Reuters logo
SCENARIOS-Whipping up a U.S. deficit plan is no easy task
August 17, 2011 / 9:00 PM / in 6 years

SCENARIOS-Whipping up a U.S. deficit plan is no easy task

WASHINGTON, Aug 17 (Reuters) - Over the next few weeks a new congressional “super committee” will be working through a number of well-known proposals to develop what could be a far-reaching U.S. deficit reduction plan and that will be offered up to Congress on a fast track.

The 12 members from the Senate and House of Representatives appointed to the panel will work through a mixture of spending cuts and tax increases to develop the package before Nov. 23. Congress will have a month to accept or reject it.

THE CHALLENGE

The challenge is to find at least $1.2 trillion in additional savings over 10 years on top of the $917 billion in spending cuts included in a recent agreement to raise the U.S. debt limit, which caps how much the United States can borrow.

It won’t be easy. The six Republicans and six Democrats bring to the table conflicting views on how to achieve the goal against the backdrop of a slow-growing economy that is producing too few new jobs.

Republicans want only to cut spending, while Democrats want a “balanced” approach that also includes tax increases.

BROAD AUTHORITY, PUBLIC ANGER

Panel members on both sides are aware of the public disgust with the partisan brinkmanship over raising the debt limit.

Some members have signaled flexibility as they prepare for their first meeting when Congress returns in September from a month-long August break.

It is called the “super committee” because it has broad authority to consider revenue-raising tax reform as well as money-saving overhauls of Medicare and Medicaid health programs for the elderly and poor and the Social Security federal retirement program.

Fortunately, the shelf is well stocked with money-saving and revenue-raising ideas put there by various bipartisan groups including President Barack Obama’s deficit commission.

But Republicans on the panel are under pressure from Tea Party conservatives to stand firm against tax increases, while Democrats are being urged by liberal groups to hold the line on Medicare, Medicaid and Social Security spending cuts.

WHAT WILL IT TAKE

A lot depends on whether the panel tries to surpass its savings goal of $1.2 trillion to $1.5 trillion over 10 years.

Many budget analysts agree it will take a sizable portion of spending cuts coupled with some tax increases to bring government spending in line with its revenue intake.

TAXES

Republicans are unlikely to accept an income tax rate hike. But they could go along with closing special interest tax breaks and loopholes which favor one group or industry over another. These breaks, which also include the mortgage interest deduction, total about $1 trillion a year.

To sweeten the deal for Republicans, some of the revenue generated by scrubbing the tax code could be used to lower top tax rates for individuals and the 35 percent corporate top rate. When the Bush-era tax cuts expire at the end of 2012, the top individual tax rate moves from 35 percent to 39.6 percent, an added incentive for Republicans to make a deal on taxes.

MEDICARE, MEDICAID, SOCIAL SECURITY

These programs account for a sizable portion of the federal budget and will consume a greater share as the baby boom generation, those born between 1946 and 1964, retires and draws on Medicare, Medicaid and Social Security benefits.

Gradually raising the retirement age, which is set to rise to 67 under current law and raising the Medicare eligibility age, currently at 65, are under consideration.

Cutting benefits for the wealthy is also on the table.

An idea that gained traction during the debt limit negotiations was changing the annual inflation adjustment for benefits to reflect lower a inflation level than the Consumer Price Index, which is now used.

Advocates for the elderly oppose the proposal because it would affect current retirees and the benefit cuts would grow over time. Anti-tax groups don’t like the idea either because a lot of tax adjustments are tied to the inflation rate.

POLITICAL AND FINANCIAL MARKET REALITIES

Many interest groups will find proposed changes hard to accept and the 12-member panel will be under intense pressure to find the right mix of spending cuts and tax increases.

Political positioning ahead of next year’s presidential and congressional elections will make it difficult for the group to achieve more than the $1.5 trillion goal.

But that could leave financial markets and U.S. credit holders demanding more deficit reduction. (Reporting by Donna Smith; Editing by Philip Barbara)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below