Sequester returns as major obstacle in debt-ceiling compromise

A key part of the fiscal cliff drama last January, across-the-board spending cuts known as the sequester, are now a big obstacle in preventing a deal in Washington about the debt ceiling and government shutdown.

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Defense Secretary Hagel talks about sequester.

On Monday, leaders in Congress were entering new discussions about the sequester’s fate. One possibility is a short-term deal this week that should allow for funding arrangements to open government facilities and establish a new debt ceiling.

It is expected these deals could just run for a matter of weeks, or maybe several months, until the budget drama begins again in Washington over the sequester and the debt ceiling—in a replay of last December’s fiscal cliff drama.

But in the long run, the permanent spending cuts in the sequester, under the Budget Control Act of 2011, will need to be dealt with before a long-term compromise between Democrats and Republicans over broader issues, like tax reform and entitlement cuts, can be reached.

Reports on the weekend indicated that a solution offered by Senator Susan Collins, a Republican from Maine, that had some support in Congress didn’t pass muster with senior Democratic leaders because of its sequester language.

The Collins proposal called for a new round of sequester cuts for January 2014, under the terms of the Budget Control Act. The GOP made concessions last January by allowing tax hikes on wealthier citizens, in exchange for spending cuts triggered by the sequester.

The Collins plan also called for a six-month extension of government funding and raising the debt ceiling through the end of January. In exchange, Congress would allow a two-year delay of a medical device tax in the Affordable Care Act; agree to an income verification requirement in order to qualify for ACA subsidies; and accept sequester cuts at a spending level of $967 billion in mid-January 2014 (with flexibility for departments to decide how to make cuts).

Currently, the sequester has reduced spending to an annual level of $988 billion. Some Democrats want to see that number upped to $1.058 trillion, while other Republicans in the Senate are pushing for keeping the $988 billion in place as negotiations continue.

One issue that is not currently in play is a set of significant changes to the ACA, or Obamacare, in exchange for a debt-ceiling and shutdown deal.

CNBC’s John Harwood said on his Twitter account on Monday that the two top Senate leaders, Majority Leader Harry Reid and Minority Leader Mitch McConnell, were haggling over an extension for a continuing budget resolution between two months and six months that would end the partial government shutdown, and raising the debt ceiling for a three-month or six-month period.

It is understood that any funding, once it was restored, would remain at current sequester levels as talks continue.

The leaders face a perceived deadline of Thursday, October 17 to get some type of deal completed about the shutdown and debt ceiling.

That is the day that Treasury Secretary Jack Lew had said that his department would need to use cash-on-hand and incoming revenues to pay the government’s bills, and it could not tap credit markets for funding.

If global investors reacted strongly before then, Congress could act quicker and agree on a short-term deal. Such a deal would also likely include the creation of a joint House-Senate committee to hammer out a long-term budget deal.

A similar plan that ended the debt-ceiling crisis in August 2011 created the so-called “supercommittee” as part of the Budget Control Act. It was the supercommittee’s failure to reach a budget deal in November 2011 that triggered the sequester and left Washington without a long-term agreement to address the debt-ceiling problem.

Scott Bomboy is the editor in chief of the National Constitution Center.

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