Obama Focuses on Senate Republicans to Reach Budget Deal

Photographer: Andrew Harrer/Bloomberg

President Barack Obama, left, speaks in the Rose Garden of the White House with Jeffrey Zients, acting director of the Office of Management and Budget (OMB), right, about a $3.77 trillion spending plan. Close

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Photographer: Andrew Harrer/Bloomberg

President Barack Obama, left, speaks in the Rose Garden of the White House with Jeffrey Zients, acting director of the Office of Management and Budget (OMB), right, about a $3.77 trillion spending plan.

While most of Washington is focused on confrontations over gun control and immigration law, the White House is quietly exploring the possibility of striking a deal with lawmakers to rein in the budget deficit.

President Barack Obama’s chief of staff Denis McDonough went to Capitol Hill last week for meetings with more than a dozen Republican senators on deficit-reduction proposals, according to White House and Senate aides.

Obama, who has held a pair of dinners with Republican senators over the past two months, is betting on finding a middle ground for a fiscal deal in the Senate even as House Republican leaders map out a strategy that could heighten the risk of a U.S. default later this year.

“I’ve had some good conversations with Republican senators so far,” Obama said today at a White House news conference. He said he’s seen a “genuine desire” from many of them to move past “Washington dysfunction” on the deficit. “Whether we can get it done or not, you know, we’ll see,” he said.

The meetings are intended to break a two-year stalemate between the administration and congressional Republicans over the nation’s finances that has hindered efforts to spur the economy after the worst recession in seven decades. A so-called grand bargain to curb the long-term deficit has proved elusive, with Democrats resisting cuts to Medicare and Social Security, and Republicans opposing tax increases.

“The odds are not exceedingly high” for an agreement, said David Plouffe, a former senior Obama adviser who left the White House in January. Still, Plouffe said, discussions about a comprehensive debt deal “have a firm heartbeat again.”

Program Cuts

Amid concern among some Republican senators over reductions in defense spending if the impasse continues, the administration signaled its willingness to negotiate by proposing a budget that includes changes to the health and retirement programs for the elderly in exchange for rolling back tax breaks that primarily benefit the wealthy and corporations.

“There are just enough” Senate Republicans alarmed by automatic cuts in national security spending to allow the plan to work, said William Hoagland, a former Republican staff director of the Senate Budget Committee. “The strategy from the White House is to isolate the House and build pressure on the House.”

Obama also has met with Senate Democrats and House members of both parties.

Same Strategy

The administration’s focus on sounding out Senate Republicans open to a budget deal mirrors a strategy from last December, when it forged a deal with those lawmakers to raise taxes for high-income earners. After it passed the Senate, the Republican-run House cleared the agreement.

The White House interprets House Speaker John Boehner’s actions in December as tacit acceptance of a Senate-first strategy in attempting a deal, said a Democrat familiar with the administration’s thinking.

Last week the House Ways and Means Committee approved a measure intended to ensure that U.S. government bondholders will continue to be paid and that Social Security benefits won’t be interrupted even if a stand-off over raising the nation’s borrowing limit causes a cash crunch.

Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, said today he’s “worried” about a replay of the summer of 2011, when a standoff over raising the debt limit led Standard and Poor’s to downgrade the U.S. credit rating.

No Solution

Republicans have “come up, at least for now, with the cockamamie idea that you’re going to pay some of your bills but not all of your bills,” he said at the Bloomberg Washington Summit. “That’s not a solution.”

Boehner can’t corral Tea Party Republicans to support a bipartisan compromise to raise the debt ceiling, Van Hollen said. “I’m very nervous that, despite what I think are the speaker’s good intentions to avoid a showdown, he can’t see his way to putting on the table a decent way out.”

Congress voted at the end of January to suspend the nation’s $16.4 trillion debt limit until May 19, temporarily removing the risk of a default. The Treasury Department can ward off a default for several months beyond that by shifting money among government accounts, possibly to as late as September.

While the administration may be courting Senate Republicans, House Republicans are preparing to seize on the need to increase the nation’s borrowing authority to extract cuts to programs such as Medicare without tax increases.

Starting Early

They are considering a strategy to act early, with legislation that would authorize a debt-limit increase on their preferred terms in the hopes it would step up pressure on the White House and Democratic-controlled Senate, aides said.

“We’re starting very early and making it clear that unless the president wants another fiscal cliff fiasco, we’re determined to avoid that,” Representative Kevin Brady, a Texas Republican, said in an interview.

Still, the refusal by House Republicans to consider higher taxes, even in return for reductions in Medicare and Social Security spending, may set up another fiscal showdown.

In 2011, lawmakers fought for months over raising the nation’s debt limit. Obama signed the increase into law on Aug. 2, 2011, the day the Treasury Department warned that U.S. borrowing authority would expire.

Investors Unrattled

Credit markets weren’t rattled by the 2011 standoff, as yields on 10-year Treasury (USGG10YR) notes declined to 2.61 percent on Aug. 2 from 3.18 percent on July 1, 2011, and continued to fall to 1.88 percent at year-end. The benchmark 10-year yield was at 1.67 percent at 11:45 a.m. New York time today, down 0.09 percentage points since Dec. 31.

Standard & Poor’s downgraded the U.S. credit rating for the first time on Aug. 5, 2011, citing the partisan gridlock over the debt-limit standoff. Stock investors got rattled, with the benchmark Standard & Poor’s 500 Index falling 16.8 percent between July 22, when talks on a broad deal faltered, and Aug. 8, the first trading day after the downgrade.

This time, the White House and Democratic congressional leaders view Republicans’ potential ultimatum on the debt ceiling as a “false threat,” said Steve Elmendorf, a Democratic lobbyist and former congressional aide with close ties to the Obama administration and party leaders.

Plouffe, now a commentator for Bloomberg Television, said House legislation tying an increase in the debt ceiling to cuts in Medicare and Social Security isn’t going to generate public pressure on the White House.

Bad Politics

“I couldn’t think of a worse political position than, ‘We would tank the global economy unless you allow us to cut Medicare too deeply,’” he said.

The White House is using a period in which Washington is focused on revising immigration policy to strengthen ties with senators who could form a middle ground on a deficit plan, Elmendorf said. Success on immigration might spill over to the fiscal fight.

“Problem No. 1, which is going to take up everybody’s time and attention until June at least, is to get the immigration bill passed,” he said. “So the focus is going to be on creating the relationships and atmosphere where you can do this fiscal deal. The focus is not going to be on negotiating a deal.”

The White House believes settling the partisan fight over budget deficits is Obama’s best chance of achieving priorities such as more money for infrastructure, medical research and education, and gives Republicans an opportunity for a tax overhaul that lowers rates by reducing breaks, Elmendorf said.

Boehner Rule

Boehner’s spokesman, Michael Steel, said the Ohio Republican is “talking with members, and the American people, about the best way to increase the debt limit consistent with the Boehner rule,” which he said demands spending cuts equal to or greater than the amount of a debt-limit increase. “No decisions will be made anytime soon,” Steel said.

The administration’s effort to sound out Senate Republicans diverges from its strategy in fiscal negotiations in 2011, when Obama concentrated on talks with Boehner. Their efforts to reach a broad deal including tax increases and cuts in federal programs for the elderly broke down.

The two sides staved off a default with an agreement that included automatic spending reductions, known as sequestration, that began March 1. If no action is taken, the sequestration will cut $1.2 trillion in spending over nine years.

High Earners

When talks between Boehner and the White House on a budget accord also collapsed last December, the administration reached a deal with Senate Republicans to raise taxes for couples earning more than $450,000 per year while extending expiring income-tax cuts for other Americans.

Many House Republicans went along, and that’s what the administration is counting on again, said Elmendorf.

“Boehner doesn’t want to be in a room cutting a deal with them,” he said. “He would rather be presented with a deal and then make a decision about whether or not he wants to sell it to his members.”

Still, House leaders are moving ahead with plans to propose a bill authorizing a debt increase. The measure may include cuts to Social Security, Medicare and Medicaid. Republicans are also looking for a way to attach a demand for a tax overhaul to a bill, according to a Republican aide familiar with the talks who asked not to be named because the options haven’t been made public.

While Obama has said he won’t agree to conditions placed on a debt limit increase, House Republicans say they’re determined to use the measure to get concessions.

‘Barter Framework’

“The president is not going to get a straight vote to raise the debt ceiling,” said Representative Tom Cole, an Oklahoma Republican. “It is just not politically possible. There has to be some barter framework that involves significant deficit reduction.”

Republicans are seizing on elements of Obama’s budget proposal this month as a sign that Congress and the White House can find common ground if Obama drops his demand to raise taxes.

A proposal by Obama to change the formula for calculating cost-of-living increases for Social Security is a “positive step forward,” House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, said at a Christian Science Monitor breakfast this month.

New Revenue

The president’s budget blueprint also renews his request to raise $580 billion in revenue over 10 years by limiting deductions and closing tax breaks for top earners. He seeks adoption of the Buffett rule, named for billionaire investor Warren Buffett, to impose a minimum tax on households with more than $1 million in annual income. The plan would limit tax- favored retirement accounts of some private-equity executives and self-employed professionals at $3.4 million.

Republican leaders are planning to spell out the steps and timing of a tax-system overhaul as a trigger for increasing the borrowing limit. Their goal is to reduce tax breaks and use the resulting revenue to lower rates.

Representative Jim Himes, a Connecticut Democrat who is vice chairman of the self-described “moderate, pro-growth” New Democrat Coalition, said Republicans are “in a real bind on this issue.”

The party, he said, is split between the anti-tax Tea Party members determined to fight, and lawmakers sensitive to complaints from the business and financial community that a repeat of the debt-limit standoff two years ago would damage the economy.

Himes said at a Bloomberg Government breakfast last week that the White House is “dead serious” that Obama won’t “be held hostage by the debt ceiling.” Still, he said, “I do believe a deal gets done” that includes Social Security and Medicare changes and revenue from reducing tax breaks as long as both sides are protected by “face-saving mechanisms.”

To contact the reporters on this story: Mike Dorning in Washington D.C. at mdorning@bloomberg.net; Roxana Tiron in Washington D.C. at rtiron@bloomberg.net.

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net.

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