By Andy Friedman
The fiscal cliff and the sequestration were not the only deadlines US Congress must face this year. On May 18, the United States will hit its borrowing limit. This is the very same deadline that kicked off the entire process a year and a half ago that led to the sequestration. After that date, the government will be able to continue to pay expenses for another few months without additional borrowing. But around July or August, the limit will have to be raised or the United States, unable to borrow, will be unable to meet its existing obligations, including paying interest on outstanding debt.
Recently, each house of Congress passed a proposed budget. This alone is an improvement over recent practice – Congress has not passed a budget to run the federal government in four years.
This year, we have a plethora of budgets – one each from the House, the Senate and the President. Those budgets will become blueprints for negotiations – negotiations that will crest around August when the debt ceiling must again be raised. The difference in the two budget proposals is stark, opposite in almost every regard.
The Republican plan, passed by the House:
• Balances the budget over 10 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;
• Repeals health care reform (but keeps the methods for financing it).
The Democratic plan, 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;
• Makes no changes to entitlements (Social Security and Medicare).
At the end of the day, the Democrats want additional taxes and the House Republicans – believing President Obama got his new tax revenue in the fiscal cliff compromise – are dead set against them. Entitlements are almost an equally strong divide.
The initial positions don’t portend a quick compromise. This is not to say that a deal won’t get done, only that it will not be easy or early. 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.
In the meantime, the rhetoric could hinder the equity markets. Because Washington ultimately will reach a compromise (the United States is not going to default on its debt), a market correction based on the perception of Washington dysfunction could be a buying opportunity.
Andy Friedman is principal at The Washington Update
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