Investors Rebuff Republicans in Poll as 2-to-1 Say Raise Taxes to Cut Debt

Global investors, by an almost 2-to-1 majority, believe the U.S. government won’t be able to substantially cut its budget deficit without raising taxes, rejecting a core stand of congressional Republicans.

Investors are also pessimistic about prospects for a deal to cut the federal deficit, a Bloomberg survey found. Almost 6 out of 10 doubt President Barack Obama and Republicans will reach an agreement by the start of the new fiscal year on Oct. 1, according to a quarterly Bloomberg Global Poll of 1,263 investors, traders and analysts who are Bloomberg subscribers.

“I don’t think raising taxes is a particularly good idea, but it might be the only option,” says Thomas Larsen, a trader at Nordea Treasury in Copenhagen and a poll participant.

Even with pessimism over a long-term deal, more than 7 of 10 poll respondents are confident Congress will raise the $14.29 trillion debt limit and stave off a default on U.S. obligations. The government will run out of options for avoiding default by about Aug. 2, according to Treasury Secretary Timothy Geithner.

Obama’s rise in popularity in U.S public opinion polls since Navy SEALs killed Osama bin Laden isn’t reflected in the president’s standing among investors. In the Bloomberg poll, conducted May 9-10, 35 percent of U.S. investors say they have a favorable opinion of him, compared with 36 percent in January. Sixty-four percent of U.S. investors have an unfavorable view.

By contrast, 54 percent of the U.S. public views Obama favorably versus 31 who have a negative opinion of the president, according to an NBC News poll conducted May 5-7.

Obama Popular Overseas

Overseas investors continue to diverge from their U.S. counterparts in their appraisal of the president, as they have since the quarterly poll began in July 2009. Among investors outside the U.S., two-thirds view Obama favorably and 28 percent hold a negative view.

Assessments of the U.S. budget impasse show no such regional variation, with majorities of investors in the U.S., Europe and Asia concluding a tax increase is a necessary part of a deficit-reduction deal. Asked if it is possible to reduce “substantially” the deficit without raising taxes, 64 percent of respondents say no, while 33 percent say it’s possible.

The view on taxes is significant because of the political outlook of the global respondents: Those describing themselves as “right-of-center” outnumber “left-of-center” investors by more than 3-to-1; 37 percent say they are “centrists.”

Although U.S. investors say they favor the Republican approach to the budget, a 55 percent majority says it won’t be possible to bring down the deficit without raising taxes.

‘Entitlements Sacrosanct’

Some suggest that tax increases are necessary because policy makers are unwilling to touch Social Security and health- entitlement programs such as Medicare, which together make up more than 40 percent of the federal budget.

“With entitlements sacrosanct by virtue of the electoral base (seniors and the poor), the only real option is higher marginal and progressive taxation,” Alfredo Viegas, director of emerging markets fixed-income strategy for Knight Libertas in Greenwich, Connecticut, says in an e-mail.

Russell Rivera, 33, head trader and equity strategist at APB Financial Group in New York, said he prefers the Republican stance because of its focus on cutting spending, though he is among the poll respondents who say a tax increase would have to be included in a deficit-reduction package.

“Spending appears to be the issue,” Rivera says. “Spending is up significantly by this administration.”

The U.S. will run a budget deficit of $1.5 trillion for the current fiscal year and about $1.1 trillion for fiscal 2012, which begins Oct. 1, the Congressional Budget Office projects.

Budget Talks

Vice President Joe Biden met yesterday with congressional negotiators from both parties in the third session of talks on the deficit. A bipartisan group of senators known as the “Gang of Six” has been meeting separately to seek common ground.

For all the concern 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. The yield on the benchmark 10-year U.S. Treasury note was 3.22 percent at 5 p.m., New York time, yesterday, below the average of 7 percent since 1980 and the average of 5.48 percent in the 1998 through 2001 period, according to Bloomberg Bond Trader.

Twenty-two percent of poll respondents say there is a “big risk” that the deficit in the next two years will trigger a market crisis resulting in dramatically higher interest rates. That figure is up from January’s 18 percent, yet lower than November’s 24 percent.

Shrugging Off S&P

Likewise, 72 percent of those surveyed say Standard & Poor’s April 18 move to lower to negative its long-term outlook on U.S. government debt would have either a slight or non- existent impact on perceptions of U.S. creditworthiness.

Some of those who reject the need to raise taxes and argue that the deficit can be tackled through spending cuts alone say one target should be the defense budget.

The “U.S. is spending too much on energy and defense,” says Ivaylo Penev, a portfolio manager with Elana Fund Management in Sofia, Bulgaria, and a poll participant.

Investors are split over whether Obama or congressional Republicans offer the better budget solution, with 39 percent favoring the president’s approach and 38 percent that of the Republicans. Still, there are strong regional differences.

U.S. investors favor congressional Republicans’ position in the budget deadlock over Obama’s by 62 percent to 24 percent, even as they don’t accept the opposition party’s no-tax tenet. Investors in other countries have the opposite view, with 47 percent taking Obama’s side versus 25 percent the Republicans. More than a quarter of investors outside the U.S. have no opinion on the matter.

Global Investors Unimpressed

House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, is viewed favorably by 33 percent of respondents, with 29 percent having a negative opinion. Almost 4 of 10 investors say they have no opinion of him.

Global investors are unimpressed with U.S. Congress members from either the Democratic or Republican parties. Forty-nine percent of U.S. investors have a favorable view of congressional Republicans and 58 percent view Ryan positively. Only 14 percent of U.S. Bloomberg customers have a favorable opinion of congressional Democrats.

The quarterly Bloomberg Global Poll of investors, traders and analysts was conducted by Selzer & Co., a Des Moines, Iowa- based firm. It has a margin of error of plus or minus 2.8 percentage points.

To contact the reporters on this story: Mike Dorning in Washington at mdorning@bloomberg.net; David J. Lynch in Washington at dlynch27@bloomberg.net.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.