A Look at US Debt and Deficit Talks

Tuesday, 31 May 2011 01:43 PM

 

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A working group led by Vice President Joe Biden is seeking to put together a deal on long-term deficits and end a standoff over raising the U.S. debt limit. After five meetings, some progress has been made but an impasse has been reached on taxes and healthcare.

The U.S. budget deficit is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for several years. If the Biden group, which includes senior U.S. legislators, can reach a deal on cutting the deficit, it could give lawmakers political cover to vote in favor of raising the country's $14.3 trillion borrowing cap.

U.S. Treasury Secretary Timothy Geithner has warned that if Congress did not raise the debt limit by Aug. 2, the United States could face a default with dire economic consequences.

 

ARE DEFICIT TALKS MAKING PROGRESS?

Progress has been made but, as Republicans and Democrats on Biden's seven-member panel have begun tackling the thorniest issues of tax increases and entitlement reform, a deal still seems far from reach.

After the fourth negotiating session on May 24, Biden emerged to say the two sides had identified $1 trillion in cuts as a "down payment" for a deal and expressed optimism about the prospect of an agreement.

But two days later, after talks that lasted little more than an hour, negotiators emerged looking downbeat and left with little comment.

Aides said the talks had entered difficult terrain and that a fundamental stumbling block remained: Democrats will not consider cuts to health benefits, such as the Medicare health program for the elderly, until Republicans consider tax increases -- something Republicans insist are "off the table."

Separately, the House was set to reject a proposal on Tuesday to raise the debt limit without corresponding spending cuts.

The vote was scheduled by the House Republican leadership to show the White House that the effort to raise the borrowing cap has virtually no chance of passing the lower chamber without significant spending cuts.

It is a message that will increase pressure on the Biden group to come up with big spending reductions before Aug. 2.

WHAT HOPES ARE THERE FOR A DEAL?

The greatest hope for a deal lies in the fact the White House and Republican and Democratic leaders all agree that the debt limit needs to be raised by the Aug. 2 deadline.

Exactly how the Biden group gets to a deal remains unclear. Biden himself has said he is not sure if the group can get to the "finish line," but members appear to agree there is not enough time before Aug. 2 to come up with a comprehensive deficit-reduction plan.

Analysts say the only realistic option is to set a deficit-reduction goal of roughly $4 trillion over 10 years, with automatic deficit-cutting "triggers" that would kick in if the deficit were not being reduced fast enough. President Barack Obama advocates that approach.

John Boehner, the Republican speaker in the House of Representatives, has rejected such "gimmicks." Yet if the Biden group can find a big enough "down payment" well in excess of the $1 trillion already identified, that might bring enough rank-and-file Republicans along.

One of the biggest unresolved questions in the negotiations is whether Republicans would accept revenue increases that are not technically tax increases. More than $1 trillion in revenues can be clawed back by closing loopholes and breaks in the tax code, without having to hike rates. If Republicans agreed in principle to such revenue increases, it could clear the way for a deal.

Whatever the outcome of the Biden talks, most expect negotiations over the debt limit to go down to the wire.

 

WILL THE TEA PARTY MOVEMENT BACK A BIDEN DEAL?

Even if the Biden panel reaches a broad deficit deal that avoids, for now, going into detail on taxes and entitlements, it is almost sure to face opposition from dozens of lawmakers aligned with the fiscally conservative Tea Party movement.

Their opposition is bolstered by opinion polls showing most Americans oppose raising the debt limit. Many conservative Republicans do not believe Geithner's Aug. 2 deadline or his predictions of catastrophe if the borrowing cap is not increased.

When Congress eventually votes to raise the debt limit, Boehner likely will need Democratic help to pass the measure.

WHO HAS MORE AT STAKE IN THE TALKS?

There are considerable risks on all sides. If Boehner fails to get a "yes" vote in the House to raise the debt limit, Republicans likely will be blamed for any fallout in the bond markets, and with it a spike in interest rates.

A financial crisis could plunge the United States back into recession. With many Americans already questioning Obama's stewardship of the economy, another downturn would endanger his efforts to seek re-election next year.

ARE THE MARKETS WORRIED?

Bond markets remain calm. Yields have stayed low, suggesting investors remain comfortable buying U.S debt. Analysts say few investors envisage Congress failing to raise the borrowing cap, even if it takes weeks of negotiations.

But that calm could to turn to panic in the bond markets if the impasse drags into August.

WHAT HAS HAPPENED TO THE GANG OF SIX?

The bipartisan group of six U.S. senators which has been trying since December to come up with a deficit-reduction plan lost one of its Republican members on May 17, leaving it increasingly irrelevant to negotiations. Senator Tom Coburn quit due to an impasse with a Democratic colleague, Dick Durbin, over how far to cut Medicare.

© 2014 Thomson/Reuters. All rights reserved.

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