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Reducing the deficit and growing the economy will be the hot topics in 2011

A chance of compromise

President Obama gave a preview of his State of the Union speech, which he will deliver on Tuesday.

The first big test of how the new dynamics in Washington will play out is likely to come in late spring, when lawmakers must agree on a funding resolution to keep the government operating.

Several weeks after that, they must decide whether they are willing to raise the nation's debt limit, a normally pro forma action that allows the government to meet its obligations. This year, however, many conservatives have signaled that they are unwilling to extend federal borrowing power beyond its current limit, and Cantor said Sunday that Republicans will use the vote as leverage against Democrats.

"Let me be clear," Cantor said. "Republicans are not going to vote for this increase in the debt limit unless there are serious spending cuts and reforms."

Despite the differences, there do appear to be some areas of possible agreement between the parties.

Many Democrats and Republicans say they are open to major changes to Social Security and Medicare, possibly including raising the retirement age and limiting Medicare benefits to those who need them most. Cantor's willingness to consider cuts to military spending puts him in line with many Democratic leaders, as well as Defense Secretary Robert M. Gates.

And despite their opposition to raising taxes, Republicans have conceded that some cherished deductions, such as one that allows homeowners to deduct the interest on their mortgages, may have to go.

White House officials said Obama will pursue corporate tax reform that significantly lowers the 35 percent rate companies pay but eliminates loopholes that many exploit. Treasury Secretary Timothy F. Geithner has held two meetings with executives and budget experts in recent weeks to discuss possible changes.

The question that faces leaders of both parties is whether they can confront these issues in a productive manner, as often has been the case, or whether the process becomes messy, bitter and ineffective. That's what happened in the mid-1990s, when the political dynamics were similar to today's and a standoff between a bold new House Republican majority and a first-term Democratic president twice led to government shutdowns.

"I think the chances of this being like 1990, where we all sit down and make an agreement, are small," said Alice Rivlin, a Clinton administration budget director who recently served with lawmakers from both parties on Obama's deficit-reduction commission. "This is likely to be much more like '95 and '96, which was very unpleasant. We did close down the government twice. And this may be worse."

$14 trillion and counting

The driving force behind the debate over spending is a national debt that recently topped $14 trillion (nearing the limit of $14.3 trillion) and annual deficits hovering around $1 trillion.

The deficit as a percentage of the economy is worse today than at any point since World War II, budget data show. Two wars, deep tax cuts and the addition of a Medicare prescription drug benefit started the nation on this path, and the recession drove the deficit into record territory.

While spending on the recession - including the bank bailouts and economic stimulus package - fueled voter anger during the 2010 campaign season, budget analysts across the political spectrum agree that popular Medicare and Social Security programs will have to be overhauled to truly cure the nation's ills.

This is clear to congressional veterans such as Rep. Paul Ryan (R-Wis.), the new House Budget Committee chairman, who hopes to persuade his GOP colleagues to adopt some of the dramatic changes to entitlement programs that he unveiled two years ago. But House Republicans have yet to embrace Ryan's ideas, instead focusing exclusively on paring back non-security appropriations, which account for only about one-seventh of total federal spending.

The resolution on the House floor Monday would instruct Ryan to cut non-defense spending immediately to 2008 levels, a demand that would require slashing 30 percent from most agency budgets over the next seven months.

Ryan and other veteran Republicans have called that goal too ambitious.

Ryan, who will deliver the Republican response to the president's State of the Union address, played down the division. "I stand in strong support of House Republicans' continued efforts to change Washington's pervasive culture of spending," he said in a statement.

At the same time, the Republican Study Committee, a conservative bloc that includes most of the House Republican conference, is pressing House leaders to trim spending back to 2006 levels starting next year, a proposal the group estimates would save $2.5 trillion over a decade. Cuts of that magnitude would require all agencies other than the Pentagon to slash spending by more than 40 percent by 2021, budget analysts said.

Democrats do not expect Obama to answer House Republicans with a detailed spending blueprint in his speech, leaving those specifics to his budget proposal in mid-February.

"I think he has to signal a serious commitment to deficit and debt reduction," said Rep. Chris Van Hollen (Md.), ranking Democrat on the House Budget Committee. "And I would hope he calls on Republicans in Congress to work with him and the Democrats to come up with a credible long-term plan."

The White House already has backed a three-year freeze on all non-security spending and a two-year freeze on federal worker pay, and Democratic lawmakers said administration officials have reiterated their focus on targeted cuts in budget discussions over recent weeks.

But Obama is expected to fight to preserve funding for programs such as Pell Grants, biotechnology research and a high-speed rail system, now being developed with stimulus funds, as crucial to the country's revival.

"We've made progress, but as all of you know, from talking to friends and neighbors, seeing what's happening in your communities, we've still got a lot more work to do," the president said in his address Saturday.

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