Debt ceiling battle could shake markets
“To attract any Republican votes to a debt ceiling increase, you’re going to have to come up with some serious spending reductions and some budget process reforms. There is going to have to be a significant incentive.”
That is from my chat yesterday with Senator John Thune. Now I think it is even more evident that getting a 2011 budget will be easier than increasing the debt ceiling to pay for it. I will add, however, that I think it is smart to try and use whatever leverage is out there to gain more spending cuts and budgetary reforms.
1. But right now the two issues are on separate tracks — and it looks likely that it will stay that way. The GOP-controlled House, with its complement of small-government Tea Party members, has already passed a bill that would cut domestic spending by $61 billion this year. Such a reduction would slash discretionary programs — everything other than defense and mandatory social spending — by an average of 25 percent. The Senate, run by Democrats, prefers to keep such spending flat.
2. Democrats may have the president in their camp, but more of them face re-election campaigns in 2012 than their Republican opposite numbers. Although another short-term fix is possible, after the give-and-take of a final deal to fund the government could include cuts of around $30 billion.
3. But Republican sources say there’s a long way to go before finding common ground, even within their party, on raising the debt ceiling. Adding to the uncertainty are new polls showing the American public unwilling to accept significant cuts in Social Security and the like. Another variable is a bipartisan group currently conducting closed-door talks to fashion a 10-year “grand compromise” on the budget. Their plan could emerge smack in the middle of the debt ceiling debate.
Bottom line: The path to avoid a debt default remains murky, though both sides know it would be a disaster.