Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Now for the real budget war

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney) -- Well, that was close.

Halfway through the fiscal year, and countless partisan power plays later, Congress finally managed to reach a deal on the 2011 budget. Its signature feature: $38.5 billion in spending cuts or, as it's referred to by the key players, "the largest spending cut in American history."

The negotiators came to their senses with only an hour and a half to spare before a scheduled government shutdown.

The brinkmanship is worrisome, given the much more difficult budget battles ahead -- namely, raising the debt ceiling and dealing with long-term deficits in the 2012 budget. Handling those as poorly as lawmakers did the 2011 budget would have far worse consequences than a temporary government shutdown ever could.

President Obama is expected to address the long-term debt in a speech this week. But first up for Congress is the debt ceiling, or legal borrowing limit. Treasury has warned that it now expects U.S. borrowing to hit the $14.294 trillion limit no later than May 16.

But here's the thing: Lawmakers will be on spring break during the last two weeks of April. So in all likelihood they won't get around to the issue until May, leaving themselves only two weeks to deal with the most dangerous budget issue on the table.

"The closer Congress gets to May 16 without an increase in the debt ceiling, the more anxious markets will become," said Chris Krueger, political strategy analyst at MF Global's Washington Research Group, in a research note. "This vote is deceptively just around the corner and there is scant attention on Capitol Hill being focused on its ramifications."

A number of lawmakers, such as Michele Bachmann, have said they will not support an increase in the ceiling, mistakenly asserting that doing so would give Congress a license to spend more.

In fact, the license to spend more stems from the laws Congress has already passed that created the commitments the government is legally obligated to fund. Even if Congress never approves another spending increase or tax cut, the country will not have enough revenue coming in to cover all its bills.

The consequences of not raising the debt ceiling would be grave, Treasury Secretary Tim Geithner told lawmakers last week.

"A broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds," Geithner said.

The Congressional Research Service estimates that the government will need to borrow $738 billion between April 1 and Sept. 30. So unless lawmakers choose to raise the ceiling, they will need to come up with several hundred billion dollars either through spending cuts, tax increases or a combination of the two if the country is going to continue to pay its bills in full.

Of course, lawmakers very well might miss the May 16 deadline because Geithner has said Treasury can employ "extraordinary" measures to stave off the day of reckoning until July 8. But that would force Treasury to have to manage the country's balance sheet down to the minute to prevent default.

Some conservative lawmakers have said they would only support an increase in the debt ceiling if it's accompanied by spending cuts. They also refuse to consider tax increases. Some on the left, meanwhile, have vowed to fight any changes to Medicare or Social Security.

Deficit hawks from the left and right, however, say that leaning solely on spending cuts or tax increases to cure fiscal shortfalls will prove too draconian and hard to sustain.

In any case, coming to agreement on any long-term plan -- balanced or not -- is unlikely to happen in the next month. So don't be surprised if lawmakers just approve a series of small increases to the debt ceiling while the negotiations continue.

That would mean "more endgames, more threats, all year," as political observer Norm Ornstein put it.

The framework for those negotiations will be the 2012 budget, which is already proving to be a hot potato.

Last week, House Budget Chairman Paul Ryan put forth a proposal that would radically restructure Medicare and Medicaid, reform the tax code and take an ax to the federal budget overall.

Many Democrats were appalled at the drastic cuts, while some conservatives said it didn't go far enough. Both have promised to proffer their own budget proposals.

Obama will weigh in on Wednesday with his plan for long-term debt-reduction plan, which was noticeably absent from his 2012 budget proposal in February.

As if to prove Ornstein's point about threats, Levi Russell, spokesman for the Tea Party Express, told CNN that the group isn't very impressed with the 2011 budget deal. The Tea Party "has a lot more work to do" to get more spending cuts, he said, signaling that he will try to use the 2012 election as leverage.

How the debt ceiling and long-term budget conflicts get resolved is unclear. But it's fair to assume it will be a very hot summer.

-- CNN senior producer Kevin Bohn contributed to this report. To top of page

Search for Jobs

Index Last Change % Change
Dow 19,804.72 -22.05 -0.11%
Nasdaq 5,555.66 16.93 0.31%
S&P 500 2,271.89 4.00 0.18%
Treasuries 2.39 0.06 2.66%
Data as of 5:51am ET
Company Price Change % Change
Bank of America Corp... 22.63 0.58 2.63%
Ford Motor Co 12.41 0.00 0.00%
Chesapeake Energy Co... 6.98 -0.03 -0.43%
Citigroup Inc 57.39 -0.99 -1.70%
Reynolds American In... 58.00 0.32 0.55%
Data as of Jan 18
Sponsors

Sections

Irish drug maker Mallinckrodt will have to pay a $100 million fine and allow one of its competitors to produce a life-saving medication used to treat infants. The company hiked the price of the drug from $40 per vial to more than $34,000 per vial over the course of about 15 years. More

Federal Reserve Chair Janet Yellen gave her outlook on monetary policy days before Donald Trump becomes president. More

Nintendo's debut smartphone game Super Mario Run is coming to the Android app store in March, months after it launched on Apple devices. More

Navient, formerly part of Sallie Mae, was sued by the CFPB Wednesday for allegedly cheating borrowers out of repayment rights. More