As if expectations were not low enough for the special congressional committee charged with writing a deficit-reduction deal, they seem to be falling by the day as the two parties harden their positions on spending and taxes.
Last week began with contradictory markers from US President Barack Obama and US House Speaker John Boehner. Boehner reiterated that Republicans would oppose any tax increases, and then Obama, newly aggressive, warned that he would veto any measure that trimmed Medicare benefits without also raising taxes on the wealthy.
The week ended with the -Republican-controlled US House of Representatives and the -Democratic-controlled US Senate at an impasse over a routine but essential measure for financing government operations for the new fiscal year (which will start on Saturday), with Republicans demanding more spending cuts to offset domestic disaster aid. Some Republicans have pushed for even deeper short-term cuts than were agreed to last month in the deal to raise the federal debt ceiling.
Against that backdrop, few in Washington see a politically realistic way for the 12 members of the joint House-Senate deficit committee, six from each party, to meet their mandate to identify at least US$1.2 trillion in deficit reductions over 10 years. People in both parties worry that the panel, which plans to meet privately this week, could fall far short of that goal or deadlock altogether, with potentially damaging economic consequences.
“Democrats cannot accept another ‘spending cuts only’ bill that makes them look like they got rolled,” said Maya MacGuineas, fiscal policy director at the New America Foundation, a centrist research group. “And Republicans will not accept new revenues. So I just can’t envision how they get to US$1.2 trillion.”
The result would be US$1.2 trillion in automatic spending cuts in January 2013 — half from Pentagon programs, a prospect that is raising alarms in the military and among defense contractors. More immediately, another episode of political dysfunction like the one that preceded the parties’ last-minute deal to raise the debt limit last month could risk another downgrade of the nation’s credit rating, representatives of the rating firms privately warned senators last week.
The committee, created by the debt deal, only recently began work to meet its Nov. 23 deadline. If a majority of its members reach agreement, Congress must vote on their plan by Dec. 23 without filibusters or amendments.
For the first time since Republicans won control of the House nearly a year ago, Democrats believe that they have the advantage — a result, administration officials say, of terms they negotiated in last month’s compromise that many liberals denounced as a sell-out.
Under those terms, Republicans cannot threaten a default again to get their way, because the deal increased the debt limit enough to cover borrowing through next year. Also, the automatic cuts in 2013 would hit military programs hard — an outcome Republicans are more eager than Democrats to avoid — while Medicaid and Medicare benefits are exempt.
Another factor increasing Democrats’ leverage: The tax cuts enacted under former US president George W. Bush expire after next year. Obama vows to sign an extension only for households with taxable income of less than US$250,000; not extending the Bush rates for higher incomes would raise about US$1 trillion over a decade.
A partisan impasse does hold risks for Obama. His job-creation plan would probably be a casualty and a negative reaction in financial markets would further weaken economic growth.
Some economists and Democrats on Wall Street say a financial crisis is not a risk because there is no threat of default this time, and because the markets have such low expectations for the panel, but other forecasters are sounding a different note.
“If we were to pick the issue that stands out most at the moment, it is the failure of governing in Washington at a time when many Americans are hurting,” Bernard Baumohl, chief global economist for the Economic Outlook Group of Princeton, New Jersey, wrote to clients last week.
He cited “a real fear that the gap between the two sides is unbridgeable.”
If the parties stand their ground on taxes and entitlement programs, the committee could avert total failure with a package of several hundred billion dollars in spending cuts identified in past bipartisan negotiations, including reductions in farm subsidies and federal employee retirement programs.
However, many Democrats would resist.
“I don’t like that because it suggests all spending cuts,” said Representative Chris Van Hollen, a Democrat on the panel. “I also think we need to come up with something serious.”
Obama’s preference remains the “grand bargain” that eluded him with Boehner — with short-term stimulus measures and long-term deficit reduction greater than mandated for the committee, including higher revenues and savings from entitlement programs.
Last week, Democratic Senator Mark Warner and MacGuineas hosted a dinner for about 60 people — equal numbers of Republican and Democratic lawmakers, along with corporate executives and economists — to discuss how to build pressure for such a compromise. Among the guests were two members of the deficit panel, Van Hollen and Republican Senator Rob Portman.
The slim hopes for a grand bargain rest on the parties’ mutual interest in overhauling the tax code to rein in tax breaks and using the new revenues to lower taxpayers’ rates.
“Tax reform is the door opener,” Senator Ron Wyden said. “It is a way to generate revenue that both Democrats and Republicans can support.”
Several conservatives, even those who are strongly anti-tax, agree.
“That’s the best chance we have of a big deal,” Republican Representative Jeff Flake said.
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