Six Fiscal Issues That Could Shut Down The Government

If you look closely enough, you can see the steam rising from the dome of the U.S. Capitol, as lawmakers brace for what is likely to be one of the most consequential budget and spending battles since Democratic President Bill Clinton went to the mat with Republican congressional leaders Newt Gingrich and Bob Dole back in the mid 1990s.

The looming conflict between President Obama and the scrappy conservative Republicans and Tea Party activists in the House and Senate is likely to get downright ugly before differences are finally resolved – with the outside possibility of a government shutdown by the end of this week.

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There will be bruising fights over virtually every facet of federal budget policy – from reordering spending levels for scores of domestic programs and government agencies to possible cuts in defence to the funding of Medicaid and other entitlements to the implementation of the new health care reform and financial regulation laws.

With a big push from scores of combative conservative and Tea Party freshmen, Republican leaders in the House and Senate are demanding massive cuts in spending for the remainder of the current fiscal year and more consequential budget savings and entitlement reforms in the coming years to address the deficit. Many are threatening to prompt a government shutdown or even a default on U.S. borrowing if necessary to get their way. Obama and Senate Democratic leaders say they are willing to meet the Republicans half way in responding to their demands for more spending cuts – but will go just so far before digging in their heels.

William Gale, a senior fellow in economics at the Brookings Institution, says that the fixation on whether politicians can avert a government shutdown late this week or prevent the Treasury from defaulting on bonds later this summer are distractions from more fundamental challenges – including the long-term debt, reining in defence spending and raising tax revenue. “As usual, politicians aren’t discussing the right issues,” he said. “The big issues are fundamental, but they are not these crises everyone is running around about.”

But Republicans say they won’t turn their attention to more fundamental, long-term issues until they have it out with the White House and Democrats over more immediate concerns  — although House Budget Committee chairman Paul Ryan, R-Ill., planned to formally unveil a 2012 budget plan calling for $6.2 trillion in cuts over the coming decade and major changes to Medicare, Medicaid and other popular programs.  And they are driving the agenda for the time being.

So for those keeping score, here are six of the hottest, most pressing fiscal issues to keep an eye on in the coming days and months >

Merrill Goozner and Michelle Hirsch contributed to this article, which originally appeared at The Fiscal Times.

Spending Cuts

The Debt Ceiling

Long-term Budget Reforms

Medicaid

Federal and state officials desperate to control runaway health care costs are zeroing in on Medicaid, the monster health insurance program for low-income and disabled people, for massive savings in the coming years. Medicaid will cost the federal government and the states a record $465 billion this year, and that cost could more than double by 2021 without a substantial policy shift.

House Budget Committee Chairman Paul Ryan, R-Wis., will unveil a long-term GOP budget plan this week including as much as $1 trillion in Medicaid cuts over the coming decade, a far cry from the $58 billion of savings over the next 10 years that President Obama's fiscal commission proposed. Medicaid accounts for an average of 22 per cent of all state spending, with Medicaid rolls expected to grow substantially under President Obama's health care reform legislation.

Haley Barbour of Mississippi and many other Republican governors are pressing for changes in the law to give the states more flexibility to reduce their costs -- such as by converting Medicaid from an entitlement program to a block grant. More than half the states are reducing Medicaid services and payments to health care providers this year, in the wake of recessionary pressures that rocketed enrollments of poor women, children and the elderly to record levels and drained state treasuries.

defence

With the U.S. embarked on a third military mission in the Middle East, efforts to rein in Pentagon spending are once again on the backburner -- but they can't stay there long.

Unlike domestic discretionary programs, military spending is scheduled for a steady diet of small increases over the next decade, and that's on top of a budget that in inflation-adjusted dollars is already 20 per cent higher than at the peak of the Reagan-era build-up.

With long-term procurement projects experiencing major cost-overruns, according to a recently released Government Accountability Office report, it won't be long before Congress and the White House come face to face with the fact that any meaningful deficit reduction plan must tackle defence. The president's bipartisan deficit commission recommended a dollar in defence cuts for every dollar in cuts to domestic discretionary spending.

Here are a couple of places to start. Every branch of the service is slated to adopt the advanced Joint Strike Fighter over the next quarter century, a nearly $400 billion program. Experts say the Pentagon could substantially cut its costs by limiting the program and buying updated versions of older models, which are already more advanced than anything else other countries can put in the air. Ditto for the Navy's 10 aircraft carrier groups and its destroyer replacement program. Critics of defence spending ask, why maintain the fleet at levels necessary to refight the naval battles of World War II when the military engages almost exclusively in limited strategic missions to counter terrorism and deal with failed states?

Taxes

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