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Republicans to focus on sequester as debt ceiling to be raised

Although the House GOP leadership has been divided on how to deal with the upcoming fiscal contests, it has apparently decided to raise the debt ceiling and focus on the sequester as I have predicted.

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Here’s the FT on the Republicans at the end of last week:

“Republicans in the House of Representatives vowed to pass a three-month extension of the US debt limit next week, reflecting their mounting concerns about bearing the blame of any new brush with default for the US economy.

Following a two-day retreat at a resort in Williamsburg, Virginia, House Republicans said they would support a short-term extension of the US borrowing limit to give Congress more time to pass a long-term budget.”

The thinking here is that, to the degree they want to cut spending, they would need to focus on the sequester – and so they are going to raise the debt ceiling for three months and focus on the sequestration items left to deal with. While defense cuts are slated to occur if nothing is done about these remaining fiscal cliff items, the Republicans, who are usually pro-defense, are still going to want these cuts to happen.

Having allowed tax increases to occur and the debt ceiling to go up, the pressure will really be on for fiscal conservatives in the sequester fight. This is why I still believe a government shutdown (and a recession in Q2) is the likely result. The President, however, was unusually political in his inauguration speech, mixing in themes from the upcoming state of the union address. This suggests that he is gearing up for a big fight and will not give in easily. All eyes now have to be on the showdown over the sequester. If Obama does manage to come out of this with a victory, the US economy will have a decent year in 2013.

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About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.