WASHINGTON -- The just-completed deal to resolve the so-called fiscal cliff has created an even greater cliff down the road. By the end of February, lawmakers will have to grapple with $1 trillion in sequestration cuts that are scheduled to take effect and the need for a debt limit increase. Shortly thereafter, they will have to deal with the end of a continuing resolution to keep the government funded.
Any one of these issues on its own would be difficult to resolve. Taken together, they could produce complete gridlock, which itself would have deep economic consequences.
President Barack Obama has pledged that he won't negotiate over the debt ceiling as a matter of principle. But Republicans are still insisting that they will extract as many concessions from the talks as they can.
Sen. Pat Toomey (R-Pa.) said on MSNBC's "Morning Joe" this week, "we Republicans need to be willing to tolerate a temporary, partial government shutdown" in order to achieve spending cuts and entitlement reforms.
On Friday morning, meanwhile, House Speaker John Boehner (R-Ohio) told members that he was prepared to use the debt ceiling fight as leverage to get spending cuts. According to a source in the room, Boehner showed fellow lawmakers the results of a survey by the Winston Group, a GOP polling firm, which showed that 72 percent of Americans "agree any increase in the nation's debt limit must be accompanied by spending cuts and reforms of a greater amount."
"The debate is already under way," the speaker said.
Elsewhere on Friday morning, Sen. John Cornyn (R-Texas), the second-ranking Senate Republican, penned an op-ed making a similar argument.
Republicans are more determined than ever to implement the spending cuts and structural entitlement reforms that are needed to secure the long-term fiscal integrity of our country.
The coming deadlines will be the next flashpoints in our ongoing fight to bring fiscal sanity to Washington. It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain. President Obama needs to take note of this reality and put forward a plan to avoid it immediately.
It wasn't entirely clear from the op-ed whether Cornyn was arguing for Republicans to avoid passing an additional continuing resolution (absent spending cuts), refuse to raise the debt ceiling, or both. A spokeswoman for the Texas Republican told The Huffington Post that she didn't see a distinction between the two, with respect to whether or not the GOP should use them as leverage.
"I wouldn't look too much into it. I think there are three big deadlines," the spokeswoman said, adding sequestration into the mix.
A Republican Senate aide added: "We all know this deadline is coming. In regards to the CR vs the debt ceiling, a downgrade will likely occur if spending is not cut, not if Congress were to refuse to [raise the] debt ceiling temporarily."
But there would, indeed, be different consequences depending on which event is used to extract spending cuts. If, for example, Congress passes a debt limit increase but fails to pass a continuing resolution, the government can continue to borrow funds to pay its existing bills. But it would cease to operate as normal.
On the other hand, if Congress were to pass a continuing resolution but not raise the debt ceiling, the government would be operating on dwindling funds. Over time, the Treasury would fail to meet its obligations on salaries and wages, retirement funds and social security benefits.
And then there would be the macro and global impact. As a 1979 Government Accountability Office report noted:
At a minimum, however, the government could be subject to additional claims for interest on unredeemed matured debt and to claims for damages resulting from failure to make payments. But even beyond that, the full faith and credit of the U.S. government would be threatened. Domestic money markets, in which government securities play a major role, could be affected substantially.
More recently, JP Morgan's managing director outlined the consequences in a letter to the Treasury Department. Among the impacts projected were the following:
- A rise in Treasury's long-term funding costs;
- A contraction of credit;
- A reduction in the purchase of Treasuries by foreign investors on a permanent basis or even sell off exiting holdings;
- A downgrading of the U.S. sovereign credit rating;
- A possible run on money market funds;
- The destruction of market confidence.