Deal guarantees spending showdown

The United States will avoid the “fiscal cliff” if the House quickly passes the Senate’s budget deal, but the deal sets up a massive spending showdown in just a matter of weeks.

Many Republicans are eager for the fight and believe once they are no longer seen as protecting millionaires, it will put them back on offense.

{mosads}”We’ve taken care of the revenue side of this debate. Now it’s time to get serious about reducing Washington’s out-of-control spending. That’s a debate the American people want. It’s the debate we’ll have next. And it’s a debate Republicans are ready for,” Senate Minority Leader Mitch McConnell (R-Ky.) said early Tuesday. 

Most importantly, the deal does not raise the nation’s $16.4 trillion debt limit. On Monday, the U.S. hit that limit and began taking extraordinary measures to prevent a default on government payment obligations.

In the 2011 fight over the debt ceiling, Republicans got $2.1 trillion in spending cuts, and they will be demanding cuts to entitlements next time around. 

Sen. Lindsey Graham (R-S.C.) has made that explicit, saying President Obama won this round but the GOP will soon get its turn. 

“It will be a political victory for the president and I hope we’ll have courage of our convictions, when it comes to raise the debt ceiling to fight for what we believe as Republicans,” he said of the emerging fiscal deal on Sunday. 

Obama has, until now, been able to argue that “millionaires and billionaires must pay their fair share.” But with the fiscal deal in place, the GOP is prepared to argue he already got his tax increases and the debt ceiling should be paid for only with spending cuts. 

The new deal allows taxes to rise on families making more than $450,000 and allows a 5-percentage-point increase in the estate tax.

Under the legislation, almost all of $1 trillion in automatic cuts defense and domestic discretionary spending over nine years are kept in place. Most centrists want these cuts replaced with mandatory spending cuts such as to entitlement spending or from closing tax loopholes that were largely left in place in the deal.

The deal turns off two months of the $109 billion in cuts for 2013 that were to take place by the brutal process of sequestration, but in March the $85 billion in remaining cuts will hit.

Obama early Tuesday said he will look to replace the rest of the cuts with a mix of further tax increases and spending cuts.

He said, “As we address our ongoing fiscal challenges, I will continue to fight every day on behalf of the middle class and all those fighting to get into the middle class to forge an economy that grows from the middle out, not from the top down.”

The deal is also not the type of $4 trillion debt grand bargain that deficit hawks and ratings agencies were seeking. It remains to be seen whether it could eventually lead Moody’s and Fitch, should no such bargain take shape in 2013, to lower the U.S. top credit rating. Standard & Poor’s did that after the August 2011 debt-ceiling fight.

“The unfinished business has not gone away,” Bob Bixby of The Concord Coalition said. “It has simply been handed off to the new Congress, which looks a lot like the old Congress. And with the president having been re-elected, it is fair to ask how the gridlock will ever be broken.”

Immediately in January, components of a debt-ceiling deal could start to fall into place. 

Senate Finance Committee Chairman Max Baucus (D-Mont.) said Monday night that he will proceed with an overhaul of the tax code that raises money to reduce the deficit. Obama and Speaker John Boehner (R-Ohio) have discussed getting $800 billion in new revenue from tax reform, but that deal is dead and the GOP may now push for both lower tax rates as a result of reform and less revenue.

The deal does not contain an appropriations omnibus wrapping up discretionary spending for 2013, leaving in place the expiration of a continuing resolution on March 27. At that time the government could shut down for lack of spending bills. 

The deal only prolongs the 2012 saga over farm programs. The Senate and House Agriculture committees in 2012 both passed five-year bills to replace the 2008 farm bill. While differences remained over how Southern crops were treated and how much food-stamp benefits were to be cut, a compromise long appeared at hand. The deal guarantees that those five-year bills are dead and lawmakers will have to start over again once the new Congress convenes Thursday.

The deal simply extends the 2008 farm bill, which expired Sept. 30, for one year. 

Efforts to craft a new farm bill will in turn be affected by the debt-ceiling-sequester-continuing-resolution-tax-reform mess that is coming in late winter and spring. 

—This report was originally published at 7:23 a.m. and last updated at 8:45 a.m.