By Robert Schroeder
WASHINGTON (MarketWatch) — Friday night’s last-minute deal to head off a government shutdown serves as a preview of two looming battles that will test the mettle of congressional Republicans, Democrats and President Barack Obama: whether to raise the U.S. debt limit, and enacting a budget for the next fiscal year.
Obama outlines budget agreement
President discusses Friday’s bipartisan agreement on the U.S. budget, which came just hours before the government was scheduled to shut down. Video courtesy of NewsCore.
The U.S. government will hit its $14.29 trillion debt ceiling no later than May 16, Treasury Secretary Timothy Geithner said earlier this week.
Lawmakers including Sen. Marco Rubio, a Florida Republican, and Sen. Joe Manchin, a West Virginia Democrat, say they won’t vote to raise it without accompanying plans to rein in the budget deficit.
The White House predicts that the deficit will hit a record $1.6 trillion this year, a figure that has many fiscal conservatives and tea-party activists outraged.
In a letter to Congress Monday, Geithner said the government could use temporary measures to avoid hitting the limit. But those tactics would only last for about eight weeks, he said, meaning the Treasury would run out of borrowing power around July 8.
What’s worrying Wall Street
Geithner has warned that interest and principal payments on Treasury bonds would stop and that Social Security and Medicare benefits would be discontinued if Congress doesn’t raise the debt limit — a prospect that has Wall Street worried.
“Future political posturing around the debt ceiling, which must be raised at some point over the next several months, could make financial markets much riskier and reduce global investor confidence in the U.S. dollar,” Aaron Gurwitz, chief investment officer of Barclays Wealth, wrote in a note on Friday. Gurwitz added that he believes it’s “extremely unlikely” that the debt ceiling wouldn’t be raised and the U.S. would default on its obligations.
Still, members of Congress from both parties will use the debt-ceiling debate to make their points about fiscal responsibility. Coming as lawmakers prepare for the 2012 elections, the arguments could be brutal.
“If we stay on the current path, we are heading toward a debt-fueled economic crisis — meaning massive tax increases, sudden cuts to vital programs, runaway inflation or all three.”
Rep. Paul Ryan (R., Wis.)
“Now on to the main event: the debt limit,” tweeted Sen. John Cornyn, a Texas Republican, on Saturday morning. He called the coming debt debate “huge leverage for systemic fiscal reform.”
See story about budget agreement.
Grappling over next year’s budget also promises to be intense. The just-concluded shutdown standoff was over funding for fiscal 2011, which ends on Sept. 30.
This week, House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, offered his budget blueprint for fiscal 2012, which begins Oct. 1. Democrats said that the plan, which would cut $6.2 trillion over the next 10 years compared to Obama’s 2012 budget proposal, wrongly remakes Medicare and gives tax breaks to the wealthy at the expense of other Americans.
Ryan, a rising star in the GOP, defended his proposal, dubbed the Path to Prosperity, in his party’s weekly address on Saturday.
Major confrontations over Medicare, Medicaid
“If we stay on the current path, we are heading toward a debt-fueled economic crisis — meaning massive tax increases, sudden cuts to vital programs, runaway inflation or all three,” Ryan warned. “Instead of letting deficits spiral out of control, our budget keeps borrowing in check and puts us on the path to balance.”
But by proposing to end Medicare as it’s currently run and by squeezing $771 billion from Medicaid, Ryan is headed for a major confrontation with Democrats who want to preserve those entitlement programs.
On Saturday, Obama signed the stopgap legislation that will fund government operations for another week while Congress puts the finishing touches on the spending agreement for the rest of the fiscal year.
Obama hailed the compromise by Republicans and Democrats over the fiscal 2011 budget and said averting a shutdown was “good news for the American people.” He also held out hope that the agreement would bode well for future compromises.
“It’s my sincere hope that we can continue to come together as we face the many difficult challenges that lie ahead — from creating jobs and growing our economy to educating our children and reducing our long-term deficits,” Obama said his the weekly address.
But Ryan’s speech made clear that coming together won’t be easy. He said that Obama’s proposed fiscal 2012 budget “is worse than just a commitment to this status quo — it would actually accelerate this country’s descent into a debt crisis.”
Robert Schroeder is a reporter for MarketWatch in Washington.