Very early this year, during the Fiscal Cliff negotiations, while everyone was losing their heads, analyst Sean West of the Eurasia Group was one of the more optimistic observers.
He was proved correct, as the debt ceiling part of the Fiscal Cliff melted away, and the tax cuts were largely resolved.
So we’re a little disturbed, and worried to get his latest note, which is titled: Nasty fall fiscal fight shaping up.
The gist: This time the debt ceiling fight is more like Summer of 2011, and an “accident” could occur, resulting in a government shutdown or worse.
The only difference is the dynamics.
This time it’s the Democrats who might be willing to go down, and spoil for a fight, and it’s the GOP that might lack the leadership to be able to come to a deal.
Of the two factors, the Democratic willingness to play hardball is probably the most surprising.
Democrats gearing up for a fight
The risk this time around is different because it is driven by Democrats rather than Republicans. In contrast to the last three years–where the core question was whether Democrats could satisfy Republican demands for clearing a CR and a debt ceiling–the new dynamic is one where both parties need to build leverage to secure policy changes. The President’s party is increasingly worried that a tactical loss on the sequester earlier this year will turn into a strategic defeat of its government spending vision without resolution before the next batch of sequestration in January. The economic recovery is strengthening despite sequestration, and the deficit is falling toward sustainable levels partly as a result of it. The Budget Control Act is designed such that Fiscal Year 14 is the last year that sequestration threatens nominal cuts-discretionary spending will actually grow under sequestration in future years, with a lower baseline effectively locked in and harder to argue against. Moreover, Democrats are worried that if they negotiate on the debt ceiling in November-amid a material ongoing deficit decline-they will have permanently validated the idea that spending must be cut alongside any increase in borrowing level.
Democrats are increasingly convinced that this is the moment to “break the fever” of sequestration and debt ceiling pay-offs. They will attempt to break up the upcoming deadlines by cutting a short-term deal on the 30 September continuing resolution-insisting on a clean debt ceiling increase with no pay-off for Republicans-and then gearing up for battle later in the fall when the short-term CR expires if necessary to get a sequester deal before January. In reality, Democrats would prefer to trade mandatory cuts and other piecemeal fiscal reforms for a sequester offset that can be implemented around the same time as the debt ceiling, without a direct negotiation on the latter issue. But Democrats have less appetite to agree to large-scale reforms amid a declining deficit: If Republicans demand too high a price for the Democrats’ key goal of offsetting the sequester, Democrats, are willing to threaten shutdown even though they don’t actually want it.
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