WASHINGTON (Reuters) - A deal to reduce the U.S. deficit could prove more elusive after the emergence of an economic slowdown that has widened the gulf between Democrats and Republicans over how to spur growth.
With deficit talks led by Vice President Joe Biden set to resume on Thursday, lawmakers from the two parties are looking closely at data showing flagging consumer confidence, a slowdown in manufacturing and stubbornly high unemployment.
For Democrats, the weak reports have reinforced fears that cutting government spending too quickly could choke off the recovery and hardened their resolve to ensure that any steep cuts be postponed until the economy is fully back on its feet.
Republicans, meanwhile, are seizing on the reports as evidence that President Barack Obama’s economic policies have failed. Blaming the run-up in U.S. debt on Obama’s 2009 stimulus package, they say high deficits are weighing heavily on business and consumer confidence and insist government spending must be slashed while keeping taxes low.
“I fear that the new economic jitters and the data will give those who don’t want to move forward on fiscal reforms another excuse not to,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Government data showing a meager jobs gain of 54,000 in May and a rise in the unemployment rate to 9.1 percent from 9 percent a month earlier confirmed fears that the pace of economic growth was slackening.
Reports on housing, manufacturing and other sectors have raised concerns about the economy’s health.
Private economists disagree over whether the slowdown is temporary or the start of a lasting period of sluggishness.
So do the politicians.
“To me, the numbers buttress my belief ... that we ought to reverse course, that stimulating the economy through government spending has not worked,” said Republican Senator Jerry Moran, one of four Tea Party senators.
Moran’s remedy for the U.S. economy’s ills is to tame the $1.4 trillion deficit and “give the private sector greater certainty” by streamlining regulations and cutting taxes.
But liberal lawmakers are wary of rapid cuts in programs such as education and job training and believe any long-term deficit reduction plan needs to include revenue increases.
“I think we are very concerned to make sure that we have a recovery plan. We want to be fiscally responsible, but we know the most important thing is to keep the economy growing,” Democratic Senator Benjamin Cardin told Reuters.
Stan Collender, a budget expert at Qorvis Communications, said the latest signs of a softening economy “should make it more difficult to cut the deficit short term because that’s the wrong economic policy.”
Collender says that while reining in long-term budget deficits is crucial, shrinking government too quickly would remove an important support for the economy.
White House officials believe deficit reduction must be timed to take into account the need to preserve the economy’s momentum. They also hope that if a credible budget deal can be worked out in the Biden talks, that would bolster financial markets and help the economy.
Many experts question whether they will exists in Washington to tackle the deficit problem and the weak economic data could further test lawmakers’ willingness to confront the problem.
But for all the differences between Democrats and Republicans over how to deal with the deficits, there are big risks for both sides if no breakthrough is reached.
The Biden talks are seeking to break a logjam over the country’s borrowing limit.
The Obama administration says the $14.3 trillion debt ceiling must be raised by August 2 to prevent the United States from defaulting on its obligations. but Republicans are demanding budget cuts in exchange for an agreement to lift it.
On Wednesday, Fitch Ratings warned it could reduce the credit rating on U.S. Treasury bonds to “junk” if the debt and deficit standoff is not resolved by August 15.
The idea of a technical default in which interest payments might be delayed for a few days has gained support from a growing number of mainstream Republicans.
Patrick Griffin, a former liaison to Congress during President Bill Clinton’s administration, said pressure may grow on Republicans to take more seriously the threat to the economy should the debt fight lead to a crisis in financial markets.
“I don’t think Republicans will be escaping what I think will be increasing pressure on being realistic about the debt limit,” said Griffin, now a lecturer at American University.
Editing by Todd Eastham