America's big bucks battles only starting

Three potential deficit showdowns could send the US into default

Rupert Cornwell
Sunday 06 January 2013 01:00
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The "fiscal cliff" battle may be over, but Washington's fiscal wars have only just begun: a series of budget battles between Barack Obama and the Republican-controlled House of Representatives could shut down the government and, at worst, send the US into default, sowing chaos in global financial markets.

On Capitol Hill, the January after a presidential election is a time of ceremonial occasions: the formal certification of the previous November's vote, the installation of a new Congress, the election of a Speaker, and the inauguration – in this case the second inauguration – of a president. And so it is this year. But minds are already on the three potential deficit showdowns looming in the first three months of 2013.

Before the start of March, Congress and the White House are supposed to agree on the "sequester", the mandated $100bn (£60bn) of cuts in government spending that were merely delayed for two months as part of last Monday night's last-ditch deal that prevented massive automatic tax increases for most Americans. And on 27 March, the stop-gap funding arrangement that, in lieu of a proper budget, allows the government to function, is due to expire. That deadline could shut down the government, failing agreement between Republicans who insist on cutting the federal deficit by reducing spending, and Democrats determined to defend Social Security and Medicare, the hugely costly federal entitlement programmes.

Most dangerous of all, however, is the issue of the federal debt ceiling. The current limit of $16.4trn was reached on 31 December, but Treasury accounting devices allow the government to keep borrowing for a few weeks more. But by mid or late-February the wriggle room runs out and the House must authorise an increase.

If both sides persist in their stated positions, we can be certain of a repeat – or worse – of the summer 2011 debt ceiling crisis, which led to a US downgrade on international markets and badly dented the country's credibility. In the process, the economic recovery that is starting to gather steam could be halted in its tracks.

Every ingredient for renewed brinkmanship is in place: a Democratic president refusing to negotiate, a weakened Republican Speaker determined to re-assert his authority, and a Republican party smarting from its failure to secure any spending cuts of significance in the fiscal-cliff deal. Having talked tough and then caved in on the July 2011 debt ceiling discussions, Mr Obama has promised that this time he will not even discuss the matter.

On Thursday, the Speaker, John Boehner, humiliatingly sidelined in the fiscal-cliff talks after he lost control of his unruly House membership, was re-elected to his post for the 113th Congress by just six votes, after a dozen arch-conservative Tea Partiers defected. Less than 24 hours later, Mr Boehner promised House Republicans he would use the debt ceiling to force Mr Obama to cut spending.

Emboldening Republicans is the sense that they now hold the initiative. The issue on which they were most vulnerable – tax increases for the wealthy – was settled in the fiscal-cliff deal. They now believe that public opinion favours their hardline stance on spending cuts to reduce a budget deficit running at $1trn-plus annually. But the White House is already hitting back, portraying Republicans as ready to risk America's – and the world's – financial stability, just to secure crippling cuts in the highly popular Medicare and Social Security.

The best way of avoiding disaster would be the so-called "Grand Bargain", a long-term deal involving a mix of spending cuts, curbs on entitlement and further tax increases, to which Mr Obama and Mr Boehner came close at one point last year. Since then, however, personal relations between the President and top Republicans have only worsened. Measured both by the acrimony it produced and by its failure to pass worthwhile legislation, the 112th Congress, which ran from January 2011 to January 2013, was one of the worst in US history. The 113th, could, many fear, be more dismal still.

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