Federal cuts delayed, but still loom

Last-minute congressional action to avert the so-called fiscal cliff on Jan. 1 effectively pushed major federal spending cuts back by about two months and made permanent 82 percent of the Bush-era tax cuts that were set to expire at the end of 2012.

Cities and towns, however, still stand to see an 8.2 percent reduction in several key federally funded programs related to transportation, elementary and secondary education, water treatment, non-Medicaid health services, and community development, if and when the delayed sequestration process begins.

On Jan. 1, Congress postponed $85 billion in spending cuts this year, but it will need to simultaneously negotiate a framework for their implementation as well as resolve the issue of the nation hitting its $16.4 trillion debt ceiling this spring.

While congressional authorization to raise the debt ceiling does not permit new spending but instead authorizes the payment of debt already incurred, the issue has become increasingly polarizing in recent years.

In late January, the House and Senate passed a bill to temporarily suspend, rather than increase, the debt ceiling.

The measure allows the Treasury to borrow the funds necessary to keep the nation from exceeding the debt ceiling until May 19. This short-term measure, however, means that Congress must confront the debt ceiling once again this spring.

Additionally, the bill will withhold pay from members of Congress if their legislative body does not pass a federal budget bill by April 15.

The Bipartisan Policy Center had estimated that, without action around the debt ceiling, the nation would have defaulted on its debt obligation around late February.

The federal government risks a credit downgrade by the major rating agencies if it defaults on its debt. In 2011, Standard & Poor’s downgraded the nation’s credit rating from AAA, the best possible rating, to AA+ as a result of the political fight over the debt ceiling increase. Such a downgrade can drive up the interest costs that the government must pay on its debt.

The federal budget process will begin soon with the release of the president’s budget proposal. House leadership has indicated that it will not authorize a short- or long-term increase in the debt ceiling unless it sees a commitment from the Senate to pass a budget this spring. While Congress faces an April 15 statutory deadline to pass a budget, it frequently fails to do so.

A larger tax reform package is also expected during the 113th Congress.