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YOUNG: Bitter fiscal battles to shape Obama II

Nothing’s settled on debt and spending

- - Monday, January 21, 2013

Already Washington has begun fighting the next battle in its fiscal war of attrition. This will be its fourth fiscal engagement in just over two years and should culminate just two months after the last one. There is no reason to expect it to end or slow down without a fully negotiated settlement. Such a deal requires entitlement reform.

As President Obama begins his second term this week, he may be experiencing, as the inimitable Yogi Berra put it, "deja vu all over again." Didn't his last term end with a fiscal fight? Yes and no. He had a fiscal fight on his hands then, too -- it just never really ended.

While the recent "fiscal cliff" fight addressed taxes, it merely delayed scheduled spending cuts until March 1. Yet before the battle was even over, the next was ready to begin.

On Dec. 26, Treasury Secretary Timothy F. Geithner informed Congress that the government's borrowing authority would soon be breached, and "extraordinary measures" would only provide about $200 billion, or two months of additional authority. That's about when the spending cuts' delay ends and just before the government's temporary funding bill expires on March 27.

These three deadlines establish the next fiscal battle's terrain -- a rougher landscape than the last. There are more deadlines and more serious consequences: potential government default and shutdown.

Understanding what lies ahead means understanding the last two years.

We can date the first battle's beginning to Sept. 29, 2010. Unable to agree on government's annual funding, a continuing resolution was enacted -- effectively, a ceasefire.

Following Republicans' November 2010 landslide, the ceasefire erupted into live fire. Six more continuing resolutions would be needed before an April 2011 agreement -- six months after the fiscal year began -- was reached hours ahead of the deadline. The Congressional Budget Office estimated total spending savings at $23 billion.

This first battle established two of the fiscal war's hallmarks: Conflict only ends at the last minute, and it does not end before the trigger for the next fight is in place -- in this case, an April 4, 2011 Treasury letter warning of the need for a debt limit increase by Aug. 2.

In the second battle, the stakes grew enormously -- progressing from government shutdown to government default and contested sums increasing from tens of billions to trillions.

The last-minute, multifaceted August deal raised the debt limit in steps. It also cut spending $2.1 trillion, with more than half to be determined by a bipartisan super committee or enforced automatically in January 2013.

Its super committee did not arrive at an agreement, but the second battle did produce the fiscal war's longest peace -- roughly a year. The next battle's elements already existed, however -- onerous, automatic spending cuts coinciding with the Bush tax cuts' expiration.

In the just-fought third battle, Mr. Obama also unsuccessfully sought to add a debt limit increase. Even without the debt limit, this battle was as ugly and expensive as the last (both sides offering versions of deficit reduction worth over $2 trillion), but with a new element: taxes.

Another last-minute resolution produced either permanent tax hikes of $620 billion (measured against current policy) or permanent tax cuts of almost $4 trillion (measured against current law), depending on your interpretation. The second battle's automatic spending cuts also were delayed two months.

Now, we will watch another battle unfold over the next two months. It has been one long conflict, occasionally punctuated by peace, but with still important lessons.

First, deadlines matter. Seemingly ignored, they ultimately precipitate action. Without them, negotiations would be just another forgettable bipartisan budget exercise, at most yielding a report. We should not expect the next battle's end before March 1.

Second, the most serious deadline defines the battle's terrain. The first fight over continuing resolutions meant annual spending was contested. The second battle raged over a debt limit increase without which spending would cease, so once again, spending was the target.

The third battle had two significant deadlines: automatic spending decreases and automatic tax hikes. The tax hikes' importance far outweighed that of the spending cuts in costs and public perception. So tax hikes became the battleground. The next battle will be over automatic spending cuts.

Third, the only uncontested area of government's budget over the last two-plus years has been automatic spending, or entitlements. The administration insists revenue increases are still in play but entitlements are not.

Given entitlements' role in current and future deficits, however, a persuasive case can be made that reform is inevitable. Driven by an aging population, the costs of Social Security, Medicare and Medicaid have spiraled upward and and will continue to do so.

The fourth and final lesson learned from the current fiscal war, therefore, is this: If it is to end -- and it is not clear it will -- it will end only with a grand deal. This deal must have entitlement reform at its center. Without a comprehensive solution -- and even with the debt limit resolved, the automatic spending cuts avoided and the rest of this year's annual spending funded -- the hiatus will only last until Oct. 1, the next annual spending deadline. The seeds for a fifth conflict are soon to be strewn.

If there is one certainty in this current fiscal war of attrition it is this: Even with a deal, the fiscal war is not guaranteed to end, but without one, it is guaranteed to continue.

J.T. Young served in the Treasury Department and the Office of Management and Budget and as a congressional staff member.