Republicans Debt-Ceiling Strategy Relies on Obama Budget

Sept. 20 (Bloomberg) -- President Barack Obama says congressional Republicans are focused right now on politics, not what is best for middle-class Americans. He spoke today at a Ford Motor Co. plant in a suburb of Kansas City, Missouri. (This is an excerpt. Source: Bloomberg)

Senate Republicans have a strategy for lifting the U.S. borrowing limit: offer what President Barack Obama asked for in his budget, then dare him to refuse.

These lawmakers, looking beyond an effort to derail the president’s health-care law, see the possibility of replacing automatic cuts to federal programs with reductions to entitlement spending. Among these: Obama’s proposal to trim Social Security cost-of-living increases that would save about $130 billion over 10 years.

“Since the president himself has proposed some of these things, it would seem logical that he would not turn that down,” John Cornyn, the Senate’s No. 2 Republican, said in an interview.

The approach is aimed at gaining enough Democratic support in the Senate to force Obama, who said he won’t negotiate on the debt limit, to accept changes that he has called “manageable” as a first step to shoring up Social Security and Medicare. Republicans also would score a victory that would provide balance to lifting the debt ceiling, something their party base opposes.

The fights over taxes and spending that have scuttled deficit-reduction talks for three years will be renewed, as Republicans oppose Democrats’ demands for revenue increases.

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House Speaker John Boehner, a Republican from Ohio, second from left, walks to a news conference in Washington, D.C., on Sept. 12, 2013. Close

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House Speaker John Boehner, a Republican from Ohio, second from left, walks to a news conference in Washington, D.C., on Sept. 12, 2013.

Next Front

Lawmakers first must resolve a standoff over Republican efforts to deny money for the 2010 Affordable Care Act as their price for funding government programs after Sept. 30. Their next front will be raising the nation’s $16.7 trillion borrowing limit, which the Treasury says could be reached as soon as mid-October.

Sixty-one percent of Republicans polled by the Washington Post oppose raising the debt limit, the newspaper reported Sept. 18. House Speaker John Boehner said last month he expects a “whale of a fight” over that must-pass measure.

Democrats including Senate Budget Committee Chairman Patty Murray predict Republicans will capitulate rather than allow a default. Obama won’t “under any circumstances” negotiate on the debt limit, spokesman Jay Carney said yesterday.

Obama has said he’s willing to negotiate to reduce entitlement costs. In his most recent budget plan, he proposed reducing Medicare spending by $371 billion over 10 years by taking money from provider groups including hospitals, managed-care plans and nursing homes. Health care and entitlement costs account for 43 percent of the U.S. budget.

Obama’s fiscal 2014 blueprint also proposes saving $50 billion over a decade by requiring the wealthy to pay more for their Medicare Part B and Part D coverage starting in 2017.

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U.S. Speaker of the House John Boehner, a Republican from Ohio, reflected in center, speaks during a rally as other House Republicans look on after a vote in Washington, D.C. on September 20, 2013. Close

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U.S. Speaker of the House John Boehner, a Republican from Ohio, reflected in center, speaks during a rally as other House Republicans look on after a vote in Washington, D.C. on September 20, 2013.

Republican Priorities

The House-led effort to strip funding from Obamacare, headed for defeat in the Senate, has obscured Republicans’ priorities of reining in mandatory spending, Cornyn said.

Even with Obama’s refusal to negotiate, there is room for compromise on the debt measure, said Senator Amy Klobuchar.

“There will be an agreement, and I think we can do it without any of these extraneous, partisan poison pills,” the Minnesota Democrat said on NBC’s “Meet the Press” on Sept. 22.

Murray, who also led a 2011 supercommittee on debt reduction, said there can be no real negotiating as long as the Tea Party is singularly focused on defunding Obamacare. “If there is a fair and balanced path forward,” she said, “I’m on board, but it’s not going to include eliminating Obamacare.”

Small Scale

Senator Mike Crapo, an Idaho Republican and member of a separate debt-negotiating group, said a small-scale bargain targeting entitlement spending is possible once wrangling over Obamacare ends.

“The only place you can be incremental at this point is in entitlement reform,” Crapo said. Revisions to the U.S. tax code must be made in a comprehensive way, and the Congress has already cut other federal programs to historic lows, he said.

Republicans would be willing to replace some of the $1.2 trillion in automatic spending cuts to domestic and military programs over the next nine years in exchange for cuts to Social Security and Medicare, Cornyn said.

Senate and House Republicans are taking the same approach on entitlement programs. A House proposal that could come to a vote this week would suspend the debt cap until Dec. 31, 2014. In addition to delaying the health law, it would charge higher-income Medicare beneficiaries more for their premiums.

Any effort to attach a delay of Obamacare to the debt measure probably will be rejected by the Senate.

Benefits Yardstick

The House Ways and Means Committee that oversees entitlement and tax policy in July released drafts that include using a less generous yardstick for calculating Social Security cost-of-living adjustments and reducing payments to hospitals and other providers under Medicare.

They are borrowed from Obama’s fiscal 2014 budget and bipartisan proposals put forward by his 2010 deficit-reduction commission. By contrast, in their budget plans, Republicans advocated converting Medicare to a voucher program and changing Medicaid to a state-based block-grant system.

“It’s good that Senator Cornyn is talking the way he is, that is movement in the right direction,” said former Senator Judd Gregg, a New Hampshire Republican who served on Obama’s 2010 debt-reduction commission.

The goal is to draw enough support from Democratic senators from Republican-leaning states to bring pressure on Obama, said Senator Bob Corker of Tennessee, who was among Republicans in discussions with the White House earlier this year over ways to reduce the debt.

“If you end up having a degree of Democratic support for something, it makes it harder for the White House to just turn away,” Corker said.

Tax Impasse

Even so, there’s cause for skepticism because when Republicans made the same offer to White House officials in talks earlier this year, entitlement cuts weren’t “interesting at all for them without a tax increase,” he said.

Republicans are unwilling to make that trade, Gregg said. “The Republicans aren’t going to put any more revenue into the mix unless it’s through major tax reform,” he said.

The need to focus on entitlement spending is bolstered by a report last week by the nonpartisan Congressional Budget Office. It found the $2.1 trillion in savings passed by Congress in 2011 won’t curb an explosion in entitlement costs over the next 25 years.

‘Accelerating Clip’

“Unless substantial changes are made to the major health-care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in future than they have in the past,” the CBO said.

Lawmakers will be forced to compromise as entitlement spending increases “at an accelerating clip” while deep cuts in transportation, education and other programs prove damaging to the U.S. economy, said David Malpass, a former Republican staff director of the Joint Economic Committee.

“The status quo won’t last very long,” Malpass, president of Encima Global LLC, an economic research and consulting firm, said at a Bloomberg Markets 50 Summit in New York City. “It will break down,” most likely “because of bad outcomes in certain areas,” he said.

Congress embarked on a piecemeal approach to tackling the debt with the Budget Control Act of 2011 that instituted $917 billion of cuts over 10 years and another $1.2 trillion in debt reduction in the form of across-the-board spending cuts.

Retirement Benefits

“The things that are left undone kind of jump out at you,” said former North Dakota Senator Kent Conrad, a Democrat who served as chairman of the Budget Committee.

He cited the so-called chained Consumer Price Index for calculating Social Security benefits, which Obama had discussed in last year’s debt-limit talks. The approach uses a less generous yardstick to measure increases in inflation that determine cost-of-living payments.

Ultimately, chances for a deal depend on Boehner’s willingness to split with his party’s Tea Party-backed wing by allowing a vote on revenue increases and entitlement cuts that could clear the Senate and pass the House with Democratic support, Conrad said.

“There are people on the Republican side and people on the Democratic side who are ready to go against party orthodoxy and put together a package,” he said. “Honestly, I think they are actually in the majority.”

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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