The congressional supercommittee seeking a long-term debt-reduction deal over at least $1.2 trillion in deficit cuts remains deadlocked over Democrats’ insistence on tax increases as a deadline for agreement nears.
Senate Finance Committee Chairman Max Baucus proposed a deficit-reduction plan worth almost $3 trillion with about half comprised of tax increases, according to a congressional aide who spoke on the condition on anonymity.
The remainder would be spending cuts, including in Medicare and Medicaid, as well as fee increases, the aide said. Republicans rejected the plan, which Senate Democrats wanted to pair with extensions of a payroll tax break and jobless benefits scheduled to expire at the end of this year, the aide said.
Republicans offered a $2.2 trillion plan, said a Senate aide familiar with the proposal. It includes $600 million in new revenue, mostly by assuming economic growth, the aide said.
“They’re gridlocked,” Greg Valliere, chief political strategist at the Potomac Research Group, said in an Oct. 24 Bloomberg Television interview. “The level of partisanship is really about to ratchet up.” Valliere raised the prospect of a lower U.S. credit rating if the supercommittee fails, even as investors have shrugged off Standard & Poor’s Aug. 5 downgrade of the nation’s debt to AA+ from AAA.
Since the S&P downgrade, the government’s borrowing costs fell to record lows as Treasuries rallied. The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note was at 2.38 percent at 3:12 p.m. today in New York.
The cost of insuring U.S. government debt against default, as shown by credit default swaps on Treasury securities, declined since early August to become the cheapest among the Group of 10 nations. Moody’s Investors Service and Fitch Ratings have affirmed their top rankings on the U.S.
“If the supercommittee fails or just does half a loaf, then I think it’s not just S&P, the other agencies as well could take us down a notch,” Valliere said.
The deal lawmakers reached to raise the borrowing limit directs the supercommittee to recommend a debt-reduction plan by Nov. 23 and for Congress to approve it by Dec. 23. Failure to do so would trigger $1.2 trillion in across-the-board domestic and defense spending cuts.
Several supercommittee members spoke at a hearing yesterday about the risks of falling short of an agreement, while others questioned whether it would be possible to alter the automatic spending cuts.
“Every day we hear more and more about what the effects of failure would be on our nation’s long-term fiscal health and creditworthiness,” said Senator Patty Murray, the 12-member panel’s co-chairman and a Washington Democrat.
The supercommittee has held most of its meetings in private and given little public indication that a deal is in the making.
Congressional Budget Office Director Doug Elmendorf told the panel that members need to find agreement by the first week of November to give his agency enough time to measure the savings of any large-scale plan.
“Lawmakers have already taken significant steps to constrain discretionary spending,” Elmendorf said. Such programs account for less than 20 percent of the federal budget.
Total discretionary funding in 2011 was the lowest, as a share of gross domestic product, since 2002, and a new budget law established spending caps for the fiscal years 2012 through 2021, said Elmendorf.
The hearing, the first in a month, replayed the longstanding conflict between Democrats pushing for tax increases and Republicans who want to find cuts in entitlement programs such as Medicare.
Democrats pressed their case for a “balanced approach” to debt reduction that includes new tax revenue that ends preferences for upper-income earners. Murray said if the committee focuses only on lowering additional discretionary spending “we would still face deficits of hundreds of billions of dollars because we haven’t touched entitlements and revenues.”
“We’ve got to deal with the revenue issue,” said Maryland Democratic Representative Chris Van Hollen. “We all know that in the past decade when folks at the very top were paying a little more the economy performed just fine,” he said. “It seems to me this is a time for shared responsibility.”
Republicans are dug in against the Democrats’ revenue demands.
Representative Dave Camp, chairman of the tax-writing House Ways and Means Committee, said in a Bloomberg Television interview that he opposed a previous debt-reduction proposal by President Barack Obama’s debt commission because it included “high revenue levels.” The leaders of that panel will testify before the supercommittee on Nov. 1.
Some Republicans also have voiced concern about the prospect of reducing defense spending.
Camp, a Michigan Republican, asked Elmendorf if there are any barriers to Congress changing how the cuts to Pentagon programs would take effect.
“Any Congress can reverse the actions of a previous Congress,” said Elmendorf.
Leaders outside the committee are sounding less than confident as the deadline for recommendations approaches.
“Look, I’m not optimistic, I’m hopeful,’” House Democratic Minority Whip Steny Hoyer of Maryland told reporters on Oct. 25.