(Bloomberg) — A long term deal to raise the debt ceiling is increasingly out of reach as Speaker Kevin McCarthy amps up Republican demands for deep spending cuts in exchange for their agreement to increase the US borrowing limit and President Joe Biden refuses to negotiate.

The GOP’s attempt to extract promises of fiscal belt-tightening is straight out of their 2011 political playbook, which yielded a 10-year, $2.1 trillion accord. This time, that strategy is running headlong into a defiant White House as the US inches ever closer to a catastrophic payment default this summer. 

The growing partisan divide and wafer-thin majorities in each chamber are pointing the way toward a shorter-term agreement — if the two parties can reach one at all. The mixed success of that 2011 deal, which never lived up to its hype, suggests that could be for the best. 

The bipartisan agreement hatched a dozen years ago set the stage for a decade of fiscal austerity. But both Republicans and Democrats quickly found back-door ways to keep their favorite programs funded. 

“A 10-year spending cap I think is probably a bridge too far — and hopefully lawmakers have learned that caps don’t typically last that long,” said Brian Riedl, a senior fellow at the Manhattan Institute and former GOP congressional aide. “If they go for a modest two- to three-year spending cap deal, that could have a better chance of passing as long as it’s realistic.”

As in 2011, Congress is divided and a first-term Democrat is in the White House and on the cusp of a reelection campaign, a challenging environment for deal-making in Washington. But adding to the difficulty in 2023 is banking turmoil, which has diverted key lawmakers’ attention, and Biden’s insistence that he won’t cave to GOP demands.

Treasury Secretary Janet Yellen recently told lawmakers that Biden remains ready to engage with Republicans on a fiscal framework. And McCarthy early Tuesday sent a letter to Biden that outlined proposed spending cuts and regulatory changes that House Republicans want in exchange for a hike in the debt limit.

McCarthy Scolds Biden on US Debt Ceiling, Demands Talks

Even before any firm offers are made, lawmakers in both parties are laying down competing markers. Some Republicans including Senator Lindsey Graham of South Carolina want no caps on defense spending. Democrats including Senator Patty Murray of Washington say defense and domestic programs must be treated equally.

While the 2011 deal did slow the pace of discretionary spending, the accord has few strong defenders now, particularly its punishment if Congress spent more than allowed — an across-the-board haircut to all programs called sequestration. Graham called it “dumber that dirt” and Democratic Senator Chris Murphy of Connecticut says it was “a disaster.” 

While it ended the most disruptive fiscal fight in modern history — which roiled markets and hurt an economic recovery — lawmakers later undercut their own deal by repeatedly raising its spending limits and ramping up funding for wars and “emergencies” that didn’t count under the pact.

 

“Congress added back the spending and found loopholes to it,” said Todd Harrison, a long-time defense-spending analyst at Metrea Strategic Insights, which advises government agencies on budget policy.

The so-called Budget Control Act of 2011, approved after months of tense talks, was supposed to narrow the deficit by some $2.1 trillion over a decade, including $900 billion in discretionary cuts to both defense-and non-defense programs. But talks by a bipartisan “super committee” that was supposed to come with the rest collapsed, unleashing deep automatic spending cuts and the threat of the sequesters annually.

But after the across-the-board cuts became a reality in 2013, Congress began raising the spending caps for the remaining years. In the final four years, they didn’t bother to offset those spending hikes with cost savings elsewhere.

Ultimately, the deal yielded $400 billion less in spending cuts than were laid out, Riedl said.

Even more damaging, from a deficit perspective, was the 2011 deal’s allowance for exemptions — something lawmakers intended to offer flexibility in the case of emergency or military engagement.

Congress made very ample use of the exemptions, however — totaling nearly $2 trillion over the 10 years, according to the Office of Management and Budget. That included emergencies like disaster relief and the response to the Covid pandemic, and classifying some routine defense spending as “war funding.”

“When you look at every piece of subsequent legislation, it just got unraveled,” said John Diamond, director at the Center for Public Finance at Rice University.

President Donald Trump’s 2017 tax cut package also contributed to a widening deficit.

 

After shrinking to the equivalent of 2.8% of US gross domestic product by 2014, the deficit had widened back out to 4.6% by 2019, on the eve of the Covid crisis. Unprecedented relief spending to combat the pandemic swept any vestiges of the Budget Control Act away.

This time, Republicans have little consensus yet but say their chief goal is to achieve strict limits within the roughly 30% of the budget decided yearly by Congress, rather than mammoth entitlement programs like Social Security and Medicare.

Read More: House Republicans Finalizing Offer to Biden on Debt-Ceiling Deal

House Budget Committee Chairman Jodey Arrington is working on a plan that would return discretionary spending to 2022 levels for fiscal 2024 and may cap it at 1% growth for a decade. Arrington’s overall budget proposal — which would entail some $16 trillion in cuts over ten years —- has “nothing to do” with the debt ceiling, according to McCarthy, since it is a GOP-only proposal.

Arrington in an interview said that while a 10-year debt deal should be McCarthy’s goal, a shorter one targeted at discretionary spending caps is a possible outcome.

“We may put 10 years or five years and we may only come up with two,” Arrington said. “But, hey, two years is better than nothing. Right now we’re not getting much reciprocation from our colleagues on the Democratic side.”

 



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