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Shutdown Averted, Now the Real Budget Battle Begins

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

With the budget deal reached Friday night, D.C. politicians averted a government shutdown and set the stage for bigger battles to come over the 2012 budget and a vote on the debt ceiling.

On Wednesday, President Obama is slated to unveil his 2012 budget, which is expected to include:

  • Higher taxes for wealthy Americans, defined as those making over $250,000 per year.
  • Steep cuts in defense spending.
  • Reform of Medicare, Medicaid and Social Security.

Of course, the devil will be in the details, including an actual dollar amount and deficit-reduction targets, which haven't been leaked as yet.

Citing White House officials, The WSJ reports President Obama didn't want to reveal his 2012 budget until after the 2011 deal was reached "so as not to complicate budget negotiations that almost shut down the government."

While there's some logic to that thinking, it seems pretty clear the White House is putting out the 2012 budget this week in response to the GOP plan released last week by Wisconsin Congressman Paul Ryan.

As Henry and I discuss in the accompanying video, there's plenty of flaws in Ryan's proposal, which calls for $5.8 trillion in spending cuts over 10 year and the privatization of Medicare and Medicaid. But the Wisconsin Congressman deserves credit for putting forth a plan and the White House looked petty by criticizing Ryan's plan without offering an alternative. As President Obama's former chief economic adviser Christina Romer told me last week: "It takes a plan to beat a plan."

By the end of this week, Obama's plan will be on the table and we'll presumably have a chance to do a side-by-side comparison to the Ryan plan. Most likely, that means a month's worth of fierce debate in the run-up to a vote on the debt ceiling, which Treasury says will be reached by May 16.

Most observers believe Congress will ultimately vote to raise the debt ceiling, in order to avoid a potential U.S. debt default and potential mass chaos in the Treasury market. But House Republicans have made it clear any vote to raise the debt ceiling must be contingent on deficit-reduction targets.

Considering Congress had such a tough time reaching a deal for 2011 when merely billions were at stake, it's hard to think the debates over the debt ceiling and 2012 budget -- when trillions are on the line -- will be anything but nasty, contentious and potentially highly destabilizing to financial markets.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com