Exclusive: Democrats seek up to $3 trillion savings

WASHINGTON Wed Oct 26, 2011 6:26pm EDT

The twelve members of the Congressional Super Committee, six Democrats and six Republicans, gather for opening remarks as the panel holds its inaugural meeting to search for new deficit reductions, in Washington, DC, September 8, 2011.         REUTERS/Mike Theiler

The twelve members of the Congressional Super Committee, six Democrats and six Republicans, gather for opening remarks as the panel holds its inaugural meeting to search for new deficit reductions, in Washington, DC, September 8, 2011.

Credit: Reuters/Mike Theiler

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WASHINGTON (Reuters) - Democrats are proposing to slash huge budget deficits by up to $3 trillion, aiming high to repair the country's fiscal mess even as Republicans show early signs of resisting the proposals.

The broad package of measures calls for long-term spending cuts, including to the government-run Medicare health program for the elderly that threatens to explode the national debt. The other half of the package would come from tax increases, four congressional aides told Reuters on Wednesday.

Republicans rejected the Democratic initiative.

"Asking for a $1.5 trillion tax hike in the middle of a jobs crisis is not a serious proposal," said a House of Representatives Republican leadership aide.

There is a deep ideological divide between the two parties over taxes -- likely a key issue in the congressional and presidential elections in November 2012.

The Democratic plan was presented on Tuesday behind closed doors to a special congressional panel tasked with finding ways of cutting the budget deficit by at least $1.2 trillion over 10 years, the sources said.

It was a rare leak from the so-called "super committee," whose secretive deliberations have sparked intense speculation about how much progress the 12 Republican and Democratic members have made since they first began meeting on September 8. They face a November 23 deadline to report to Congress.

The aides spoke on condition of anonymity because of the sensitivity of the negotiations.

The Democratic plan proposes cutting the deficit by $2.5 trillion to $3 trillion and calls for between $200 billion and $300 billion in new stimulus spending to boost an ailing U.S. economy. It would be paid for with lower interest payments from reducing deficits.

It also seeks around $400 billion in Medicare savings, with half coming in benefit cuts and the other half in cuts to healthcare providers. Details of that proposal were scant but tackling the popular Medicare program is always politically risky for politicians in Washington, especially Democrats.

The Democratic proposal also identifies $100 billion in cuts to the Medicaid healthcare program for the poor, according to a lobbyist in contact with the committee.

Many Democrats oppose cuts to Medicare, while Republicans have consistently fought tooth-and-nail against any tax hikes. The congressional aides were not immediately able to say how the Democrats' plan would achieve the revenue increases.

The aides did not elaborate on why Democrats were proposing such a big deal, but Democratic congressional leaders have repeatedly called on the super committee to go beyond its mandate to improve the country's fiscal health.

Super committee Republicans refused to comment publicly on their political opponents' plan. But one congressional aide told Reuters that Senator Jon Kyl, a Republican member of the committee, interrupted the Democrats' presentation on Tuesday to complain that it contained "too much revenues."

"We haven't signed off on any revenues, and we certainly aren't doing anything that high," the aide quoted Kyl as saying.

Another Republican member, Representative Dave Camp, on Wednesday proposed slashing the top tax rates for individuals and corporations.

Camp, chairman of the tax-writing House Ways and Means Committee, also called for a "territorial system" that would exempt 95 percent of offshore corporations' profits from the U.S. corporate income tax.

CLYBURN'S MISGIVINGS

With U.S. budget deficits topping $1 trillion annually, ratings agencies are watching closely to see how the super committee advances toward a credible long-term solution to restore the U.S. fiscal health.

"It's smart from the Democrats' perspective to put some markers down and look like they're serious about deficit reduction, because there are two games in town: reduce the deficit and avoid the blame," one healthcare lobbyist said.

If the committee fails to reach a deal, automatic spending cuts that are evenly divided between military and domestic programs would be triggered, starting in 2013, under a budget deal struck between Republicans and Democrats this summer.

The Democratic plan proposes deeper cuts to Medicare than those envisaged by the summer budget deal. The automatic spending triggers in that deal would limit cuts to Medicare to 2 percent a year. Analysts say that would amount to about $123 billion in spending cuts for the program through 2021.

While sources characterized the plan as a Democratic one, they noted that at least one Democratic super committee member, Representative James Clyburn, had reservations about the move to cut Medicare spending.

He is not alone. Liberal House Democrats have voiced opposition to popular benefit programs being cut.

One congressional aide pointed out the Democrats' proposal was similar to the long-term budget plan that President Barack Obama sought to negotiate with House Speaker John Boehner, the top Republican in Congress, over the summer.

Those talks faltered when Republicans balked at raising taxes, and Boehner backed down from a "grand" deal with Obama. In the end, the White House and Congress ended up agreeing to a smaller, $917 billion deficit-reduction package that also raised the U.S. borrowing authority and averted a government default on its debt.

Standard & Poor's was unimpressed by both sides' failure to agree on a comprehensive deal and cut the U.S. AAA rating by one notch in August.

Rating agencies say Washington needs to find a total of about $4 trillion in savings, including the amount agreed to in August. That total is far beyond the $1.2 trillion minimum the super committee is mandated to come up with by November 23.

(Additional reporting by David Morgan, Thomas Ferraro, Tim Reid, Andy Sullivan, Rachelle Younglai, Kevin Drawbaugh and Patrick Temple-West; Editing by Ross Colvin and Philip Barbara)

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