U.S. shutdown battle begins as Republicans kill spending measure

By David Lawder

WASHINGTON | Thu Aug 1, 2013 8:20pm EDT

(Reuters) - A battle in Congress expected this fall over the budget and a potential government shutdown broke out early on Thursday as Republicans in the U.S. Senate effectively killed a $54 billion spending bill for transportation and housing projects.

All but one Republican voted against the measure, denying it the 60 votes it needed to advance past a procedural hurdle.

Blockage of the Senate's first appropriations bill, along with a decision on Wednesday by Republicans in the House of Representatives to halt consideration of their own transportation funding measure, sends Congress back to the drawing board to find a way to agree on spending and taxes.

It marked the failure of a much-touted return to normal budgeting practices in Congress as a way to try to overcome deep fiscal divisions between the two parties.

When Congress returns from a five-week recess in September, lawmakers will have just nine legislative days to craft a stop-gap funding measure to keep government agencies from shutting down as the new fiscal year gets under way on October 1.

On Wednesday, the majority Republicans in the House halted consideration of a much more austere $44 billion transportation-housing bill, as not enough Republicans were willing to support the measure to overcome the opposition of Democrats who said the cuts were simply too deep.

KEEPING SEQUESTER

In the Senate, just one Republican - Susan Collins of Maine - voted to advance the transportation measure.

Senate Republican leader Mitch McConnell had called on his party to block the bill, saying Democrats were trying to spend far more than would be allowed under the across-the-board "sequester" spending cuts.

Those cuts were set in motion by a 2011 budget deal after Congress failed to agree on other deficit reduction measures. They went into effect in March and are now causing hundreds of thousands of temporary layoffs at government agencies and defense contractors.

But even a short-term spending measure will require the Democratic-led Senate and Republican-led House to find a way to replace or at least reduce the sequester cuts. They face a $91 billion gap between their top-line spending levels, and even deeper differences on spending for various domestic programs such as community development grants and the Environmental Protection Agency.

"We needed to indicate that we'd keep our word" to maintain spending cuts, McConnell said, explaining the vote. He dismissed suggestions that a primary re-election challenge he faces from a conservative Tea Party-backed candidate in his home state of Kentucky influenced his stance on the issue.

Senate Budget Committee Chairman Patty Murray, a Washington Democrat, complained that Senate Republican leaders "threw a tantrum" in blocking the bill.

"Senate Republicans chose gridlock over jobs," she added.

After insisting that the House pursue "regular order" on budget legislation, House Speaker John Boehner on Thursday publicly acknowledged for the first time that the 12 spending bills would not be passed by September 30 and said a short-term funding extension "would probably be in the nation's interest."

Congress a few weeks later faces another, potentially more consequential deadline to raise the $16.7 trillion federal borrowing limit. Failure to do so would ultimately lead to a default on U.S. debt repayments and a possible global financial crisis.

Meanwhile, a group of eight Republican senators led by Georgia's Johnny Isakson held their second meeting in as many days with White House Chief of Staff Denis McDonough in an effort to find a path forward on the budget.

Both sides have been tight-lipped about the talks, but have acknowledged that little progress has been made so far. Still, the meetings are the only regular, open communication line between the Obama administration and Congress on fiscal issues.

One Republican aide said the group plans to stay in touch during the August break by telephone. Other Republican senators participating in Thursday's meeting included Kelly Ayotte, Bob Corker, Lindsey Graham, and John McCain.

"I don't know that there's much more optimism than there was earlier in the week but there's still an openness," the Republican aide said.

(Additional reporting by Richard Cowan, Caren Bohan and Mark Felsenthal; Editing by Vicki Allen and Eric Walsh)