May 16, 2011 / 11:15 AM / in 8 years

Q+A: Debt and deficit talks in early stages

WASHINGTON (Reuters) - A working group led by Vice President Joe Biden is seeking to hammer out a deal on long-term deficits and end a standoff over the U.S. debt limit, but after three meetings the talks are in their early stages.

The U.S. budget deficit is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for several years. A deficit-reduction agreement would pave the way to raising the country’s $14.3 trillion debt limit.

The government is expected to reach the statutory borrowing cap on Monday, but the Treasury has warned that if the debt limit is not raised by August 2, the country will begin to default on its obligations.

The standoff between Democrats and Republicans has made bond markets anxious and President Barack Obama warned in an interview broadcast on Sunday that the country could face a financial crisis more severe than the 2008-2009 meltdown if investors begin to doubt U.S. credit-worthiness.

ARE DEFICIT TALKS MAKING PROGRESS?

After attending the latest meeting of his seven-member group last week, Biden described the talks as “frank” but said many more sessions would be needed to reach a deal.

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

WHAT HOPES ARE THERE FOR A DEAL?

Republican and Democratic leaders seem to agree — Republican leaders mostly in private — the debt limit should be raised. Yet developments last week made clear any deal is probably weeks away, and talks are likely to stretch well into July.

After early signs Republican leaders might be open to a broad deal, involving long-term deficit-cutting goals with details to be worked out after the 2012 elections, John Boehner, the Republican House speaker, said in a speech last week to Wall Street any debt-limit rise would have to be matched with the promise now of even greater spending cuts.

That signaled that Republicans see this negotiation as a moment of leverage they will not cede until they have exacted as many spending cuts as possible. Similarly, Democrats show no sign of giving ground on the issue of taxes.

Chris Van Hollen, a Democratic member of the Biden panel, told Reuters negotiations would be slow, and that they had yet to get to the “painful” issues of taxes and entitlements such as Medicare, the government-run program for the elderly.

The growing consensus in Washington is the Biden panel provides the greatest hope of a deal that could clear the path to a vote in Congress to raise the debt limit.

WILL THE TEA PARTY BACK BIDEN DEAL?

Even if the Biden panel reaches a broad deficit deal that avoids the thorny issues of taxes and entitlements, it is almost sure to face 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. There are many conservative Republicans in the House of Representatives who do not believe in the Treasury’s August 2 deadline — or even that a default would roil the markets. Without them, 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 re-election 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 deficit-reduction plan. Its members concede that if they fail to reach a deal soon, they will become “irrelevant” to the 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 the group would issue its plan in early May, but that deadline passed without agreement. One member now says a deal is unlikely until late May — another delay that poses a risk to the group’s relevance.

Reporting by Tim Reid; Editing by Todd Eastham

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