President aggressively-seeking to decouple $1.2T Debt-ceiling

Key Themes:

  • President clearly anticipates need foradditional $1T-$1.2T 2013 Debt-ceiling increasein late February.
  • President is claiming ≈$2.5T in immediate Deficit-reduction-commitment over past-two years; comprised of ≈$1.4T Discretionary Spending-cutsover 2012-2021; plus additional $620B Tax-increases(2013-2022); plus additionalInterest-savingsfrom those Spending-cuts/Tax-increases.
  • President has resurrected initial $4T “Grand Bargain” Deficit-reduction goal; which would now only requirefinal $1.5Tin new 2013-2022 Deficit-reduction.
  • President is proposing to achieve thatfinal $1.5T 2013-2022 Deficit-reduction, through ≈$600B Tax Reforms, (closing loopholes for wealthy), plus ≈$600B modest Spending-cuts. (Assumes additional ≈$300B in Interest-savings).
  • President appears genuinely-concerned thatHouse Republicans could demand up to ≈$2.4T Spending-cuts(2013-2022), in exchange for additional $1T-$1.2T 2013 US Borrowing-authority;(by including the previous $1.2T Sequesteras part of those new Spending-cuts).
  • President also appears genuinely-concerned that House Republicans could cause US Government to default on current Obligation/Outlays (40% borrowed), unless White House commits to one-dollar in Spending-cuts for every-dollar of Debt-ceiling increase.(White House wants final Deficit-reduction Tranche to be limited to $1.5T, comprised of ≈$600B Tax Reforms, ≈$600B Spending-cuts, and ≈$300B Interest-savings; rather than $2.4T additional Deficit-reduction, regardless of composition).
  • President is clearly-attempting to mobilize Public Opinion, using combination of: (1) concern from currentEntitlement Beneficiaries(Social Security/Medicare/Medicaid/Veterans); plusInvestor/CEOconcerns over potential damage to “full-faith-&-credit” of US Government.
  • President is seeking bifurcated-process ofimmediate Congressional $1T-$1.2T Debt-ceiling increase; followed byseparate $1.5T negotiationthrough Fall 2013 ondollar-for-dollar Tax Reforms/Spending-cuts;(which will belimited to $1.2T current Sequester-penalty, andnot include the additional $1.2T 2013 US Borrowing-Authority). [Inference is that requirement for Debt-ceiling Spending-cuts will have been superseded, by stabilization of Deficit/Debt under combined $4T “Grand Bargain” amount].
     
  • Expect:
  1. At leastshort-term Debt-ceiling increasein late February/early March;
  2. Short-term OMB delayed-release of formalFY2014 Budget Request, to incorporate expected Sequester/Debt-ceiling compromise;
  3. Current “Best-case” outcome for 2013 DoD Base funding would be -$10B (-2%), from $525B 2013 Base Request. [Assumes $1.2T Deficit-reduction package];
  4. Current “Most-likely” outcome for 2013 DoD Base funding would be -$15B-$20B (3%-4% cut), from $525B 2013 Base Request. [Assumes $1.2T Deficit-reduction package];
  5. Current “Worst-case” outcome for 2013 DoD Base funding would be -$23B (-4%), since full-year 2013 DoD Sequester-penalty has now been reduced to $45B, (but $6B DoD cuts more in 2013-2014) . [Assumes $1.2T Deficit-reduction package].
  • Final White House/House agreement on totalDeficit-reduction package ($1.2T versus $2.4T) is critical, because it directly-drives both amount, and speed, of likely Defense funding-cuts as part of any eventual compromise. Compromise cuts to 2013-2014 Defense Base appear achievable under $1.2T-$1.5T Deficit-reduction package, (cut of $10B-$23B/year). But potential cuts to 2013-2014 Defense Base would likely be significantly-larger, under maximum $2.4T Deficit-reduction plan; potentially-endangeringDoD’s “Rebalance-to-Pacific”, and requiring significantProgram “Kills”/Curtailments/Delays.
  • Final outcome is obviously TBD.However, this structural issue has potential for critical-impact on2013 Defense Appropriations Bill;final 2014 POM/Budget; and outyear 2015-2022 DoD Resourcing. I will obviously keep you informed in real-time of additional developments.