Last updated: June 7, 2011 11:58 pm
Both parties in Congress and the White House aim to strike a deal within the next month. Although the partisan rancour that has defined the fiscal policy debate in the US this year has not vanished, both Republican and Democratic leaders have displayed a desire to speed up the pace of the negotiations to avoid the last-minute brinkmanship that could cause market turmoil.
The Treasury department has warned that in the absence of a deal to increase America’s borrowing limit of $14,300bn – which Republicans have tied to demands for deep spending cuts – the US could default on its debt by August 2, potentially plunging a sputtering recovery into a recession. Moody’s, the rating agency, warned last week that it could place America’s triple A credit score on review for a possible downgrade if no deal on the debt ceiling was reached.
Although severe divisions remain on long-term fiscal reform – with Republicans holding out against any tax rises and Democrats reluctant to cut healthcare programmes – the risk that the impasse could run past the August deadline appears to be decreasing.
“We’re confident that all parties will come together to reach an agreement soon and prevent the economic damage that a default would cause,” an Obama administration official said on Tuesday. “The important thing is that we are making real progress,” added one congressional aide. “I wouldn’t say we are getting to crunch time – that implies a desperate situation.”
At the least, the sides could agree a short-term increase in the debt limit to the beginning of next year – rather than the ideal target, which would raise it until the end of 2012. The challenge would be to get rank-and-file members, particularly House Republicans, to go along with it.
Eric Cantor, the House majority leader, told fellow party members in a letter this week that he was “cautiously optimistic” that a deal could be reached with Obama administration officials that would meet Republican demands of deep spending cuts.
Although many details are under wraps, both Mr Cantor and Joe Biden, the vice-president, have indicated that they envisage a compromise involving at least $1,000bn in cuts during the next decade.
Some reductions may be easily agreed – such as farm subsidies and cuts to federal pensions, while others are proving more difficult.
One wild card is whether any short-term stimulus measures to prop up the struggling economy – such as a payroll tax cut extension – might end up in the bargain.
As the talks intensify, President Barack Obama may have to become more personally involved, as he did in talks to avert a government shutdown in April and those for a deal on taxes in December.
Further impetus for a deal could come from a bipartisan group of senators that has been working on its own long-term deficit deal and is trying to regain steam after several setbacks. Mark Warner, the Virginia Democrat, and Saxby Chambliss, the Georgia Republican, are expected to provide an update on those talks today.
That opportunity could come on June 18, when Mr Obama will play golf with John Boehner, House speaker. “They have a lot to talk about,” said Jay Carney, White House press secretary, though he added that it would be more of a “social outing”. “They will not resolve the budget negotiations on the back nine.”
Even if the sides are able to reach a deal that would avoid a potential default and put a “downpayment” on deficit reduction, the challenge would be to get rank-and-file members, particularly House Republicans, to go along with it.
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