Deficit reduction painful, commission chiefs warn

WASHINGTON (Reuters) - Restoring U.S. fiscal balance is going to be a painful process that mostly requires spending cuts, but also some tax increases, the leaders of President Barack Obama's deficit commission said on Wednesday.

Erskine Bowles and Alan Simpson made clear at a U.S. Chamber of Commerce event that the bipartisan panel is eyeing tax breaks, including the popular mortgage interest deduction, as well as slashing government spending in its effort to recommend ways to cut the estimated $1.4 trillion federal deficit.

"It is all going to be very painful," Bowles said.

The 18-member commission has been tasked by Obama to deliver its recommendations in December, well after the November congressional elections in which the deficit and $13 trillion debt have become major issues.

Bowles and Simpson provided some insight into what the commission might suggest.

Bowles, who served as former President Bill Clinton's chief of staff, said most of the effort has to come from spending, a view that puts him at odds with some of his fellow Democrats who are looking to pare back President George W. Bush's tax cuts for the wealthiest Americans to reduce the deficit.

"I just want to see the vast majority of it come out of spending," Bowles said.

He said about 75 percent of the deficit reduction effort should come from spending cuts and 25 percent from revenue increases.

Bowles also called for capping government spending at 21 percent of the overall economy. Government spending now accounts for 24 percent of the economy and could rise to 27 percent, according to Republican Senator Judd Gregg, who is also a panel member.

He said he would also like to see a broadening of the tax base and simplifying of the tax code which would require hundreds of individual and business tax breaks to be eliminated.

These so-called tax expenditures, such as the mortgage interest deduction, are a popular way for lawmakers to direct economic activity and encourage investment in housing and other areas such as ethanol production.

Those tax benefits, however, cost the federal treasury about $1 trillion a year and generally result in higher income tax rates for everyone else.

"I would like to see us take a hard look at tax expenditures," Bowles said, adding that they amounted to government spending by a different name. Bowles said he favors lowering corporate and individual income tax rates and putting in place a tax on consumption.

"On the books of the United States, they are listed as a tax cut and there is nothing tax cut about them," said Simpson, a Republican, who added that it becomes politically difficult to eliminate them without being accused of raising taxes.

Both Simpson and Bowles made clear that cuts in defense spending, food stamps and other social programs as well as the Social Security retirement program and Medicare healthcare program for the elderly were under consideration.

They acknowledged they had a difficult task before them and Simpson gave the commission "minimum" odds of success.

Bowles said he hoped the panel could agree on a deficit reduction plan that would be voted on by Congress and put in place by the beginning of 2012, giving time for the fragile economic recovery to take hold.