June 6, 2013 5:50 pm

US told to reset deficit reduction debate

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An influential liberal think-tank with close ties to the White House is calling for a “reset” of the US political debate on deficit reduction, arguing that it should no longer be the main economic policy objective in Washington and disavowing calls for a big compromise with Republicans.

The 40-page report from the Center for American Progress on Thursday suggests Barack Obama’s window for persuading members of his own Democratic party to embrace a “grand bargain” with Congress on deficit reduction may have passed.

The report shows that liberals are sceptical that a deal with Republicans can be reached, and the recent improvement in the short- and medium-term public finances means the need for an agreement to pass more deficit reduction measures is no longer urgent.

“No more pretending that the sky is falling. No more rash actions to cut the deficit without regard for real-world impacts. No more calls for an ever-elusive grand bargain,” wrote Michael Linden, the managing director for economic policy at the CAP.

“Improving our national finances is still an important goal – that has not changed. But so much else has, and the debate must change too,” he added.

Instead of a big deficit reduction deal, the CAP is suggesting a much smaller agreement to replace three years of sequestration with budget savings, as well as $80bn in new spending on infrastructure and education.

The scaled-back deficit plan includes $100bn in reductions to federal healthcare programmes over a decade, as well as $40bn in cuts to farm subsidies and raising taxes on wealthy Americans earning more than $1m a year and on oil and gas companies.

The new spending would include funds for Mr Obama’s plan to implement universal pre-kindergarten education, as well funds for new bridges, roads and other infrastructure.

The annual US budget deficit is projected by the Congressional Budget Office to drop to 2.1 per cent of gross domestic product in 2015 after being above 10 per cent in the immediate aftermath of the 2009 recession. This is due to the steady US economic recovery as well as spending cuts and tax rises since then.

But projections of rising government healthcare spending, the main driver of long-term US fiscal problems as the population ages, have also slowed, reducing the pressure for big changes to the largest medical insurance programmes such as Medicare for the elderly and Medicaid for the poor.

In addition to those factors, the CAP said that some European countries had “experimented with austerity and those experiments have failed spectacularly” and “a key argument that that high debt causes slower growth has crumbled” after criticism of the findings of a study by economists Carmen Reinhart and Kenneth Rogoff.

Fix the Debt, a group co-founded by Erskine Bowles and Alan Simpson, the bipartisan pair that chaired Mr Obama’s 2010 fiscal commission, pushed back forcefully against the CAP’s conclusions.

“It seems that their case mainly comes down to arguing that because we’ve divided up the grand bargain into pieces and done the easy part we should no longer worry about the hard parts,” a spokesman said.

“Given that our debt continues to remain on an upward path relative to the economy, our tax code is a mess, our entitlement programmes are continuing to grow unsustainably, and we have no real solution to deal with sequestration, we disagree,” he added.

But the CAP said that the pursuit of a grand bargain on deficit reduction had itself led to perverse outcomes, such as “sequestration” – the automatic across-the-board spending cuts worth $1.2tn over a decade that began in March affecting a vast swath of government programmes and agencies. Both Republicans and Democrats say they are displeased with the reductions, but cannot agree on savings to replace them.

While there are still some Democrats who are pushing for a big deficit reduction deal with Republicans, the CAP study could further limit the appetite for such an agreement among Mr Obama’s allies on Capitol Hill, who have always been sceptical of big cuts to social programmes.

In the coming months, fresh fiscal negotiations will have to take place, since the US Congress will have to raise the nation’s borrowing limit around October or November, and a new agreement to fund the government will be needed by the end of September.

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