By David Lawder
WASHINGTON (Reuters) - The annual spending bills now working their way through the Congress were supposed to mark a welcome return to fiscal normalcy in Washington.
The House of Representatives and Senate are supposed to pass budgets, hash out their differences, then carve up the taxpayers' money.
That dream is crashing into the reality of deep and intractable differences between Democrats and Republicans over budget policy. Without a broad agreement on how to cut deficits, appropriations bills passed by the House this week, and those yet to be considered, may go nowhere.
"We're just spinning our wheels on these measures," said Representative Chris Van Hollen, the top Democrat on the House Budget Committee. "The reality is that we can go through these appropriations bills but at the end of the day we'll be back to where we are now unless we come to an overall agreement."
The result is that a stop-gap government funding measure to avoid an October 1 government shutdown looks increasingly inevitable.
The Republican-controlled House and the Democratic-controlled Senate are writing their spending bills to conform with their partisan visions of what the budget should look like.
Automatic spending cuts of $1.2 trillion began on March 1 under the so-called "sequester" and are supposed to continue for the next decade.
Republicans assume that the "sequester" spending cuts will continue, so they are using a $967 billion spending cap, the lowest in a decade. Senate Democrats, meanwhile, believe the sequester will be replaced with other savings, an assumption that requires a bigger fiscal deal, and are applying a $1.058 trillion cap.
And as strong tax revenue growth brightens the budget outlook and pushes back the final deadline for increasing the federal borrowing limit to perhaps November, neither side has much incentive to move toward compromise now.
"There aren't any carrots or sticks here," said Chris Krueger, an analyst who tracks Washington politics for Guggenheim Securities. "This is absolutely teeing up a really messy fourth quarter. You're going to come back from Labor Day (September 2), with a government shutdown looming and a month later the debt limit deadline."
Many Republicans see the debt limit as their key leverage point for extracting more spending cuts from the Obama administration, particularly on costly pension and medical benefits for the elderly. They engineered a temporary debt limit extension earlier this year with idea that it would come back to pressure Democrats into a deficit deal over the summer.
But with that timing thrown off, Republicans are reluctant to enter into direct, public budget negotiations with Democrats. They say that without some pre-negotiated "framework" agreements on tax reform and reforms to entitlements programs, the process would be unproductive.
"If it's just a free-for-all, then it becomes more of an opportunity for the demagoguery and the partisan back and forth that won't reach a solution," said Rep. Tom Price, the second-ranking Republican on the House Budget Committee.
Meanwhile, liberal Democrats, who have favored further tax increases on the wealthy, have viewed recent increases in revenue collection as a reason to push back against proposals, including some from President Barack Obama, to trim back some Social Security and Medicare benefits.
House Republicans are having none of that, pursuing a strategy to carve up spending already reduced by the "sequester" to shift more money to defense and security while imposing deeper cuts on other domestic agencies. This week they gave increases to the departments of Homeland Security and Veterans Affairs and to military construction projects [ID:nL1N0EI1AH].
The Defense Department also would get a boost of $28 billion over sequester-induced levels under a bill unveiled this week by the House Appropriations Committee that pushes non-war funding back up to $512.5 billion.
The stable or slightly increased funding makes these measures easier to pass, but lawmakers and aides from both parties say that some appropriations bills with deep cuts below the sequester levels are unlikely to pass even in the House.
The bill that funds the departments of Labor, Health and Human Services and Education would face an 18.6 percent cut below sequester-starved levels, which translates to further cuts of about $28 billion. Van Hollen said Democrats and many Republicans could not support cuts that deep, and he predicted failure in the House.
The Democratic-controlled Senate is virtually certain to reject it, and Obama has threatened to veto appropriations bills that contain the "draconian" cuts prescribed by Republicans.
Republican House Speaker John Boehner on Thursday accused Obama of making a "reckless" threat to shut down the government unless Democrats get their way in a budget deal, and urged the president in a letter to rescind the veto threat.
(Reporting by David Lawder; Editing by Vicki Allen and Fred Barbash; editing by Clive McKeef)