Looming fiscal obstacles for Congress, nation

September 30 is the last day of fiscal 2013. For years, Congress has had to pass continuing resolutions (CRs), i.e. emergency legislation to keep the federal government going. The reason is that the Washington politicians are too divided to agree on a normal budget. When Congress returns from vacation in September, it will need to make haste for it will have just nine working days to come to an agreement.

Around the time the next fiscal showdown resumes, the debt ceiling will be hit (again). The Treasury Department thinks the federal government can hold out until October or November.

Also on the menu in the coming months are the sequestration budget cuts in fiscal 2014. Democrats would love to kill the automatic spending cuts whereas the Republicans are adamant they want to keep them in place (except – sometimes – in relation to defense and security).

In combination, these fiscal disputes make for an interesting fall. The last time we saw such an imperfect political storm in the summer of 2011 the U.S. credit rating was downgraded, stock prices plunged, and the real economy felt the pain.

As if this was not complex enough, several prominent Republicans want to throw healthcare into the mix. Sens. Marco Rubio (R-Fla.) and Ted Cruz (R-Texas) want to shackle the Affordable Healthcare Act to the fiscal negotiations. They argue that approval for legislation preventing a government shutdown should be withheld unless Obamacare is "defunded."

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In addition to Obamacare, another issue is directly linked with the fiscal debate: defense/national security. Politicians such as Cruz, Rubio and Sen. Rand Paul (R-Ky.) are often regarded as fiscal hawks but are considered doves when it comes to foreign policy and defense. To put it starkly, they put more value on getting the public finances under control and on deficit reduction than on defense expenditure. In addition, their mindset tends to be isolationist. Most of the politicians in this camp are relatively young "rebels" within the GOP. In the other camp we find established names such as Sen John McCain (R-Ariz.). They warn that the blunt approach of people such as Cruz is jeopardizing national security and international peace, stability, and prosperity. McCain has famously referred to Cruz and Paul as “wacko birds”.

The dividing lines run crisscross through the GOP, which weakens the party from the inside. This will make it harder to negotiate with the Democrats, who seem more able to present a united front. Republicans are also at loggerheads with each other over gun control, immigration, agricultural subsidies, and Obama's nominees for government posts.

Precisely because it is internally divided, the GOP could be forced into a fiscal deal. The financial stats may help:  federal spending has dropped for two consecutive years and the deficit has narrowed from 10.2 percent of GDP in 2009 to 4 percent this year. In short, there is less need to fret about public finances spiraling out of control, so perhaps the parties will be more inclined to seek a compromise.

Unfortunately, a fiscal agreement is by no means a given. We see various obstacles. For instance, over 40 percent of Americans think the budget deficit has increased a lot since 2010 whereas in reality it has shrunk from $1,300bn to $600bn. Owing to misconceptions, the GOP's right-wing could continue to obstruct a deal – not least because many voters are obsessed with the national debt.

Another factor that could get in the way of a fiscal deal is the exposed position of Republican Senate Minority Leader Mitch McConnell (Ky.), who faces a struggle to be re-elected  next year. If he performs various antics to placate the electorate, the fiscal negotiations may be in extra trouble. The position of House Speaker John Boehner (R-Ohio) is also weak. He appears unable to control his majority, so he may not be able to scrape the votes to pass a compromise. In addition, his party's conservative wing – which has the strongest electoral base – could tie his hands.

Finally, Rubio and his grassroots army could put a spoke in the wheel should their campaign (to make a fiscal deal contingent on the repeal of Obamacare) gain momentum.

Wall Street is not really anticipating a government shutdown and/or a debt bloodbath. A fiscal deal is still the most likely outcome. However, the wacko birds are still flying and the fiscal deal is not yet out of the woods…

Langenkamp is political analyst at ECR Research and Interest & Currency Consultants.