* Republicans targeting bigger cuts in next year's budget
* Government to hit limit of borrowing authority in weeks
(Repeats with no changes in text)
By Andy Sullivan and Richard Cowan
WASHINGTON (Reuters) - The battle over the U.S.
budget has ended. Now the war begins.
The debate over this year's budget that took the U.S.
government to within an hour of a shutdown is only a dress
rehearsal for bigger spending clashes to come.
Within weeks, the government will bump up against the
limits of its borrowing authority and will require
congressional action to avoid a debt default that would roil
At the same time, Republicans in the House
are targeting bigger game in their budget plan
for the next fiscal year, which starts Oct. 1.
Their proposal would slash taxes and overhaul Medicaid and
Medicare, government-run health programs for the poor and
elderly. It is likely to be rejected by the
Democratic-controlled Senate, setting up another showdown
between the two chambers.
That fight could last well into the 2012 campaign season,
when President Barack Obama, one-third of the U.S. Senate and
the entire House will face voters.
The budget deal agreed on Friday, if it passes Congress
next week, would amount to the largest domestic spending cut in
That's a victory for Republicans who won control of the
House in November on a promise to scale back the government and
take a bite out of recession-bloated budget deficits that have
hovered around 10 percent of GDP in recent years.
But the size of that cut, $37.8 billion, is less than the
amount the federal government spends in four days.
Even as the government stood on the brink of a shutdown
markets largely shrugged, because the Treasury Department still
would have been able to issue and service debt.
TIME FOR MARKETS TO PAY ATTENTION
Investors will be watching the next fight more closely.
Treasury Secretary Timothy Geithner estimates the
government could hit its current debt limit of $14.3 trillion
by mid-May and has warned failure to raise it would be
"catastrophic." Treasury could employ a variety of tricks to
avoid defaulting for several weeks, but eventually it would run
out of options.
An increase of at least $1 trillion is needed to keep the
government running through the end of fiscal year on Sept. 30,
according to a Reuters analysis. To last until the November
2012 election, the increase would need to be well over $2
Raising the debt ceiling is always a politically difficult
vote no matter the circumstances, but it will be a heavier lift
for Republicans. Facing pressure from fiscally conservative Tea
Party activists, they say they will not vote to raise the debt
ceiling without significant concessions to slow government
That could force Treasury to spin its wheels for months
while Congress works out a solution, said Ethan Siegal, a
policy analyst with The Washington Exchange, which tracks
political developments for investors.
"We do not know how that deal will be reached, or when it
will be reached -- just that we believe a deal will be reached
and that it will be very ugly," Siegal wrote in a research note
Next year's budget debate will not be pretty, either.
Democrats have already promised to block the Republican
proposal to give states control over the Medicaid health
program for the poor and turn the Medicare health program for
retirees into a voucher system.
Democrats also have criticized House Budget Committee
Chairman Paul Ryan's refusal to end tax breaks for wealthy oil
companies or to propose other tax increases that many budget
experts think are necessary to solve long-term fiscal woes.
And there will be a chance to reprise the recent fight over
domestic spending, which focused largely on the discretionary
programs whose funding levels are set by Congress each year.
Ryan is seeking another round of deep cuts in that area,
which encompasses education, law enforcement, aid to the poor,
and space exploration, but represents only about 14 percent of
the U.S. annual budget.
In his plan for the 2012 fiscal year, Ryan would slice
approximately $80 billion from those discretionary programs,
while increasing defense spending about $28 billion.
"This is a big hit on non-security spending" on top of cuts
already achieved this year, said one budget analyst and former
White House budget official, who asked not to be identified.
The House could vote on Ryan's budget blueprint as soon as
(Editing by Mohammad Zargham)
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