US Lawmakers Negotiating Budget Deal

Democrats and Republicans have identified $2 trillion in spending cuts over the next ten years. We offer some perspective.

House Majority Leader Eric Cantor, Republican congressman of Virginia, April 7
House Majority Leader Eric Cantor, Republican congressman of Virginia, April 7 (Republican Conference)

Congress is facing an August 2 deadline for raising the nation’s debt ceiling but Democrats and Republicans are still far apart on reaching a deal that would cut future spending while expanding the government’s borrowing authority.

The Treasury Department has warned that it will run out of money to cover the country’s bills if Congress does not raise the $14.3 trillion legal debt limit by August. Some Republican legislators dispute that and have suggested that the Treasury prioritize interest payments to avert a default if negotiations have failed to produce a budget agreement by then. Talks to reach a deal in time are underway regardless.

The two major parties are understood to have agreed to raise the debt ceiling by up to $2 trillion which would suffice to keep the government running until after the 2012 presidential election. Republicans, who have a majority in the lower house of Congress, want at least a $1 cut for every $1 with which the debt ceiling is raised — over the next decade.

Between $900 billion and $1.3 trillion in cuts could come from capping the growth of future discretionary spending which includes everything from education to defense. Republicans are opposed to actually cutting military spending although there is lukewarm support for the $400 billion in savings outlined by former defense secretary Robert Gates this year.

Entitlement programs like pensions and health-care support — so-called mandatory spending — are mainly responsible for driving up federal expenditures in the future but no major reforms are expected to be announced between now and August 2. Lawmakers have negotiated cutbacks to the retirement benefits of federal workers and could change the way in which inflation is measured to slow the growth of general pensions which would save up to $300 billion. Also, Medicare benefits for wealthy retirees could be reduced although Democrats fear that it could lead to an erosion of public support for the program. They previously rejected a Republican plan to private Medicare and replace it with “premium support” or vouchers.

The two parties would also agree to cut farm and ethanol subsidies along with tax deductions for wealthy individuals and corporations although Republicans insist that such changes cannot amount to tax increases at a time of fragile economic recovery. They would rather reform the tax code altogether to lower rates across the board. America has the highest corporate tax rate in the world. Democrats, including President Barack Obama, have argued that the well to do should share in the burden of austerity however and perhaps be taxed specifically for owning private jets and yachts.

At Downsizing Government, the libertarian Cato Institute’s Tad DeHaven puts the $2 trillion spending cut over the next ten years in perspective and concludes that it’s far from massive. The Congressional Budget Office estimates that federal spending will reach nearly $46 trillion over the same period. “Even with the cuts, federal spending would still increase by $1.8 trillion” between now and 2021, writes DeHaven.

Democrats could increase spending even more as they have proposed additional stimulus measures to boost employment. Nearly one of ten Americans is out of work. Several senators support additional infrastructure spending and subsidies for “clean energy” but Republicans are adamantly opposed to it. They say that government spending is part of the problem, not the solution to the nation’s lackluster economic performance.

In an effort to curtail future spending growth, several fiscal conservatives have teamed up to champion a balanced budget amendment to the Constitution that would prohibit future Congresses from running deficits except during times of crisis. Democrats, who control the Senate, hardly favor subjecting the nation to the time consuming process of amending the highest law in the land although their support would be crucial for initiating the process. Republicans say that now may be the only time for them to persuade Democrats to vote for a balanced budget amendment. Some of them have threatened to vote against raising the debt ceiling unless such an amendment is part of the deal.

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