November 3, 2010 / 2:45 AM / 9 years ago

Q+A: Could Congress reduce the budget deficit next year?

WASHINGTON (Reuters) - Republicans who were projected to have won control of the House of Representatives have campaigned on the promise of large spending cuts, and President Barack Obama has said that reducing the budget deficit will be a top priority in 2011.

A road sign urges voters to "Fire Incumbents" in Sleepy Hollow, New York November 2, 2010. REUTERS/Jessica Rinaldi

Some budget experts fear the United States will face a Greek-style debt crisis over the coming decade if it does not bring down budget the deficit, which hit 8.9 percent of gross domestic product in the last fiscal year, to a more sustainable level of around 3 percent of GDP.

The deficit is expected to shrink in coming years as the economy recovers from the worst recession since the 1930s before widening again due to increased government retirement and healthcare costs.

Some 91 percent of Americans say it is crucial or important for Congress to tackle the deficit next year, according to a Reuters/Ipsos survey on October 13.

Will Congress be up to the task?

WILL REPUBLICANS BE ABLE TO CUT SPENDING?

House Republicans campaigned on the promise to slash non-security spending by roughly $100 billion in the first year they are in charge. That would represent a 15 percent cut from current levels.

Their efforts could face a veto from Obama, who has said the proposed cuts could undermine education and harm the nation’s competitiveness.

They could also get watered down in the Senate, where Democrats looked on Tuesday night like retaining a narrow margin of control.

Still, that could be enough to move the needle in the direction of spending cuts.

“The Senate might hate them and the White House might oppose, but the leverage could produce a serious reduction in discretionary spending growth or even an absolute decline,” said Douglas Holtz-Eakin, a former head of the non-partisan Congressional Budget Office who served as chief economic adviser for Republican John McCain’s 2008 presidential campaign.

WOULD THAT BE ENOUGH?

Even if Republicans managed to slash $100 billion in domestic spending, that would not be enough to close a budget gap expected to top $1 trillion again for the current fiscal year. Experts say lawmakers will need to trim the retirement and healthcare programs that make up roughly 57 percent of the $3.55 trillion budget.

Neither party is eager to take on this task on their own. Representative Paul Ryan, the top Republican on the budget committee, has outlined a plan to control retirement and healthcare costs, but party leaders have not endorsed it.

Democrats remember 1993, when they passed a deficit-reduction plan with no Republican help. Voters responded by handing control of the House to Republicans the next year.

WHAT ABOUT THE PRESIDENT’S DEFICIT COMMISSION?

Obama has set up a bipartisan commission to devise a plan to bring the budget deficit down to a manageable level. The panel is due to issue a report on December 1, but it is unclear whether its 18 members will be able to reach consensus or if Congress would adopt its recommendations.

IS A BIPARTISAN PLAN POSSIBLE?

Republicans and Democrats managed to work together to pass a deficit-reduction plan in 1990, although it became a liability for Republican President George H.W. Bush during his reelection campaign two years later.

Cooperation will also be needed to pass any legislation next year, but budget experts are pessimistic that the two parties will be able to tackle the deficit without a European-style debt crisis or other external shock.

“I’m not very optimistic that we’ll make any progress on the deficit over the next several years unless there’s a crisis of some kind,” said Isabel Sawhill of the Brookings Institution.

The two parties could agree to extend soon-to-expire income tax cuts on a temporary basis, though they disagree on whether they should be made permanent for all income brackets. That might head off a nasty fight and avoid upsetting the fragile economic recovery, but it would only worsen the budget picture.

Though many Republicans have sought to harness voter concern about the deficit, they are likely to remain wary of inflaming conservative activists who have voted out incumbents for working with Democrats.

“You can easily see two very different scenarios — one where the lesson is that bipartisan cooperation is punished and rhetoric on getting tough on spending trumps real policy choices, or alternatively, a bipartisan group of statesmen comes together,” said Maya MacGuineas, president of the Center for a Responsible Budget. “Obviously, we need the second model to prevail, but I can’t say that I am altogether optimistic.”

Editing by Eric Walsh

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