Breaking News

Qualcomm Gets SEC Wells Notice on China Bribery Allegations
Tweet TWEET

Debt Plan Includes Spending-Cut ‘Trigger’ With a Long History of Failure

As they struggle to reach an agreement over how to extend the nation’s debt limit and trim budget deficits, Republicans and Democrats are turning to an enforcement tool, called a “trigger,” with a history of failure.

Republicans are insisting that the trigger would cause across-the-board, automatic spending cuts if Congress comes up short of implementing its own budget reductions. Democrats want the mechanism to force deficit reduction through both cutting expenditures and adding revenue.

“If we need to put in place some kind of enforcement mechanism to hold us all accountable for making these reforms, I’ll support that, too, if it’s done in a smart and balanced way,” President Barack Obama said at the White House today.

A trigger could be a potential area of compromise if it assumes new revenue through overhauling the tax code, Senator Mike Crapo, an Idaho Republican, said in an interview last week. “A trigger that would raise taxes, I don’t think that’s acceptable” to Republicans, he said.

Even if the parties can reach agreement to avoid a possible default on Aug. 2, Congresses have repeatedly ignored or overridden automatic cuts dictated in previous legislative agreements.

For that reason, budget and credit rating experts are skeptical of the device, and they are even more critical of the call in both the House and the Senate for identifying future cuts through a newly created bipartisan committee -- another Washington mainstay that can’t guarantee any real impact.

‘Congress Can Undo’

“Anything Congress does, Congress can undo,” said Bob Bixby, executive director of the Concord Coalition, an Arlington, Virginia-based group that advocates for balanced budgets. “They can’t really bind themselves. You really have to have a political will to make these things work or they won’t.”

Formulating an effective way to hold Congress to its promises to make the choices required to slash trillions in spending in the next decade is key to satisfying demands by credit rating services like Standard & Poor’s for a credible commitment to taming the long-term debt.

Without enforcement powers, any new bipartisan committee may not be taken seriously on Wall Street and by ratings agencies, said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC.

Toxic Term

At least three commissions in the past year have failed to offer a plan that gained traction, including Obama’s National Commission on Fiscal Responsibility and Reform, a group of six senators often called the “Gang of Six,’’ and a bipartisan panel of lawmakers led by Vice President Joe Biden.

A reference to a “bipartisan deficit commission” has become so toxic in Washington that Senate Minority Leader Mitch McConnell, a Kentucky Republican, admonished reporters who used the term, insisting they call the proposed new panel a “committee.” That hasn’t diminished the skepticism.

“What can this committee offer that can be so dramatically different than what we’ve heard before?” Ader asked. “It’ll be tiresome and frustrating,” he said. “I don’t see how it’s possible it’ll have any teeth to it.”

Standard & Poor’s has warned that there is a 50 percent chance it will lower the U.S. government’s AAA credit rating by one or more levels within three months. S&P said that even if Congress raises the debt limit in time to avert a default, it might lower the U.S. sovereign rating to AA+ with a negative outlook if it isn’t accompanied by a “credible solution” on the debt.

Bill Hoagland, a budget adviser to Republican congressional leaders from 1982 to 2007, isn’t convinced that a new committee will meet the rating services’ demand.

‘Kicking the Can’

Republicans will appoint lawmakers who have taken an oath against tax increases, while Democrats will name members unwilling to allow cuts to Medicare and Social Security, Hoagland said. “I see this committee kicking the can down the road again,” he said.

The deficit-reduction proposal by House Speaker John Boehner, an Ohio Republican, imposes statutory spending limits, a device that worked successfully for almost a decade as part of the 1990 Budget Enforcement Act. It’s a simple trigger: Failure to stay below the spending caps prompts automatic, across-the- board spending cuts.

The U.S. went from a $221 billion deficit in 1990, the year the caps were enacted, to a $236 billion surplus in 2000, by abiding by the spending caps during a period of economic growth that brought in new revenue. In 2002, the provisions both expired and Congress didn’t renew them.

Health Care, Entitlements

Hoagland said this particular trigger may not be effective in reducing the nation’s debt because discretionary spending covers only roughly 18 percent of the federal budget.

“The real problem remains the health-care entitlement programs and the revenue side,” he said.

The 1990 agreement also featured a pay-as-you-go requirement for mandatory programs and revenues. A trigger was enacted to enforce the caps and the “paygo” requirement.

Still, Congress overrode the enforcement provision two out of the three times it was triggered, according to an April 28 report by the Peterson-Pew Commission on Budget Reform.

Gramm-Rudman

And in 1985, the Balanced Budget and Emergency Deficit Control, or the Gramm-Rudman-Hollings Act, included a trigger to enforce deficit targets. If the year’s target wasn’t met, spending cuts were triggered. In the five years of the act, the triggers kicked in twice, one of which was reduced by Congress and the other overridden by a subsequent budget agreement.

Congress has also rejected scheduled automatic reductions in doctors’ Medicare pay rates established in the Balanced Budget Act of 1997, prompting the annual passage of additional spending that is so routine it has a nickname: the “Doc Fix.”

Alternative enforcement options are being pushed by outside groups in the closing days of the debt negotiations. These include a freeze on new policies that increase the deficit, a trigger that repeals tax cuts for upper-income Americans favored by Obama and opposed by Republicans, and a guaranteed vote on the “Gang of Six” plan.

Lawmakers such as Virginia Senator Mark Warner, a Democrat and co-chair of the Senate group, are insisting that an enforcement mechanism is necessary -- if only to give the new bipartisan committee credibility.

“If this new so-called commission deadlocks, what happens then?” he said.

To contact the reporters 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

Bloomberg reserves the right to edit or 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.