Grand Bargain Deficit-Deal Failure Would Set Election Showdown on Debt Cap

Photographer: Andrew Harrer/Bloomberg

U.S. Vice President Joe Biden speaks to reporters after a bipartisan meeting on deficit reduction with congressional leaders in Washington, D.C., U.S., on Thursday, May 12, 2011. Close

U.S. Vice President Joe Biden speaks to reporters after a bipartisan meeting on deficit... Read More

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Photographer: Andrew Harrer/Bloomberg

U.S. Vice President Joe Biden speaks to reporters after a bipartisan meeting on deficit reduction with congressional leaders in Washington, D.C., U.S., on Thursday, May 12, 2011.

A Republican demand that an increase in the U.S. debt limit be matched by spending reductions may do more than force painful cuts. It could mean another vote on the borrowing cap at the height of the 2012 election campaign.

With hopes fading for a grand bargain to rein in the debt, Vice President Joe Biden said he thinks a bipartisan group of lawmakers he’s leading in talks can agree on a $1 trillion deficit-reduction package to win enough votes to raise the $14.3 trillion debt ceiling by August. Yet unless he can get Republicans to agree to raise the debt ceiling beyond that, it won’t be enough to get past the election, budget experts say.

“Nobody has put enough savings on the table to justify lifting the debt limit by $2-or-$3 trillion, which is what we have to do,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that examines fiscal policy.

“I don’t know whether they have thought through the consequences of making this dollar-for-dollar deal,” Joe Minarik, senior vice president at the nonpartisan Committee for Economic Development and a former chief economist in the White House budget office, said of the Republicans. “They’ll have to make multiple, politically difficult votes, and the financial markets could be in a continued unsettled state.”

With the Biden talks set to resume June 9, Republicans are vowing to block any tax increases that Democrats say must be part of a deal. And a special-election victory last month in New York has hardened Democrats’ opposition to Republican demands to re-engineer Medicare, the biggest driver of the long-term debt.

Boehner Wants Cuts

House Speaker John Boehner “has made clear that if President Obama wants Congress to increase the debt limit then it must be accompanied by spending cuts greater than the debt hike,” said Kevin Smith, a spokesman for Boehner, an Ohio Republican. “The American people simply will not tolerate anything less.”

Negotiations among a separate group of six senators, who have been trying to craft a comprehensive plan for months, have gone into a deep freeze, making significant moves on taxes and entitlements -- the basis of any grand bargain on the debt -- more remote.

“Politics is getting in the way,” said Tim Penny, a former Minnesota lawmaker who founded the Democratic Budget Group in Congress to draft deficit-cutting initiatives. “A substantive deal is unfortunately not likely, but budget targets with some enforcement mechanism may be doable.”

Growing Pressure

Pressure is building on debt negotiators to deliver an agreement.

Moody’s Investors Service last week said if there’s no progress on increasing the debt limit in coming weeks, it expects to place the government’s rating under review for a possible downgrade. In April, Standard & Poor’s downgraded its U.S. debt outlook to negative.

“The markets ought to know we’re going to get this done,” Representative Steny Hoyer of Maryland, the No. 2 House Democrat, said on June 2 after a meeting at the White House. A default “would have catastrophic consequences.”

House Majority Leader Eric Cantor e-mailed House Republicans yesterday that he’s “cautiously optimistic” they will be able to reach a deal with the administration on spending cuts that would equal whatever increase in the debt limit they decide on. Cantor, a Virginia Republican, said he plans to let them know “in the coming weeks” of specific cuts under discussion.

Branding Republicans

John Feehery, a political strategist and a former spokesman for onetime Republican House Speaker Dennis Hastert, played down the risk of repeated votes on the debt ceiling and the effect on markets. And he said Republicans could benefit from the debate.

“If they can have a long sustained period of proving that they’re cutting spending, that’s good for Republicans because it helps brand Republicans as the spending-cutters,” he said.

“Ultimately, they will get a deal,” he said. “They can extract a lot more concessions with this than with almost everything else.”

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 2.99 percent today, 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.

Partial Victory

Barring a “more significant market warning” in the form of increased costs of borrowing or credit default swaps, a $1 trillion down payment with an enforcement mechanism would allow both sides to declare a partial victory, said MacGuineas.

“It leaves the toughest pieces to figure out post-election -- Social Security, Medicare, defense and taxes,” she said. “This is the unfortunate reality of politics.”

For Democrats, reaching a deal with Republicans on so- called entitlements would neutralize a Republican plan to largely privatize Medicare, the issue that propelled Democrat Kathy Hochul to a May 24 victory in a western New York district.

The “unfortunate lesson” of that election for Democrats is “‘don’t cut a deal on entitlements,’” said Matt Bennett, a vice president of Third Way, a Democratic policy group that supports an overhaul of the government programs.

For their part, Republicans don’t want to hand Obama a history-making agreement to slash the federal debt that would win him support among independent voters. “If Obama gets a grand bargain done it makes it very difficult to beat him,” said Bennett.

Short-Term Extensions

“Tax reform will take longer and so will Medicare, Medicaid, entitlement reform,” said Charlie Stenholm, a former Texas congressman and veteran of battles to curb entitlements. Stenholm, a Democrat, envisions “a short-term, even a series of short-term debt ceiling extensions, that would eventually do what has to be done, and that’s cut spending.”

Stenholm is among those who support what’s known as a trigger scenario: If Congress fails to put in place a plan to meet agreed-upon savings and debt targets, automatic spending cuts and revenue increases would take effect.

On April 13, the president outlined his version of the concept, though critics and Republicans say it’s a nonstarter because it exempts Medicare and Social Security from automatic cutbacks. The trigger wouldn’t kick in until 2014 and only if projections showed average deficits of over 2.8 percent of gross domestic product. This would give lawmakers a year after the election to reach a deal.

Gramm Rudman

One pitfall is crafting an enforcement mechanism that doesn’t suffer the same fate of a similar attempt in 1985, the Gramm-Rudman-Hollings Act, which was viewed as a failure because Congress ultimately ignored its automatic cuts. Balanced budgets didn’t materialize until the 1990s, when budget surpluses resulted from an improved economy.

While Biden has set a goal of a package of at least $1 trillion, aides involved in the negotiations say the two sides have found common ground on just $200 billion in cuts thus far.

Even his goal would fall far short of the $4 trillion package the group of six senators led by Mark Warner, a Virginia Democrat, and Saxby Chambliss, a Georgia Republican, had been drafting. That effort stalled, with one Republican member, Senator Tom Coburn of Oklahoma, stepping away from the talks.

The Biden-led group is “not going to solve the $14 trillion debt,” said Chambliss. “I don’t think there’s any way.”

Senator Jon Kyl of Arizona, one of the lawmakers participating in the Biden talks, said the debt ceiling would have to be raised by $2.4 trillion now to get through the end of next year, adding that Republicans would want at least take that much in savings in return.

Asked whether he’s willing to take additional votes in an election year, Kyl, the No. 2 Republican in the Senate, said: “I’m perfectly happy to do it.”

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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