Amid doubts, US deficit panel eyes retirement, tax

Tue Sep 28, 2010 1:29pm EDT

* Social Security program, taxes said to be on its agenda

* Analysts question panel's ability to agree hard proposal

* Final report is due on Dec. 1, a month after elections

By Kevin Drawbaugh

WASHINGTON, Sept 28 (Reuters) - A U.S. commission looking at ways to cut the federal deficit is considering changes to the Social Security retirement program and a variety of tax increases, but doubts about its potential to come up with a solid deficit-cutting plan are widespread.

Amid rising pre-election rhetoric over government red ink, the commission set up in February by President Barack Obama will hold another meeting on Wednesday. Its much-anticipated final report is due to come out on Dec. 1.

Analysts are skeptical about the bipartisan group's ability to agree on a formula in an election year that would tilt Washington back into the black.

Under the order creating the panel, 14 of its 18 members must vote to approve "a final report containing a set of recommendations" to balance the budget, excluding interest payments on the national debt, by 2015 and to "meaningfully improve the long-run fiscal outlook."

Failure to meet this mandate could spook the bond markets, although some analysts believe such a credit event is unlikely as expectations for the panel have been low all along.

"They're looking at Social Security. Everyone has made that very clear," said Dean Baker, co-director of the Center for Economic and Policy Research, a think tank. "They have been looking at the tax code ... at the system for tax expenditures for healthcare, for the home mortgage interest deduction."

He added: "My guess is the final report is not going to be a concrete proposal ... that Congress can literally vote on. It's more likely to be recommendations that can be pursued."

That would be better than nothing, but nothing is also possible in the divisive political climate, analysts said.

"The commission is not likely to be able to agree on very much," said Brookings Institution fellow Isabel Sawhill.

"We need everything to be on the table and Republicans are not likely to agree to any new revenues, leading to a stalemate both on the commission and in Congress," Sawhill said.

VOTERS WORRIED

Dozens of U.S. lawmakers signed a letter released on Tuesday urging the panel not to tinker with Social Security.

The program "does not belong as part of" the panel's recommendations, said the letter addressed to Obama, adding to the challenges faced by the commission on Capitol Hill.

The budget deficit as of the end of the federal fiscal year on Thursday is estimated to be $1.3 trillion to $1.5 trillion -- figures that are hard to comprehend and that have voters scared as the economy struggles to recover from recession.

A Reuters/Ipsos poll last week showed that 57 percent of Americans see cutting the deficit as a better way to help recovery than raising government spending, although many economists warn spending cuts now could hurt the economy.

Acknowledging the importance of the deficit situation, Obama earlier this year appointed the National Commission on Fiscal Responsibility and Reform, led by former White House chief of staff Erskine Bowles and former Senator Alan Simpson.

At least two other panels of experts in Washington have been working in recent months on the deficit-and-debt issue, with members of these panels saying both spending cuts and tax changes will be needed in any serious strategy.

The White House sees total U.S. public debt rising to 68.6 percent of gross domestic product in fiscal 2011. That level of total indebtedness, to which the budget deficit adds every year, would surpass Britain's projected debt-to-GDP ratio of 61.9 percent, but be well below France's 86.5 percent.

Greece, hammered earlier this year by bond markets, is struggling to tame a debt load forecast at 139.4 percent of GDP next year, while Japan's debt is expected to top 235 percent of GDP for 2011, said International Monetary Fund forecasts.

REPUBLICAN CAP

U.S. budget hawks are demanding action, with some Republicans in Congress urging a "hard cap" on spending.

Republican Representative Jeb Hensarling, a commission member, last week called for canceling unspent stimulus funds, capping discretionary spending, ending government control of mortgage giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), and a net hiring freeze on non-security federal employees.

Republican Senator Bob Corker said on Thursday he is working on legislation to cap spending.

"We need to change the conversation, and I think that means focusing on the big picture first ... agreeing on the amount of spending we can sustain," Corker said in a statement.

Such broad proposals may appeal politically, but they gloss over the tough specifics, analysts said.

"A lot of the caps the Republicans have called for apply only to non-defense, non-homeland, non-veterans discretionary spending, which is one-seventh of the federal budget," said Brian Riedl, a fellow at the Heritage Foundation.

"Capping one-seventh is better than nothing, but the more spending that can be brought under a cap, the better."

Riedl speculated that changes to Social Security, Medicare and Medicaid would be the focus of the commission. "I'm not sure that significant tax changes would be able to get agreement from 14 of the 18 commission members," he said.

Republican Senator Judd Gregg told Reuters last week that the panel would emphasize spending cuts over tax increases and that he was confident it would agree on an outline by Dec. 1.

He said a failure to reach consensus would "be a very bad signal to the American people and the markets."

But a soft report from the panel was unlikely to cue creditors to suddenly lose faith in U.S. debt instruments, said American Enterprise Institute resident scholar Alan Viard.

That scenario "might be a bit of a stretch. The problem is not imminent enough that you would be likely to see a mass movement away from Treasuries," he said.

"The fact that it happened to Greece certainly doesn't mean that it could happen here anytime soon." (Additional reporting by David Lawder, Donna Smith and Andy Sullivan, editing by Mohammad Zargham)