Budget Feud’s Next Round Keeps Cuts to Avoid Shutdown

Lawmakers in both parties and President Barack Obama agree they want to avoid a federal shutdown. The latest feud is as much about which agencies -- notably defense -- will be given flexibility to manage the reductions as it is about the amount of spending.

“I don’t think these guys are going to get enough heat before the 27th” to change the spending cuts, said Scott Lilly, a senior fellow at the Center for American Progress a Washington-based public policy group aligned with Democrats.

The across-the-board reductions, known are sequestration, are set to total $1.2 trillion over the next nine years, including $85 billion for the fiscal year that runs through September. Agencies aren’t allowed to shift money to crucial programs from those considered less important.

The automatic budget reductions, if they remain in place, will cause a 0.6 percentage-point reduction in U.S. economic growth this year, the nonpartisan Congressional Budget Office has estimated. Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee on Feb. 26 that “this additional near- term burden on the recovery is significant.”

Market Reaction

Investors haven’t been deterred much. The Dow Jones (INDU) Industrial Average yesterday reached its highest level since October 2007, gaining 38.16 points, or 0.3 percent, to 14,127.82. The Standard & Poor’s 500 Index rose 0.5 percent to 1,525.20 at 4 p.m. in New York, after falling as much as 0.4 percent earlier.

Treasury 10-year yields increased three basis points, or 0.03 percentage point, to 1.88 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data.

The House bill unveiled yesterday would finance the U.S. government at an annual rate of about $982 billion through Sept. 30. It would give the departments of Defense and Veterans Affairs more leeway to decide how to spend their money and implement the mandated cuts.

Obama said March 1 that to avoid a government shutdown, he would sign legislation that kept spending at the same level as a result of the automatic cuts.

Senate Democrats

Senate Democratic leaders, though, haven’t decided the approach they will take to funding the government after March 27. They are considering whether to give other agencies -- in addition to defense and veterans’ affairs -- the ability to move money among programs to ensure priorities are funded.

Senate Appropriations Chairwoman Barbara Mikulski, a Maryland Democrat, said last week that her bill would include spending at an annualized rate of $1.043 trillion. Unless the Senate agrees to turn off the automatic cuts, the spending authority in the bill would drop to about $982 billion.

The Senate could take up the House-passed bill.

House Appropriations Committee Chairman Hal Rogers, a Kentucky Republican, said yesterday that his chamber’s spending plan would avoid a federal government shutdown.

“It is clear that this nation is facing some very hard choices, and it’s up to Congress to pave the way for our financial future,” Rogers said in a statement. “This bill will fund essential federal programs and services, help maintain our national security, and take a potential shutdown off the table.”

Defense Budget

Under Rogers’s bill, the Defense Department would receive $10 billion more to train troops, maintain weaponry and pay for operations. It would allow the department to transfer as much as $4 billion between accounts for some purposes such as “unforeseen military requirements,” with advance notification to Congress. Some accounts such as military personnel and pay are exempt from the automatic cuts.

Current legislation prohibits the Defense Department from moving money between accounts, and it can’t start new programs or enter into multiyear contracts. As a result, the department has reported funding shortfalls for its operations, according to Rogers. The House measure would alleviate that, he said.

The House bill also would cancel a 0.5 percent pay raise for federal civilian employees scheduled to take effect in April, the first time the federal pay schedule was to be increased since 2010. The provision is expected to save $11 billion over 10 years, Republicans have said.

‘Tiny’ Adjustment

Eliminating such a “tiny” pay adjustment “doesn’t make any sense,” Jacqueline Simon, public policy director for the American Federation of Government Employees, said in an interview. The labor union represents about 650,000 federal and District of Columbia workers.

“You can only describe it as a desire to inflict harm on working class and middle-class people who happen to work for the federal government,” Simon said.

The Republican spending measure is already being criticized by Democrats.

New York Representative Nita Lowey, the Appropriations Committee’s top Democrat, said in a statement she was “disappointed” that Rogers’s proposal “would lock most of the federal government into outdated plans and spending levels.”

Lowey said the automatic discretionary spending cuts that are preserved in the bill “will result in job losses and furloughs, slowed economic growth” and a reduction of government services.

Debt Limit

Congress mandated $1.2 trillion in spending cuts spread over nine years as part of a 2011 deal to increase the U.S. debt limit. Though the cuts were designed to be so onerous that Congress and the president wouldn’t let them occur, they started last week.

Senator Richard Durbin of Illinois, the chamber’s second- ranking Democrat, predicted that a House measure would be altered in the Senate and ultimately clear the House with a combination of Democratic and Republican votes.

“I think we’ve all heard that song before, and here we go again,” Durbin told reporters.

Winning the required 60 Senate votes for a stopgap measure that doesn’t alter the across-the-board automatic cuts would not be “an easy ask,” Durbin said.

“For some senators, on both sides of the aisle, there are some specific losses in their states relative to sequestration that are very painful,” Durbin said.

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