US Fiscal: At Least One More Round

Published on October 14, 2013

Looking over their shoulders at the debris left in the House after the Tea Party had shredded whatever remaining leverage House Speaker John Boehner had, Senate Republicans spent most of the weekend essentially negotiating the GOP’s surrender terms to a defiant Senate Majority Leader Harry Reid.

The Republicans were able to block Reid’s proposed bill to extend the debt ceiling for one year by uniting behind the modest, compromise proposals put forward by Maine’s Republican Senator Susan Collins, whose key terms are a six month CR and a three month debt ceiling, with some flexibility on how to manage the sequester’s across the board spending cuts. A few sops to the Obamacare de-funding cause were added that will be easily stripped out.

But the three and six month structure for the debt ceiling and the CR are both non starters for Democrats, and so an end to the shutdown and the pressing need to lift the debt ceiling is again stalled.

*** An obvious compromise in the Senate lies in shortening the CR back to the January time frame of the debt ceiling, postponing the fight over the sequester, as it seems highly unlikely the Senate, much less the House, could ever resolve the politics of the sequester in the next 72 hours. Neither side wants to give ground today unless forced to by either the market or movement in the House, but give they will. ***

** A door is also now opening for Speaker Boehner to move a bill — really, anything on the standalone debt ceiling or to include a CR — through the broken landscape of the House to salvage a win of some kind for the badly battered GOP. Once any bill moves through either the House or the Senate, it becomes the legislative vehicle to end the shutdown, and a modest victory for whichever side first proves to have the muscle with votes. ***

*** Ending the shutdown and lifting the debt ceiling is still probably going to take at least one more nasty, ugly turn to resolve, maybe more. We do still nevertheless expect the fiscal siege on Capitol Hill to be lifted by Wednesday or Thursday this week, but we would be reluctant to give odds on exactly who will be left standing when the smoke clears. ***

CR Pushed into Next Year

Importantly, the Collins proposal pushed back the end date to the Continuing Resolution into March next year — who after all wants to revisit this carnage in front of Christmas — but in doing so, it opened up a fairly obvious problem with the next round of deeper sequestered cuts in discretionary spending due to kick in from January 15 under the terms of the 2011 Budget Control Act.

That would have dropped the fiscal year spending levels by $90 billion under the Senate Democrats proposed $1.058 trillion budget, and with the year half gone, would have left little time to revive any chance of higher spending.

Democrats could not agree to that and so were all but forced to make an effort to extend their winning run of the negoations to include a higher FY2014 spending level and to break up the sequester. And that is what is now stalled in the Senate.

This is exactly the sort of moment Speaker Boehner and the House Republican leadership were hoping for, and they can be expected to be reviewing their whip counts again this afternoon to gauge whether they can revive their own short dated debt ceiling bill and CR.

Assuming enough members of the Tea Party have come to their senses and laid off the defund Obamacare kool-aid — admittedly, a big if — Boehner may now have his badly needed 217 plus Republican votes to pass bills to end the shutdown and the debt ceiling increase with Republican votes.

If a bill, whatever its terms, has passed in either chamber, that is the vehicle that will be used to end the crisis. And if the market reacts badly in the next few days, it will help lend pressure to whichever side has the tactical advantage at that moment to garner a minimum of their demands.

As of mid-day Sunday, however, the Tea Party was still tweeting that they were “winning” against Obamacare and sharing Instagram pictures of Second World War vets tearing down barricades. While they may live in an alternate reality, it is not clear yet what force will cut their ranks in the House from the best guestimate of 40 or more conference members to below 16 and where Boehner and the Republican leadership can reassert control.

Positioning for the Next Round

It should be noted that despite the Tea Party’s almost surreal resistance to any deal that bears any chance of passing in the Senate, the Senate battle at this point has already moved on from an immediate end to the shutdown and lifting the debt ceiling per se to a purely fiscal fight over terms to give each side an edge on the next round of negotiations over the FY2014 spending levels and the sequester.

Both sides badly want an end to the sequester, but for the GOP, the goal is to replace it mostly with entitlement cuts, and for the Democrats, to replace it mostly with new tax revenues. That fight was likely on the next round, when the current CR, whatever its duration, would have to be either extended or replaced with the actual spending bills of a new budget.

If the Senate talks continue to stall through the rest of today, Boehner will have his opportunity to shape the contours of the final outcome to the crisis. If he is able to pass his House version of a bill to end the shutdown, the final lifting of the current fiscal siege will be slightly more to the GOP liking, sans the costly Tea Party diversion into Obamacare defunding delusions.

If Boehner hesitates or still can’t move a bill through the House by tomorrow, the advantage goes back to Reid, and the odds go up for the Senate Democrats to pass their version of a bill with six or more panicked Republican crossover votes.

But if the crisis is intensifying by Tuesday evening and there is either no satisfaction to the Tea Party faction or what comes out of the House is unacceptable to both sides in the Senate and the White House, then the pressure on the House Speaker to steer away from the Tea Party once and for all will be intense and probably overwhelm all other factors.

We do still expect (or is it hope?) the shutdown and an increase in the debt ceiling will be in place by Wednesday or Thursday this week, but how exactly is frankly still unclear. Our sense this morning is that the situation is still volatile and unlikely to break either way today, and is instead more likely to go well into Tuesday before the smoke clears.

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