Parties Seek Fallback Plans to Avoid Fiscal Cliff

Legislators discuss package of $60 bln to $100 bln in deficit reductions to avert larger cuts and tax increases.

Both parties in Congress are discussing fallback plans for $60 billion to $100 billion in deficit reduction to avert larger spending cuts and tax increases that could trigger a recession in 2013, according to several congressional aides.

With Republicans including House Speaker John Boehner saying a broad tax-and-spending deal after the Nov. 6 election probably can’t happen, the two parties are separately discussing a down payment to replace at least half of $110 billion in automatic spending cuts set to begin in January, said the Democratic and Republican aides.

Congress might delay the rest of the spending cuts while lawmakers work on entitlement or tax policy changes in the first half of 2013, said the aides, who weren’t authorized to talk publicly about the discussions.

“There is this developing consensus around a down payment and a framework,” said Bob Bixby, head of the Concord Coalition in Washington, which advocates limited spending. The $60 billion figure is “just enough to be taken seriously” by the nation’s creditors, he said. “It’s something to show that you’re in the game, that it’s not just a total can-kick.”

The $60 billion to $100 billion in reductions would come from unspecified savings from mandatory and discretionary federal spending, said the aides, who didn’t give details because any plan would be open to negotiation.

Republicans and Democrats are still far apart on a broader agreement on taxes. Republicans want the George W. Bush-era tax cuts, scheduled to expire at the end of this year, to be extended for everyone. Democrats want top earners to pay more.

One Democratic aide said the party may be willing to consider cutting a larger share of spending from non-defense programs to get a deal through the House, assuming the Bush tax cuts expire because both sides can’t reach a consensus on continuing them.

The parties have fought during Obama’s presidency over Republicans’ desire to extend the tax cuts for all income levels and Democrats’ effort to end the cuts for income exceeding $250,000 a year for married couples and $200,000 for individuals. Republicans have insisted that tax increases can’t be part of an agreement on deficit reduction, while Democrats say top earners should pay more.

A 2011 deficit-reduction agreement between Obama and congressional leaders created the so-called fiscal cliff of $607 billion in spending cuts and tax increases starting in January unless Congress acts to stop it.

BlackRock Inc. Chief Executive Officer Laurence D. Fink said yesterday the economy could shrink at the start of 2013 as companies curb hiring ahead of the fiscal cliff.

 

Creditors' Concerns

The Democratic and Republican congressional aides say a $60 billion down payment on spending cuts may be the largest amount they can come up with this year, and the minimum needed to calm concerns by the nation’s creditors that Congress and the president are incapable of addressing the budget deficit.

The aides said stopgap plans being considered by each party could continue miscellaneous tax breaks, prevent more people from having to pay the alternative minimum tax and delay cuts in Medicare payments to doctors. Democrats are also talking about ways to extend expanded unemployment benefits.

The Senate’s No. 2 Democrat, Dick Durbin of Illinois, said at the Democratic presidential convention in Charlotte, North Carolina, that many lawmakers want to “buy” a six-month delay in the scheduled tax increases and spending cuts by finding other ways to reduce the deficit.

Paul Weinstein, a former White House domestic policy aide who advised Obama’s 2010 fiscal commission, said a $60 billion deal would be “pretty small.” He said it would give Congress only a few months to work out differences on a broader agreement without roiling the credit markets.

“I wouldn’t be surprised if there’s a short-term deal,” Weinstein said. “I’m not sure that $60 billion without some kind of timetable or bigger deal is going to satisfy the ratings agencies.”

In September, Moody’s Investors Service said it would probably cut its triple A rating on U.S. government debt if deficit negotiations fail. Moody’s cut its outlook on U.S. debt to “negative” in August 2011, a warning that it might downgrade the rating. That same month, Standard & Poor’s stripped the government of its triple A rating on bonds.

There’s little sign that Republicans and Democrats are accomplishing much before the election to bridge their differences.

Bipartisan Group

Last week, a bipartisan group of U.S. senators that has worked on the issue for almost two years finished a three-day retreat at Mount Vernon in Virginia with no sign of progress. The Democratic and Republican aides said little or no bipartisan work is being done by the committees governing taxes and entitlements.

Last week, New York Senator Chuck Schumer, the Senate’s third-ranking Democrat, rejected a tax overhaul that would lower income tax rates while limiting deductions and credits, which Republicans consider an essential part of a deficit agreement.

In the House, Boehner said he is reluctant to back a major deficit-reduction deal in a post-election session. It’s unclear whether Boehner, an Ohio Republican, could get the chamber’s anti-deficit advocates to go along with a $60 billion deal that would delay the second half of the scheduled spending cuts.

Failure to reach a deal would put the nation at risk of another recession, said former New Hampshire Senator Judd Gregg, a Republican and co-chairman of the Campaign to Fix the Debt, a nonpartisan group urging a debt compromise.

“We cannot afford to have the fiscal cliff,” Gregg said. ‘It would definitely throw us into reverse, if not directly into recession. It would be a terrible failure of government for that to happen.’’

Many Democrats, including Senate Majority Leader Harry Reid of Nevada, predict that an Obama victory on Nov. 6 would strengthen his hand in persuading Republicans to agree to tax increases. Conversely, Republicans say a win by Republican presidential nominee Mitt Romney would cause Democrats to give in on extending tax cuts for all income levels.

There will be other political considerations after the election. Boehner will be reluctant to agree to a compromise that would frustrate anti-tax Tea Party members in the House before January, when the Republican rank-and-file will decide whether to re-elect him as speaker.

Some Democratic leaders, including Senator Patty Murray of Washington, say they are willing to let all of the Bush-era tax cuts temporarily expire next year rather than continue them for all income levels.

White House and congressional aides are working on ways to address the tax-and-spending issues depending on which party will control the White House and the House and Senate in 2013, according to congressional aides.

In July 2011, Obama and Boehner came close to reaching an agreement before talks broke down, at least in part over whether fresh tax revenue should amount to $800 billion or $1.2 trillion. Democrats say that could provide the basis of negotiations between Obama and Boehner after the election.

 

Bloomberg News

Page 3 of 3
Comments