Obama Sets June Deadline for Deficit-Cut Deal in Challenge to Republicans

President Barack Obama set a June deadline for a bipartisan deal to cut the federal deficit and offered a path to get there that was designed to contrast with a Republican proposal he called unfair to the elderly and overly generous to the wealthy.

Obama’s plan, outlined in a speech yesterday at George Washington University, would cut $4 trillion in cumulative deficits within 12 years through a combination of spending reductions and tax increases that draws heavily on recommendations from the chairmen of his bipartisan fiscal commission.

The timeline Obama proposed for coming up with an agreement -- beginning talks in early May and completing them by late June -- sets up a negotiation over the nation’s long-term fiscal challenges in parallel with a congressional debate over raising the $14.29 trillion legal debt limit. The Treasury Department projects that it will reach the limit on May 16, though it could use emergency measures to avoid default until about July 8.

Moody’s Investors Service said the plan Obama announced may be a “positive” for the nation’s credit quality.

“It seems both sides of this debate are now targeting lower debt and lower deficits,” said Steven Hess, senior credit officer at Moody’s. “We do see this as a turning point in terms of the debate. We would view that as a positive, but we’ll have to wait to see the outcome.”

The president’s speech also sought to frame the issues for the 2012 presidential campaign by casting the partisan struggle over budget priorities as part of the debate over values.

‘Basic Social Compact’

Obama called his approach to the deficit “a more balanced approach” than the Republicans have, saying “their vision is less about deficit reduction than it is about changing the basic social compact in America.”

He said a proposal in the House Republicans’ budget plan to replace Medicare’s current fee-for-services plan with a subsidy to buy private insurance “ends Medicare as we know it.”

Obama rejected that idea. “I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs,” he said.

Instead, Obama would build on cost-containment measures in the health-care overhaul law and strengthen a Medicare cost- cutting board. He also proposed allowing Medicare to negotiate drug prices with manufacturers, accelerate availability of generic versions of higher-priced biotech drugs, and prohibit brand-name drug companies from paying generic competitors to delay their products.

Voting Group

Though the Republican plan would not change benefits for anyone currently over 55, Obama’s stand positions the president as a defender of a program important to the elderly, potentially bolstering his support among a constituency that recently has deserted Democrats.

Among voters age 65 and older, support for Democratic House candidates dropped from 49 percent in 2006 to 38 percent in 2010, according to exit polls. In the months before the 2010 midterm elections, Republicans charged that Obama’s health-care law weakened Medicare benefits.

Obama drew a connection between the Republican plan, which he said would raise the cost of Medicare to a new recipient in 10 years by almost $6,400, and the party’s support for extending the 2001 and 2003 tax cuts for the wealthy.

“They want to give people like me a $200,000 tax cut that’s paid for by asking 33 seniors to each pay $6,000 more in health costs,” said Obama, who vowed to block renewal of tax cuts for individuals making more than $200,000 a year and married couples earning more than $250,000.

Republican Response

Obama’s speech was noteworthy for “setting a new standard for class-warfare rhetoric,” said Representative Jeb Hensarling of Texas, the chairman of the House Republican Conference.

House Budget Committee Chairman Paul Ryan, a Wisconsin Republican who was the main author of his party’s budget plan, said Obama’s proposal was “hopelessly inadequate to address our country’s pressing fiscal” problems.

“What we heard was a partisan broadside from our campaigner in chief,” Ryan told reporters after Obama’s speech. “We don’t need partisanship, we don’t need demagoguery.”

Treasuries gained, while the Standard & Poor’s 500 Index halted its longest slump since November. Yields on the benchmark 10-year note fell four basis points, or 0.04 percentage point, to 3.46 percent at 5:05 p.m. in New York, according to BGCantor Market Data. The S&P 500 rose less than 0.1 percent to 1,314.41.

Lower Yields

Bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago, even though Treasury Department data show that the amount of marketable debt outstanding has risen to $9.13 trillion from $4.34 trillion in mid-2007. The yield on the benchmark 10-year note is below the average of 7 percent since 1980 and compares with the average of 5.48 percent in the 1998 through 2001 period, according to Bloomberg Bond Trader prices.

Obama set a target of reducing the annual U.S. deficit to 2.5 percent of gross domestic product by 2015, compared with the 10.9 percent of GDP projected for this year.

In contrast to the House Republicans’ budget plan, which includes no tax increases, Obama would get a quarter of his $4 trillion in deficit reductions from higher taxes.

Republican leaders said after getting briefed by the president that they won’t accept tax increases to cut the deficit.

“If we are going to resolve our differences and do something meaningful, raising taxes will not be part of that,” said House Speaker John Boehner of Ohio.

Debt Commission

The president borrowed some ideas from the debt commission he created last year, drawing on the recommendation by co- chairmen Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, a former chief of staff for President Bill Clinton, for a simpler tax code that lowers rates and increases revenue. He also adopted the recommendations on non-security discretionary spending, which would save $770 billion by 2023.

Obama proposed saving $400 billion in current and future defense spending and called for a “fundamental review” of U.S. military missions. The deficit commission majority recommended deeper cuts in the defense budget.

Obama’s plan also calls for $480 billion in savings from Medicare and Medicaid, with an additional $360 billion coming from other entitlement programs such as farm subsidies.

To achieve the debt targets, the president is urging Congress to pass a “debt failsafe” that would trigger across- the-board spending cuts and tax changes if the debt-to-GDP ratio hasn’t stabilized by 2014. The automatic cuts wouldn’t apply to entitlements, including Social Security, Medicare and programs intended for low-income Americans.

Triggers

Stan Collender, managing director of Qorvis Communications and a former staff member of the House and Senate budget committees, said the president’s approach for a trigger attempts to overcome the limits of the 1985 Gramm-Rudman-Hollings Act, which required automatic cuts if deficit targets, based on budget projections, weren’t reached. That plan, he said, could be bypassed with optimistic economic assumptions.

“We had triggers in the past, but no one decided to comply with them,” Collender said. A debt trigger “is going to be monitored by people in the markets who are very serious about it and who aren’t in the political system.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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