Budget Deal Forcing More Taxes, Spending Cuts Circulates in U.S. Congress

Senate and House members, seeking to break an impasse over curbing the nation’s debt, are looking at a “club in the closet” mechanism that would force Republicans to agree to tax increases and Democrats to accept cuts to entitlement programs.

Proposals being circulated among the bipartisan “Gang of Six” Senate negotiators, and about 20 other lawmakers in both chambers, would set deficit-cutting targets, according to people familiar with the plan. They would impose automatic, across-the- board spending reductions and higher taxes if Congress failed to meet the goals.

Such plans -- dubbed save-as-you-go, or Savego in one version -- contrast with the immediate spending cuts House Republican freshmen are demanding.

“The enforcement mechanism is key to striking a deal,” said Bob Bixby, executive director of the Concord Coalition, a group that promotes balanced budgets. That’s because Republicans are worried Democrats will never accept entitlement-benefit cuts, while Democrats doubt that Republicans would agree to tax increases, he said.

The imperative to reach an agreement gained urgency this week when Standard & Poor’s put the U.S. government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

Photographer: Jay Mallin/Bloomberg

Timothy Geithner, U.S. treasury secretary, yesterday called for a version of the Savego plan, saying Congress and the administration need a framework for cutting budget deficits with “enforceable limits” on debt. Close

Timothy Geithner, U.S. treasury secretary, yesterday called for a version of the Savego... Read More

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Photographer: Jay Mallin/Bloomberg

Timothy Geithner, U.S. treasury secretary, yesterday called for a version of the Savego plan, saying Congress and the administration need a framework for cutting budget deficits with “enforceable limits” on debt.

Debt Limit

Lawmakers are up against a more immediate deadline, with the government projected to reach its debt limit by mid-May, though the Treasury could use emergency measures to avoid default until early July. To get an agreement to raise the limit, lawmakers may have to settle for broad targets instead of a full overhaul of entitlements and taxes.

The Obama administration has signaled general support for the Savego concept.

Yesterday, Treasury Secretary Timothy Geithner called for a version of the plan, saying Congress and the administration need a framework for cutting budget deficits with “enforceable limits” on debt.

Last week, President Barack Obama urged Congress to pass a “debt failsafe” that would trigger spending cuts and tax increases if U.S. debt didn’t stabilize by 2014. Unlike Savego, his proposal wouldn’t apply to Social Security, Medicare and programs for low-income Americans.

‘Strict Limitations’

Republicans are also speaking about setting spending limits. While traveling today in Riga, Latvia, Senator Jon Kyl of Arizona, the chamber’s No. 2 Republican, said it is possible “some strict limitations on how much money we can spend in the future, some procedural constraints” will have to be imposed on Congress as part of the debt ceiling vote.

The Savego plan to trigger automatic cuts was written by the Bipartisan Policy Center in Washington. The co-chairwoman of the group’s debt-reduction task force is Alice Rivlin, former President Bill Clinton’s budget director who served on Obama’s fiscal commission last year. Her co-chairman is Republican former Senator Pete Domenici of New Mexico, a former Senate Budget Committee chairman.

The Gang of Six senators is considering a new set of spending cuts, in addition to those approved for this year, on top of deficit reduction targets, according to four people familiar with their deliberations. The group, three Republicans and three Democrats, is led by Democrat Mark Warner of Virginia and Republican Saxby Chambliss of Georgia.

Past enforcement mechanisms, including the 1985 Gramm- Rudman-Hollings law that created deficit-reduction targets, failed because Congress ignored them, said Donald Marron, director of the Tax Policy Center in Washington.

‘Ticking Clock’

Still, the debt ceiling vote is a “ticking clock out there that we’re going to need things to attach to” on cutting the deficit, Marron said.

Unlike Republican proposals that focus solely on spending cuts, the proposals under discussion include revenue increases that Democrats say must be part of any bipartisan effort.

The enforcement mechanism is “a club in the closet, something that will happen if you don’t do what you’re supposed to do” in controlling deficits, said John Spratt, a former House member from South Carolina who was chairman of that chamber’s Budget Committee.

“Otherwise, it would be too easy to abandon if it got politically tough” to enact spending cuts and tax increases, said Spratt, a Democrat who also served on Obama’s bipartisan fiscal commission.

Manchin

With Republicans and some Democrats like Senator Joe Manchin of West Virginia insisting on deficit-reduction measures in exchange for increasing the debt limit, a plan to enforce spending and revenue targets may be the best lawmakers can do in a short time frame, Marron said.

“It would be difficult to have large-scale budget policy changes in place in time to tie them to a debt-limit increase,” said Marron. “It may be more straightforward to come up with budget process reforms like a trigger.”

For all the debate about the deficit in Washington, 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 more than $9 trillion from about $4.3 trillion in mid-2007.

The yield on the benchmark 10-year note is below the average of about 7 percent since 1980 and the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

Ten-Year Yields

Ten-year yields increased four basis points, or 0.04 percentage point, to 3.40 percent at 8:18 a.m. in New York, according to Bloomberg Bond Trader prices.

Overhauling tax policy and Medicare, and cutting defense spending, could take two to three years, said Dave Kendall, senior fellow for health and fiscal policy at Third Way, a Democratic policy group.

“There’s just too much work to be done,” he said. “You have to have a placeholder for these major reforms.”

Second-ranking Senate Democrat Richard Durbin of Illinois, a member of the Gang of Six, said Republicans have the upper hand in setting the fiscal debate terms in the Senate, where Democrats have a 53-47 working majority.

Republicans’ strong party discipline and Tea Party strain make it more likely that they would persuade 13 Democrats to join them to get 60 votes on budget issues than that Democrats would win over seven Republicans, Durbin said at an April 13 Bloomberg Breakfast.

Medicare and Medicaid

The Bipartisan Policy Center plan calls for reducing health-care costs, including spending on Medicare and Medicaid. If Congress fails to act, those programs would be subject to automatic cuts. Social Security would also receive automatic cuts unless Congress made revisions to put it on a course for solvency.

In health care, two-fifths of any savings would come from raising Medicare Part B premiums or other options; one-fifth by reducing Medicaid payments to states, and two-fifths from capping the exclusion for employer-sponsored insurance.

Tax increases would occur by raising rates across the board, by reducing tax credits or deductions by as much as half of their value in a given year, or by a combination of the two.

“We expect a lot of inquiries when members return” next month from the congressional recess, said Steve Bell, a Bipartisan Policy Center director and longtime Domenici aide.

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net.

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

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