The new Congress and the Obama Administration are in the early stages of determining each other's position on federal spending and taxes for this fiscal year and for 2012. Neither side has yet obtained an advantage in the early skirmishes, nor decided to precipitate a confrontation over their policy disagreements. So far, all parties have agreed to avoid a shutdown of noncritical federal functions by passing a short-term Continuing Resolution that funded the government for another two weeks.
The track record in prior budget battles years suggests that we can expect enactment of a series of further short-term extensions while attempts continue to reach a global settlement. The situation could become more complicated, however, if the current impasse is not resolved before treasury reaches the limit on its statutory authority to borrow to finance our national deficit. The debt ceiling is looming just over the horizon. Depending on its skill in cash-flow management, treasury likely will reach the debt ceiling in late May or early June, once it has spent the wave of tax receipts that are due on April 15th. If the political deadlock were to prevent Congress from increasing treasury's borrowing capacity, we would face a unique situation -- a short term national liquidity crisis caused, not by the markets, but by a failure of the political system.
One of the wild cards in the budget debate is its relationship with simultaneous republican efforts to deny the Environmental Protection Agency the funds necessary to implement its Green House Gas regulations (GHG). Both the House and Senate are considering short-term proposals that would strip EPA of funding through September, and also permanent legislation that would prohibit EPA from limiting GHGs, so that Congress could settle this important part of our industrial policy. The GHG bills have not attracted enough votes from democratic senators to overcome a filibuster, let alone an anticipated presidential veto, so the only viable republican strategy is to include a defunding provision in a bill the president might be forced to sign.
The maneuvering to defund EPA is simply one manifestation of a larger phenomenon. The risk in global budget negotiations is that individual members of Congress will promise their constituents that they will not vote for a funding bill unless it contains a specific policy solution, whether defunding EPA, high speed passenger rail or Planned Parenthood. If enough members make inconsistent commitments, then Congress can lose the ability to forge any spending bill that will attract a majority, thereby inadvertently backing the country into a crisis no one wanted.
We are still near the start of this extended negotiation process. After one inning, there is no score. Early votes show that democratic senators facing reelection in 2012 will support more overall spending cuts than their colleagues, but do not suggest which programs are vulnerable. EPA also is softening its new rules (emissions from industrial boilers, deadlines for reporting GHG emissions) to avoid giving fresh ammunition to its opponents. What has become clear is that the battles over spending/tax policy and energy/environmental policy are currently interwoven, and leaders in both branches will be challenged in seeking to unbundle the issues in a manner that avoids a system-wide political impasse.
John F. Cooney is a partner in the Washington, D.C., office of Venable.