Budget War Expected to Rage as Debate Turns to 2012

Now that last week’s budget battle is over, the real fiscal war can—and will—begin in earnest.

Democrats and Republicans both claimed victory in the fiscal year 2011 spending package that they negotiated Friday night. But this week they will go at it again when House Budget Committee Chairman Paul Ryan presents his FY 2012 budget to the full House and President Obama on Wednesday gives a major speech outlining a new package of deficit reduction ideas for his version of the 2012 budget.

Ryan's budget calls for about $5.8 trillion in spending cuts over 10 years, mostly from Medicare, Medicaid and other entitlement programs. Obama, meanwhile, is expected to lay out his plan for reducing the U.S. deficit, an issue that he has avoided until now, leaving the debate over taxes and spending cuts to Congress.

All tax issues originate in the House. The House Budget Committee provides a blueprint for the budget, but it's the House Ways and Means Committee that writes the legislative language. The Ways and Means Committee is involved in all issues involving revenues and taxes, including budget deals.

"Every corner of the federal government has to be looked at here," said David Plouffe, a senior White House advisor, on Sunday in a television appearance, adding that tax increases are on Obama’s docket. "Revenues are going to have to be part of this.”

Obama is expected to propose cuts to entitlement programs, including Medicare and Medicaid, and changes to Social Security, according toThe Wall Street Journal. Obama also will call for tax increases for people making over $250,000 a year, a proposal contained in his 2012 budget, and changing parts of the tax code he thinks benefit the wealthy.

The speech, which will address deficit reduction, is expected to go beyond Obama’s initial FY 2012 budget released in early February, which avoided major entitlement savings.

Also this week, the House and Senate prepare to vote on the FY 2011 spending package agreed to late on Friday night by congressional and White House negotiators. The agreement will pay for government operations through the end of September while trimming $38.5 billion in spending. The plan cuts spending by $78 billion below what Obama first proposed.

Lawmakers on Friday also approved a days-long stopgap measure to keep the government running while the details of the new spending plan were written into legislation.

Republican House Speaker John Boehner warned on Monday that Republicans will not increase the debt limit without addressing underlying fiscal problems.

In an op-ed in USA Today and an interview with Fox News, Boehner challenged Obama to outline a budget blueprint as aggressive as Ryan’s, which seeks to cut $5.7 trillion in federal spending over the next decade.

Boehner pressed for a vote to raise the country’s borrowing limit with other reforms that will cut the deficit and help reduce the debt. He also said that failure to raise the debt ceiling could create turmoil in the markets and have “very serious implications” on the United States’ ability to borrow money.

“There are going to be dozens of these battles over the next 18 months. This is the first one,” Boehner said in the Fox News interview. “We got through this one. The next one will be more difficult.”

House Democrats have announced plans to offer an alternative FY 2012 budget this week.

Senate Budget Committee Chairman Kent Conrad is expected to release his FY 2012 budget in late April or early May, according to Market News International, which noted that Conrad continues to work with a bipartisan group of senators on turning the main elements of the Simpson-Bowles deficit reduction plan into a bipartisan legislative package.

Read “Deal Is Reached to Avoid Government Shutdown” at AdvisorOne.com.