Obama’s Goal of Grand Budget Deal Elusive as Talks Begin

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U.S. President Barack Obama leaves after he made a statement at the White House October 17, 2013 in Washington, DC. Obama said the American people are completely fed up with Washington and called on cooperation to work things out.

Forget talk of a budgetary grand bargain when members of Congress sit down to meet a December deadline for progress on a revenue-and-spending plan.

Lawmakers say even a mini-bargain to carry the government through the next year or two would be difficult, never mind a breakthrough on entitlement spending limits and tax revenue that’s eluded negotiators for the past three years.

“It’s kind of hard to be positive about it, particularly when we’ve gone through what we’ve gone through recently,” said Senator Saxby Chambliss, a retiring Georgia Republican who anticipates what may be his final opportunity to put the nation’s fiscal house in order. Chambliss, 69, was co-chairman of a now-demobilized group of eight Senate negotiators.

This week’s deal to end a government shutdown and avert the threat of a U.S. default followed weeks of stalemate that began when House Republicans tried to force a delay in the Affordable Care Act, President Barack Obama’s signature health-care law. The accord sets a Dec. 13 date for completing the budget talks that opened yesterday. It funds government operations through Jan. 15 and suspends the debt limit through Feb. 7.

Budget Path

Senator Patty Murray of Washington, the lead Democrat on the congressional panel established by the agreement to write a budget, said the group will focus on a limited deal covering a shorter time horizon than the 10-year fiscal plan Congress tried and failed to negotiate in 2011.

Murray said she set her goal at “a budget path for this Congress in the next year or two, or further if we can.”

Negotiators will seek a mix of cost reductions and revenue increases that could replace the across-the-board spending cuts known as sequestration that Congress approved two years ago.

“There’s a real desire to take another effort, not at a grand bargain, but at a sequestration replacement,” said Senator Lindsey Graham, a South Carolina Republican.

Senator Jeff Sessions of Alabama, the top Republican on the Senate Budget Committee, said yesterday after the first meeting of budget committee leaders from both chambers that “we don’t want to raise expectations above reality, but I think there’s some things we could do.”

Obama’s Goal

Obama said yesterday at the White House that a bipartisan deal should be possible. In his budget released earlier this year, the president offered to reduce annual Social Security cost-of-living increases and to increase Medicare premiums for the wealthy, in exchange for tax increases to help fund other government programs.

“This shouldn’t be as difficult as it’s been in past years because we already spend less than we did a few years ago,” Obama said yesterday. “Our deficits are half of what they were a few years ago.”

The federal budget deficit fell from $1.1 trillion, 6.8 percent of gross domestic product, in 2012, to $642 billion, 3.9 percent of GDP, in 2013, according to projections by the Congressional Budget Office. The CBO forecasts a budget deficit next year of $560 billion, or 3.3 percent of GDP.

Buyers of U.S. government debt haven’t signaled concern about the nation’s fiscal prospects. Yields on 10-year Treasuries (USGG10YR) were little changed for the day at 2.59 percent at 10:27 a.m. in New York, after dropping to 2.54 percent, the lowest level since July 24. That compares with an average yield of 4.75 percent over the past 20 years.

Stocks Surge

Equity investors’ enthusiasm for the U.S. is surging. The benchmark Standard & Poor’s 500 U.S. stock index touched an all-time high and added 0.3 percent to reach 1,738.06 at 10:54 a.m. in New York. The index has rallied 2.1 percent in the past five days, headed for its biggest weekly advance since July.

Even as the government shutdown exposed deep divisions among lawmakers, Democrats and Republicans may be willing to tackle the big driver of the nation’s long-term debt: spending on entitlement programs including Medicare that is rising automatically as the baby boom generation retires.

The U.S. has already shaved non-security discretionary spending to its lowest level since Dwight D. Eisenhower was president, when it was 2.2 percent of gross domestic product, and Congress has availed itself of delay tactics including a failed 2011 supercommittee and the automatic spending cuts.

“We’ve done a lot already on discretionary, and the sequester is in place so it’ll be harder to kick it down the road,” said New Jersey Representative Scott Garrett, a Republican who sits on the House Budget Committee. “They can’t do another sequester.”

The House-Senate budget conference is the first of its kind since 2009, when Congress failed to produce a budget and began a pattern of lurching from crisis to crisis by funding the government through stopgap spending bills.

Ad-Hoc Groups

In the interim, ad-hoc groups of lawmakers, such as the Senate’s so-called “Gang of Eight,” sought to find agreement. “Working through the committees has a better track record of success,” said Senator Max Baucus, a Montana Democrat and a veteran of the “Gang of Eight” who is retiring next year.

Democrats say they hope Republicans will be more willing to compromise in the aftermath of the Tea Party-driven effort that partially shut down the government. The economy paid a penalty of $24 billion, according to Standard & Poor’s.

McConnell’s Lesson

Senator Mitch McConnell of Kentucky, the Senate’s Republican leader, said his party was done with using a cutoff of funds for the government as a bargaining chip.

“One of my favorite sayings is an old Kentucky saying, ‘There’s no education in the second kick of a mule,’” McConnell said in an interview with the National Review. “The first kick of the mule was in 1995; the second one was the last 16 days. A government shutdown is off the table. We’re not going to do it,” he said, referring to a shutdown during the Clinton administration.

That doesn’t mean McConnell would support a tax increase, which Obama is seeking to pay for spending on infrastructure, education and other priorities.

Democrats say the deficit-reduction deals of the past three years have been weighted toward spending cuts instead of tax increases. About $2 trillion in automatic cuts are scheduled as part of the 2011 Budget Control Act compared to about $600 billion in tax increases as part of last year’s fiscal-cliff agreement.

Taxes, Spending

The bipartisan fiscal commission led by former Republican Senator Alan Simpson of Wyoming and former Bill Clinton White House chief of staff Erskine Bowles recommended in its December 2010 majority report a three-to-one ratio of spending cuts to tax increases.

“The amount of revenue that’s raised should match the spending cuts in the health arena,” said Representative Kurt Schrader, an Oregon Democrat who sits on the Budget Committee.

Chambliss and his Democratic co-chairman, Senator Mark Warner of Virginia, are meeting weekly while Baucus, the Senate Finance Committee chairman, plans to meet with every single member of the Senate and discuss tax proposals weekly with his Republican House counterpart, Dave Camp of Michigan.

“I’m not campaigning anymore, and that frees up 30 to 40 percent of my time,” Baucus said in an interview. “Just psychologically, it frees me up to work to try to get tax reform that’s good for the country.”

There are others willing to move closer together.

“If you’re willing to work with me on real structural reform for entitlements to change the direction, I’m open to talking to you about revenue,” said Senator Mike Johanns, a Nebraska Republican.

Entitlement Changes

He cited Obama’s proposals to charge higher-income Medicare recipients more for benefits and to slow the rate of growth in Social Security cost-of-living adjustments, through a formula called the chained consumer price index.

“You’ve got an opportunity to do some things that were in the president’s budget and pro-growth tax policy,” said Representative Tom Price, a Georgia Republican and vice chairman of the House Budget Committee.

There also are entitlement proposals in Obama’s plan palatable to Democrats, said Representative Jim Moran, a Virginia Democrat. “We do need to negotiate our way out of the sequester, and I think the way to do so is to deal with some of the entitlement programs.”

Rigell Proposal

A plan by Republican Representative Scott Rigell of Virginia would rely on chained CPI, streamlined Medicare cost sharing and reduced farm subsidies for savings of $519 billion. His proposal would raise a total of $100 billion in revenue with provisions that include a cap on income-tax deductions above $1 million and an end to a corporate jet tax loophole.

Graham has cited revenue that could be raised by repatriating corporate funds sheltered overseas.

There is still a gulf between many Democrats and Republicans. Chambliss and other Republicans say Democrats must go beyond the entitlement cuts in Obama’s budget, or there can be no discussion of revenue.

Democrats say they want a ratio of revenue to spending cuts that Republicans are bound to reject.

The furthest Democrats are likely to go on entitlements is the chained CPI proposal, said Steve Bell, a onetime Republican Senate budget aide and now a senior director at the Bipartisan Policy Center in Washington.

“It is a technical change,” he said. “You’re not going to the prom with the queen for that one.”

“We may get a deal that is not entirely lame,” he said, “but it will not change the fundamental debt trajectory.”

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Jodi Schneider at jschneider50@bloomberg.net

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