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Q+A: State of play in debt and deficit talks
May 10, 2011 / 5:07 AM / 7 years ago

Q+A: State of play in debt and deficit talks

WASHINGTON (Reuters) - A group of Republican and Democratic lawmakers, led by Vice-President Joe Biden, meet on Tuesday to try to hammer out a deal to cut the United States’ long-term deficits, due to hit $1.4 trillion this year and stay in the trillion-dollar range for several more.

If a deal can be struck on how to cut the deficit, the White House hopes that will clear the path for Congress to act on a far more pressing issue: raising the country’s $14.3 trillion debt limit.

The government is expected to reach the statutory borrowing cap in less than a week -- on May 16 -- and the U.S. Treasury says it must be raised by August 2, or the country will begin to default on its obligations.

A lengthy standoff between Democrats and Republicans, who are demanding drastic spending cuts in return for their support for raising the debt limit, could trigger a crisis in the markets and a spike in interest rates.

ARE THE DEFICIT TALKS MAKING PROGRESS?

After attending the first meeting of the seven-member Biden group last week, senior Democratic lawmaker James Clyburn said he hoped Tuesday’s meeting would “get down to nuts and bolts”.

The two Republican and four Democratic lawmakers on the panel agree the long-term deficit must be brought under control but are far apart on how to achieve this.

Republicans insist that increasing revenues through higher taxes are “off the table”, and that the deficit can be reduced solely through drastic spending cuts. Democrats, including President Barack Obama, say that raising taxes for the wealthiest Americans -- those earning more than $250,000 a year -- must be part of a deficit-reduction solution.

SO, IF BOTH PARTIES FAR APART, WHAT HOPES FOR A DEAL?

In a move that raised hopes the parties may be edging closer to a deal, top Republicans last week backed away from their plan to privatize Medicare, the government-run program for the elderly, as a way to help reduce the long-term deficit.

By putting the issue of Medicare on the back burner, Republicans removed a major obstacle to a potential deal. Democrats, and a majority of voters, oppose turning Medicare into a privately-run voucher scheme, which was a centerpiece of the Republicans’ long-term budget plan released last month.

Both sides in Biden’s deficit talks also appear willing to put off negotiations on the divisive issues of healthcare and taxes until a later date.

Instead, the White House and the Republican leadership both seem ready to agree to a long-term deficit reduction goal of about $4 trillion with fail-safe “triggers” that would reduce the deficit if it had not been lowered enough over time.

But the two sides are still far apart on how deficit-cutting “triggers” might work. The White House wants those triggers to include both spending cuts and higher taxes. Republicans say the triggers must solely cut spending.

IF BIDEN GETS A DEAL, WILL THE TEA PARTY BACK IT?

Even if the Biden panel reaches a broad deal on the deficit that avoids the thorny issues of taxes and entitlements such as Social Security, the lack of details is likely to guarantee opposition from dozens of lawmakers aligned with the fiscally conservative Tea Party movement.

Conservative Republicans want to use the August 2 debt limit deadline as leverage for their demands for deep spending cuts. If enough fiscal conservatives in the House of Representatives refuse to back a debt limit rise, the Republican House Speaker John Boehner will not have enough Republican votes to pass the measure and will need Democratic help.

WHO HAS MORE AT STAKE IN THE TALKS?

There are considerable risks on all sides. If Boehner fails to get a “yes” vote to raise the debt limit through the House, Republicans will likely be blamed for any fallout in the bond markets, and with it a spike in interest rates.

A financial crisis could plunge the United States back into recession. With many Americans already questioning Obama’s stewardship of the economy, another downturn would endanger his efforts to seek reelection next year.

WHAT ABOUT THE “GANG OF SIX”?

A bipartisan group of six U.S. senators has been trying since December to come up with a detailed plan to cut the long-term deficit. Its members concede that if they fail to reach a deal soon, they will become “irrelevant” to the deficit and debt discussions.

Lawmakers and markets have been watching the “Gang of Six” closely because it is the only effort in Washington to craft a detailed plan to bring the long-term deficit under control.

There were hopes that the group would issue its plan in the first week of May, but that deadline passed without agreement. Members say they are close to a deal but that obstacles still remain.

Reporting by Tim Reid, Editing by David Lawder

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