Republicans aren’t scared to toy with the U.S. debt limit. Both parties now seem to agree that failing to raise the country’s borrowing cap would be a disaster. But brinkmanship looks likely as Republicans hold out for cuts far deeper than Democrats will easily accept. Pushed far enough, the tactic could still rattle Treasury markets.
Leaders inside the GOP certainly know their recent political history. And they have no intention of allowing their party to suffer a repeat of what happened in 1995. When Republicans took control of Congress that year, they squandered public confidence by being seen as responsible for shutting down the government in a budget dispute with President Bill Clinton.
The political damage would be far worse today if Republicans took the fall for making Uncle Sam look as though he might default on his obligations. But the GOP also must contend with its new Tea Party colleagues. The newcomers say they want to radically shrink the federal government in exchange for acceding to raising the debt ceiling. At $14.3 trillion currently, the limit could be reached in two months. One faction says it wants to cut non-security spending by 50 percent — also excluding Social Security and Medicare — by $2.5 trillion over 10 years. Sen. Rand Paul of Kentucky is prepared to go even further.
By contrast, President Barack Obama is looking to trim just $40 billion a year by freezing current spending at current levels. Reconciling what GOP spending hawks want and what Obama would conceivably accept will be difficult. Republican leaders are already planning for temporary gridlock. One option is to explicitly prioritize paying the interest on public debt. All other spending would need to be cut by $125 billion for each month the stalemate continues. Another path would be to raise the ceiling, adopt the Obama freeze but also include strict spending caps. Sen. Bob Corker of Tennessee and Sen. Claire McCaskill of Missouris have cooked up a bill that would do the following: “Put in place a 10-year glide path to cap all spending – discretionary and mandatory – to a declining percentage of the country’s gross domestic product, eventually bringing spending down from the current level, 24.7 percent of GDP, to the 40-year historical level of 20.6 percent.”
The release of Obama’s budget in two weeks will give a better sense of the gap between the two sides. Until it is closed, investors in U.S. bonds need to steel themselves for rhetoric that sounds more alarming than the consensus on the debt ceiling suggests.