IMF Austerity in the U.S.: Tax Hikes and Social Spending Cuts on the Menu in 'Debt-reduction' Talks

Taxes on the Menu in 'Debt-reduction' Talks

June 9, 2011

Reuters – Top lawmakers on Thursday are expected to discuss one of the biggest hurdles in the way of a debt-reduction deal that would allow the United States to continue borrowing at rock-bottom rates -- taxes.

As Vice President Joe Biden and six lawmakers meet for a sixth round of talks, outside pressure is growing for them to reach an agreement that would let Congress raise the $14.3 trillion debt ceiling before an August 2 deadline.

Though bond markets remain placid, investors are increasingly alarmed that Congress will fail to act before that date, when the Treasury Department has warned it will run out of money to pay the nation's bills.

"I really hope that they would stop playing with fire," Li Daokui, an adviser to China's central bank, told Reuters in Singapore on Wednesday. China, the largest foreign creditor to the United States, holds about $1 trillion of the United States' outstanding debt.

Top Republicans have said that any increase in the country's debt ceiling would have to be matched by an equal amount in spending cuts, though they would not likely take effect immediately.

Participants in the Biden group say they have made steady progress since talks began early last month, and have conditionally agreed on at least $150 billion in cuts. But that is far short of the roughly $2 trillion in deficit reduction needed to ensure that Congress will not have to revisit the debt ceiling issue before the November 2012 elections.

Democrats and Republicans agree that the United States needs to reduce deficits by $4 trillion over the coming decade to ensure its debt remains at a manageable level. Some worry that the group is not up to the challenge of fixing the country's long-term fiscal problems.

"One of my concerns about the debt ceiling negotiations is that if we kind of limp through the lowest common denominator -- what's the minimal amount to cut to get through a short term extension," said Democratic Senator Mark Warner, who has been working on a long-term deficit-reduction deal with a handful of other senators. "We may have the time, bond markets may react okay. But I don't know how big this window is."

Republicans and Democrats both say that the Biden talks are not moving fast enough, and time is starting to run short.

Moody's credit rating agency warned last week that it could consider cutting the United States' top-notch credit rating if there was no progress by mid-July. Fitch warned on Wednesday that the United States probably would not be able to maintain its top rating if it missed even a few bond payments.

Conscious of the potential for chaos in global financial markets if there is not a deal soon, both President Barack Obama and House of Representatives Speaker John Boehner, the top Republican in Congress, have endorsed a timetable for reaching a deal. Both say they would like to see an agreement within a month.

BREAKING THE DEADLOCK

The Biden group has been deadlocked over two items that could lead to the biggest savings: taxes and health benefits.

In Thursday's session, due to start at 12:30 p.m. EDT in the Capitol, the group is expected to take a look at tax hikes, said Republican Senator Jon Kyl, one of the negotiators.

A congressional aide said that in addition to revenues, the agenda for Thursday's talks included the budget process and discretionary spending.

Democrats say tax increases must be part of the solution but Republicans have refused to consider them on the grounds they would hurt job creation.

They also are expected to consider capping federal spending as a percentage of the economy. Federal spending is at 24 percent of gross domestic product, and a proposal that would cap it at 18 percent of GDP is gaining traction among key Republicans like Kyl. Liberals say that approach would prevent the government from responding to recessions and emergencies. Another proposal, which would cap spending at 20.6 percent of GDP, has drawn support of a handful of Senate Democrats as well as some Republicans.

Finding common ground on the other big-ticket item -- healthcare -- is likely to be daunting. With the 2012 election cycle already under way, Democrats see an opportunity to win votes by opposing a Republican plan that would privatize the Medicare health plan for future retirees.

Democrats have proposed healthcare savings of their own by accelerating reforms in Obama's signature Affordable Care Act of 2010, which Republicans want to repeal.

One potential compromise could surface around a proposal to revamp the payment structure that consistently threatens doctors with huge pay cuts. That actually could cost about $300 billion over 10 years, but it could give both sides political cover to trim healthcare spending elsewhere, analysts say.