March 7, 2011 / 6:06 PM / in 7 years

SCENARIOS-Messy U.S. budget, spending prospects

WASHINGTON, March 7 (Reuters) - The deeply divided U.S. Congress faces a March 18 deadline to send President Barack Obama legislation to keep the federal government funded and running.

Republicans, who hold a strong majority in the House of Representatives, and Democrats, who narrowly control the Senate, are still far apart on spending levels for the rest of this fiscal year, which ends on Sept. 30.

With nearly half of the fiscal year gone, they’ve been funding the government through a series of temporary measures because they failed to pass a budget for this year.

House Republicans insist that current spending must be cut by at least $61 billion, while Democrats have proposed a total of $10.5 billion. Both have already agreed to a downpayment by enacting into law $4 billion in spending cuts in a $3.7 trillion annual budget.

None of the plans would put much of a dent in the $1.65 trillion budget deficit forecast for this year.

The fight over spending could lead to a shutdown of many government operations and prompt Congress to refuse to allow the United States to borrow more money.

Here are scenarios for what could happen:

AGREEMENT ON SHORT-TERM FUNDING

Since Oct. 1, the start of fiscal 2011, Congress has approved five stop-gap spending bills to keep the government running. The most recent one, with the $4 billion in spending cuts, was enacted on March 2 and expires on March 18.

With negotiations still in early stages on funding the government through Sept. 30, it’s likely Congress will have to produce a sixth short-term spending bill.

House Republican leaders say that absent legislation to fund the government for the rest of the fiscal year, they’re happy to embrace a series of these miniature bills, known as “continuing resolutions,” that cut $2 billion a week in spending.

Democrats say that’s too extreme and would result in government layoffs that would ripple through the economy. They also say stopgap bills are a bad way to govern.

Failure to pass a temporary spending bill by March 18 would spark an immediate shutdown of nonessential government services, an outcome neither political party seems to want.

COMPLETION OF A FISCAL YEAR 2011 BILL

Vice President Joe Biden is in charge of negotiations with Congress on a bill to fund the government through Sept. 30.

In an effort to push those talks along, the Senate this week is expected to defeat both the Republicans’ $57 billion in further cuts and the White House’s proposal to trim $6.5 billion. The thinking is that voting down those two options would underscore the need for compromise.

GOVERNMENT SHUTDOWN:

House Speaker John Boehner says “I chuckle” every time a government shutdown is mentioned because “there’s no threat” of that happening. Democrats say they don’t want one either.

Both parties know the shutdown scenario would be politically damaging. An electorate already annoyed with Washington would become even more angry and no politician is sure whether he or she would escape the public’s wrath come election day. Some opinion polls indicate the public would blame Republicans and Democrats alike.

The last government shutdown was on Dec. 16, 1995, to Jan. 6, 1996 and Republicans who controlled Congress got most of the blame in the standoff with then-President Bill Clinton, a Democrat.

Even a partial government shutdown could have a negative impact on global financial markets -- on top of uncertainties over the slow-healing U.S. economy and political upheavals in the Mideast and North Africa.

But if Republicans and Obama’s Democrats cannot reach a deal, there’s only one alternative: the layoff of thousands of federal workers and the disruption of government services.

DEBT LIMIT

Besides fighting over this year’s spending, Congress and the White House face another problem in coming months: U.S. government borrowing authority.

The Treasury Department says it will bump up against its statutory $14.3 trillion borrowing ceiling sometime in mid-April or May.

Without an increase, the U.S. government faces a possible default on loans, many of which are held by China, Britain and other foreign investors. Federal Reserve Chairman Ben Bernanke has warned that a default would cause “catastrophic” consequences for the U.S. economy and financial system. A default is seen as unlikely but political posturing over the debt limit in coming weeks could unsettle financial markets.

No more borrowing authority also would shut down government operations and possibly disrupt Social Security and other government benefits.

Some Tea Party conservatives say they are willing to push this alternative unless spending cuts are in place or there is a move toward a balanced budget constitutional amendment.

The Senate has already rejected another idea in the event that U.S. borrowing authority runs out: legislation instructing the Treasury Department to first pay creditors and issue Social Security retirement checks, leaving most other government functions to shrivel.

A THIRD WAVE OF TURMOIL

Once the fiscal year 2011 spending and debt limit problems are resolved, attention turns to the fight for the 2012 fiscal year budget and a series of spending bills to fund the government for next year.

Republicans are promising to tackle big-ticket items, such as the expensive Social Security, Medicare and Medicaid programs that account for more than half of the federal budget. A failure to reach agreement would again raise the specter of forced government closings. (Editing by Vicki Allen)

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