CORRECTION: An earlier version of this story misstated the total cost of the spending cuts under sequestration. There will be about $85 billion in cuts in 2013, according to the Office of Management and Budget.
Congress may have pulled the country back from the fiscal cliff—the year-end threat of more than $500 billion in major tax hikes and spending cuts that could have triggered a new recession—this week, but there are still some banner budget fights left for Washington to take up in the new year. There are three “mini-cliffs” that might not be all that mini, given Congress’s propensity for disagreement; In each of these instances, failure to act could shake markets or worse. Here’s a look at when the next fights will occur, and what they’ll be about:
1) Averting a Government Default: Coming Soon.
Going over the fiscal cliff would have been catastrophic, but there’s an even greater potential threat to the economy: a debt default.
On Monday, Treasury Secretary Timothy Geithner notified congressional leaders that the country had hit the limit on its borrowing. Treasury, he wrote, would begin implementing “extraordinary” measures it has used in the past to prevent a default. Under normal circumstances, that would buy the nation about two months before the debt ceiling would have to be raised. But the major changes to tax and spending policies in the fiscal cliff deal complicate estimates. Once the measures are exhausted, the nation will default on its debt without congressional intervention.
It wouldn’t be the first time the U.S. government has defaulted on its financial obligations, but it could be devastating. Economists say a debt default would be worse than a serious fall over the fiscal cliff and they have little hope that the debt-limit fight will be any easier.
Congress last raised the debt ceiling in the summer of 2011, following a bitter fight that resulted in a historic downgrade of the government’s credit rating. Republicans at the time were insisting that an increase in the debt limit be matched with spending cuts and they’re expected to do the same this time around, especially since they secured so few cuts in the fiscal cliff deal. President Obama, however, has vowed not to negotiate on the issue.
The experts at Capital Economics recently summed up the conventional wisdom on the coming debt fight succinctly: “Out of the frying pan, into the fire.”
2) Preventing $85 Billion in Blunt Spending Cuts (a.k.a. “Sequestration”): March 1, 2013.
In its New Year’s Day deal to tackle the fiscal cliff, Congress only postponed half the fight. Sure, lawmakers reached an agreement on the expiring tax cuts, but they just delayed the imminent and drastic spending cuts known as sequestration. Now, on March 1, Obama will be required to implement what amounts to an evenly split $85 billion in cuts to defense and nondefense spending. The across-the-board cuts are widely panned for being too blunt.
The fight puts some Republicans in an unusual position: arguing against spending cuts they have long sought in order to protect the military from nearly $42.5 billion in cuts. Undoing sequestration will likely require each party to agree to hard-to-swallow spending cuts, an uphill battle in a polarized Congress.
3) Keeping the Government Funded: March 27.
Government shutdown fights are no fun. But that’s exactly what the country could be facing again in March. The legislation that funds the government is set to expire on March 27.
The nation hasn’t passed a federal budget on time in years. Instead, Congress has passed a series of short-term budget fixes, known as “continuing resolutions” in Washington parlance. Their passage hasn’t always been amicable. In April 2011, a near-government shutdown brought confusion and uncertainty to bear on the District’s residents and visitors, who wondered whether paychecks would still be delivered, trains would still run and if the National Zoo would have to shut down, too. The crisis was resolved at the eleventh hour.
Democrats and Republicans don’t see eye to eye on the budget, and the most recent CR’s passage was held up by a disagreement over aid to the Middle East. A new showdown over passage of routine budget legislation would renew concerns over a government shutdown and only add to the perception that Washington is broken.
This article appears in the January 3, 2013, edition of NJ Daily as The Three Looming ‘Mini-Cliffs’ to Watch.