As debt ceiling nears, Washington gropes for agreement on budget tool

With Congress facing an impasse over lifting the government's borrowing ceiling as Republicans demand concessions on budget process, members of both parties are trying to identify the right tool to end the debate.

Now, a veteran group of policymakers is offering a package of budget rules -- a kind of fiscal Swiss Army knife -- they hope will give both parties the incentive to make a deal.

The proposal, released by the Bipartisan Policy Center, does not bridge the fundamental political differences that divide the two parties. But it might allow them to save face and punt the consequences of future disagreement to the next president.

The plan draws on the experience of former Senate Budget Committee Chairman Pete Domenici, R-N.M., who faced a similarly intractable divide over a borrowing increase in 1985 and ultimately bridged it with the budget process reforms that became known as Gramm-Rudman-Hollings.

"We just believe that it will be impossible to pass even a short-term increase," Steve Bell, Domenici's staff director at the time and one of the authors of the new plan, called SAVEGO. "An enforcement mechanism is going to be necessary, as an amendment to the debt bill, in order to get the votes."

The SAVEGO package is broader than previous rules like PAYGO; it is a debt-reduction process. It would require Congress and the White House to acquiesce to deficit reduction targets that would stabilize the debt over 10 years, including agreements capping discretionary spending, health care savings, and revenue increases -- areas of broad disagreement.

However, Democrats and Republicans may be able to agree on savings targets if debates over specifics are postponed. Under the SAVEGO enforcement mechanism, failure to reach the statutory targets would mandate the president to find savings through across-the-board cuts and tax increases.

With many politicians in Washington anticipating an improved negotiating position following the 2012 elections, such a plan may be appealing, since it could provide a mechanism for a credible budget agreement that still provides each party with a chance to pursue its preferred policy options following the next campaign seasons.

Legislators could easily vote to end the rule, as Republicans ended PAYGO, but the authors of SAVEGO hope their plan increases the political cost of such irresponsibility.

If action is not taken to raise the debt ceiling, which will be reached in mid-May, the Treasury will be unable to borrow money and will be forced to either default on its financial obligations or take emergency actions to cut spending. Refusing to lift the ceiling will have no effect on real spending, but could cause economically dangerous chaos in financial markets dependent on U.S. Treasuries as a stabilizing factor and the dollar as a reserve currency.

In the face of Democratic demands for a clean bill, Republican leaders say that some kind of process reform, such as the balanced budget amendment endorsed by Senate Republicans, spending caps, or procedural road-blocks for tax increases, will be the price of increasing the debt ceiling.

Some Democrats agree, and at least one bipartisan piece of legislation to cap spending has emerged in the Senate, co-sponsored by Missouri Democrat Claire McCaskill and Tennessee Republican Bob Corker. President Obama proposed a debt "fail-safe" in a speech last week that would require mandatory spending cuts and revenue increases if policymakers do not agree on a debt reduction path by 2014.

A group of six senators has been negotiating a budget deal based on the plan released last winter by the president's fiscal commission, while Vice President Joe Biden will lead a separate round of bipartisan, bicameral budget talks beginning on May 5.

Staffers working with both groups confirmed that the participants were familiar with the SAVEGO proposal, and Bell said that members of the BPC's budget task force, including Domenici and former Clinton OMB Director Alice Rivlin, have been advocating widely for the approach in Washington.