Politicians Propose Social Spending Cuts and Tax Hikes to Reduce Trillion-dollar U.S. Budget Deficit

Biden and the Gang of Six Debt Negotiators Set July 1 Deadline for 'Debt Restructuring' Deal

Obama and Federal Reserve Chairman Ben Bernanke warned this week of potentially devastating economic consequences if the debt limit was not raised by an August 2 deadline, when the Treasury Department has warned it will no longer be able to pay all of the country's bills. Credit rating agencies have warned that the United States' top-notch rating could face a downgrade if Congress does not act soon. Republicans have said any increase in the debt limit must include spending cuts equal in size. That would mean cuts of at least $2 trillion to ensure Congress does not have to revisit the politically toxic issue before 2012 elections.

June 15, 2011

Reuters - A group of top lawmakers Wednesday set an ambitious July 1 goal to reach a broad debt-reduction deal, even though Republicans and Democrats are still far apart on taxes and healthcare.

Vice President Joe Biden sat down in the Capitol with six lawmakers trying to agree on how to narrow huge budget deficits and raise the $14.3 trillion debt limit so the United States can avoid defaulting on its financial obligations and keep borrowing money to pay its bills.

The group, which is hoping to break through the growing political partisanship in the run-up to November 2012 elections, talked about proposals that would trigger automatic spending cuts and possibly tax hikes if Congress cannot narrow trillion-dollar budget deficits in the coming years.

"There was broad support for the idea that we put in place a mechanism that ensures deficit reduction," Democratic Representative Chris Van Hollen told reporters after the second straight day of talks.

But he said Republicans and Democrats were still at odds over how to implement the mechanism.

Negotiators, who will return Thursday to review their progress to date, are under increased pressure for a deal.

President Barack Obama and Federal Reserve Chairman Ben Bernanke warned this week of potentially devastating economic consequences if the debt limit was not raised by an August 2 deadline, when the Treasury Department has warned it will no longer be able to pay all of the country's bills.

Credit rating agencies have warned that the United States' top-notch rating could face a downgrade if Congress does not act soon. Standard & Poor's may get a chance to explain its views in detail to Congress, House Budget Committee Chairman Paul Ryan told Reuters. It is unclear if Ryan will ask S&P officials to appear at a private briefing or a formal hearing.

S&P was not immediately available to comment. S&P is the only of the big-three rating agencies to have the U.S. "AAA" rating on negative outlook, which means it is likely to downgrade the country in the next 12 to 18 months if no progress is made on budget consolidation.

Competitors Moody's and Fitch still have a stable outlook on U.S. ratings, although they have said that rating may come under pressure if the government fails to reduce the country's budget deficit in the next few years.

Republicans have said any increase in the debt limit must include spending cuts equal in size. That would mean cuts of at least $2 trillion to ensure Congress does not have to revisit the politically toxic issue before 2012 elections.

The White House and Republicans have tentatively agreed to save at least $150 billion over the next 10 years by trimming areas such as farm subsidies. Both sides have said they believe they can get more than $1 trillion in savings overall.

Participants said they aim to wrap up talks by July 1, well before the Treasury's August 2 deadline, which would allow time for Obama and House Speaker John Boehner to hammer out a final deal and sell it to rank-and-file lawmakers.

"The final deal will not be in place. It is doable that they could reach enough of an agreement to pass it upstairs," said Ethan Siegal, an analyst with The Washington Exchange, which tracks federal policy for investors.

A majority of 70 economists surveyed in a Reuters poll said it was "highly unlikely" that the United States would go into a technical default, when the government would be unable to meet some financial obligations.

WHAT KIND OF CAP?

The stubborn divide over whether to raise taxes -- which Republican oppose and Democrats favor -- resurfaced as the lawmakers discussed how to implement caps.

The White House and Republicans disagree on the actual mechanisms of the triggers that would go into effect if Congress does not get budget deficits under control.

Republicans want to lower spending from the current level of 25 percent of gross domestic product to below 20 percent. They say automatic spending cuts should be triggered if this level was breached. Democrats say that would tie the government's hands and would make it unable to respond to emergencies. They say it is better to set overall deficit or debt targets in coming years, and allow for either tax increases or spending cuts to close the gap if these targets aren't reached.

Van Hollen said Democrats wanted to close special interest tax loopholes, get rid of oil subsidies and special tax breaks for things like corporate jets. Republican leaders have said closing tax breaks should be done in the context of broad tax reform that would lower rates, a task that is beyond the scope of the Biden group.

The Republicans' no-tax-hike stance was muddled Tuesday when most Senate Republicans voted for a proposal to eliminate tax breaks for ethanol producers for $6 billion in annual savings. The measure failed in a 59-40 vote.

"I think getting rid of unwarranted tax breaks is a good idea," said Lamar Alexander, the No. 3 Senate Republican.

The White House wants to see a short-term payroll tax cut for businesses and the issue was discussed in Tuesday's talks. Leading Republicans have been cool to the idea.

A payroll tax cut would cost roughly $200 billion over 10 years, according to former White House economic adviser Larry Summers. That would complicate the Biden group's task of finding more than a trillion dollars in deficit savings.