the party platform in spreadsheets. Many of the proposals will never pass Congress; they’re simply cotton candy for the base. In fact, the only tangible work congressional budget committees do are the top line number – setting the overall size of the pie that appropriators then divvy up — and reconciliation, a safety net for spending bills that get held up. Votes on budgets have historically been along partisan lines. So, much of what we’re about to hear on this will be a lot of sturm minus the drang.

The Administration has made it clear in recent weeks that they get that spending needs to be tackled and they’ve leaked a few details of items they plan on cutting. But Obama is still insisting on two key elements that Republicans adamantly oppose: some corporate tax increases to help subsidize unemployment benefits and targeted spending increases in areas vital to keep the economic recovery on track. The big debates on this budget, however, won’t happen for another two months, until the House releases its version and committees begin hearings.

2. The 2011 Budget. In the meantime, there is another budget debate yet to play out – and unlike most budgets this one has sharp teeth. Democrats last year did not finish a single appropriations bill, leaving the government funded by a so-called continuing resolution which  extended the 2010 funding levels until March 4. The House unveiled their budget last week – three times. The Republican appropriators first proposed $40 billion in cuts, arguing that the fiscal year, which ends in September, is half over. The freshmen rejected that. The appropriators came back with $76 billion in cuts. No go. Finally, they found the full $100 billion that was promised in the GOP’s Pledge to America.

Needless to say Democrats are having heart palpitations. And while there’s no way the Senate will pass a budget with $100 billion in cuts, there is some concern that enough upper chamber Democrats are up for reelection in conservative states that Republicans may be able to force through deeper cuts than the Administration or Party would like. “There could be a compromise where some of these cuts – many of these cuts – are kept in place,” says Scott Lilly, a budget expert at the Center for American Progress who spent two decades at the House Appropriations Committee. Lilly estimates that if the full $100 billion in cuts were to be passed upwards of 70,000 people could lose their jobs as government aid to cops, teachers and research is slashed.

The House this week is expected to pass the budget. Dozens, if not hundreds, of amendments are expected many of which could pass and increase the size of the cuts. The Senate is not scheduled to begin work on the bill until the first week of March. Though there is a nominal deadline of March 4, with both chambers out next week for President’s Day recess, most likely another short-term continuing resolution will have to be passed. Though, even that could prove a challenge to Boehner. “Until Wednesday it looked like Boehner was in control and he could get his guys to go along with a temporary extension but I don’t think that’s the case any more,” Lilly says.

As much as a government shutdown would be a giant exclamation point to the case the Tea Partiers are making, no one is seeking it – just yet. And no one is ruling it out. “We’re a long way from anything like that,” says Rep. Jim Jordan, an Ohio Republican who heads the fiscal conservative Republican Study Committee, which has 170 members including much of the freshmen class. “We’re going to focus on what the Senate sends back to us first.”

3. The Debt Ceiling. Democrats are hoping that a show of compromise on the 2011 budget will grease the skids for the looming painful vote on raising the debt ceiling. The Treasury estimates it will bump up against this ceiling at the end of April or early March. Senate Majority Leader Harry Reid will probably wait till the last minute to schedule a vote to add pressure on members to pass it. Federal Reserve Chairman Ben Bernanke warned last week that if the debt ceiling isn’t increased the U.S. could default on its debts and the result would be catastrophic for the economy.

Not so fast, says the Republican Study Group. Democrats are dreaming if they thing Tea Partiers aren’t going to jump on every opportunity to force cuts. “The only way you get conservatives to support a debt ceiling increase is if there are real cuts attached to that bill and real reform,” Jordan says.

4. A Deficit Reduction Package. All of these spending cuts thus far are essentially nickel and dime the problem. Medicare, Medicaid, Social Security and defense, which make up nearly 90% of all spending, will remain largely untouched in the 2011 and 2012 budgets. Obama has said he’d like to work with Republicans on a package along the lines of what the Deficit Reduction Commission proposed in December. Forget about $100 billion, we’re talking $4 trillion here. Such a grand bargain would take significant GOP support in both chambers to pass. While a few Senate Republicans have expressed interest in talking, the bigger problem again could be in the House. The commission recommended not only deep cuts in spending – including all sacred cows  – but also tax increases in order to fill the hole. “There is no way you’re going to see House Republicans support tax increases – the Republican Study Group, we’re certainly not going to support that,” Jordan says. “I don’t believe our leadership would support that either. That is not going to create jobs or grow the economy.”

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