Bloomberg News

Grand Budget Bargain Goal Is Set by Senate Group to Avoid Fiscal Cliff

September 20, 2012

Senators Craft Post-Election Debt Plan Relying on Bowles-Simpson

Sen. Michael Bennet, a Democrat from Colorado, is among a group leading an effort to do something almost unthinkable in Washington: craft a bipartisan solution to the nation's deficit problem. Photographer: Doug Pensinger/Getty Images

A group of U.S. senators is quietly attempting to do something almost unthinkable in Washington: craft a bipartisan solution to the nation’s growing deficit in an election year.

The group -- which includes Lamar Alexander, a Tennessee Republican, and Michael Bennet, a Colorado Democrat -- hasn’t been given a name like the “Gang of Six,” and members might fail like others before them. That hasn’t stopped them from joining forces when most lawmakers are focused on campaigning.

They are looking at reviving a proposal by the leaders of President Barack Obama’s failed 2010 deficit-cutting commission to require Congress to act on a long-term plan, said Senator Kent Conrad, a North Dakota Democrat. The lawmakers want to offer a plan during the lame-duck session of Congress after the Nov. 6 election.

“The thing that has the greatest potential to succeed is, in the lame duck, a framework agreement is reached on a grand bargain to reduce deficits and debt by at least $4 trillion over 10 years,” said Conrad, the Senate Budget Committee chairman and a member of the new group of eight senators.

Today, Senator John McCain, an Arizona Republican, also embraced the debt commission leaders’ proposal. “Everybody knows what the solution is, and that’s Simpson-Bowles,” he said in an interview with Bloomberg Television’s Peter Cook, on the new program “Capitol Gains,” airing Sept. 23.

The Template

“Everybody knows that that’s the template for what we need to do,” said McCain, though he also said he is not ready to “raise taxes” to reach an agreement.

The U.S. faces a so-called fiscal cliff in January, when $1.2 trillion in automatic spending cuts over 10 years will start and the George W. Bush-era tax cuts will expire, unless Congress breaks its deadlock on a plan to replace it. Democrats propose letting tax cuts expire for top earners, while Republicans want spending reductions instead of more tax revenue.

U.S. Senate Majority Leader Harry Reid today predicted that Congress will reach a deal after the election, saying he supports a “long-term” approach. “I do not believe that we are going to go over the fiscal cliff,” Reid, a Nevada Democrat, told reporters in Washington.

Under one alternative being considered by the group of senators, Congress would be given six months to overhaul U.S. tax law and entitlement programs such as Social Security. If lawmakers can’t agree, the deficit panel leaders’ plan would be triggered, Conrad confirmed in an interview yesterday.

Automatic Consequences

“We have automatic consequences that go into effect” in place of the automatic spending cuts, Conrad said. “We’ve spent an enormous amount of time on other consequences for failure,” he said.

“I’m all for that, I wanted Bowles-Simpson,” said Senator Tom Coburn, an Oklahoma Republican participating in the Senate group’s talks. As a member of the president’s debt commission, Coburn voted in December 2010 for the proposal by Republican former Senator Alan Simpson of Wyoming and former President Bill Clinton’s White House chief of staff, Erskine Bowles.

Still, Coburn cited the Simpson-Bowles plan’s lack of a full overhaul of Medicare as a potential concern.

Should the spending cuts take effect in January, the biggest hit would be to the Defense Department, with $52.2 billion in fiscal 2013. The Department of Health and Human Services would see the next largest cut, $6.6 billion.

Homeland Security

The departments of Education and Homeland Security would each face spending reductions of $3.7 billion, followed by Housing and Urban Development with $3.6 billion, according to a Bloomberg Government analysis.

Government contractors have been given few details as to which programs might be cut and by how much. Bethesda, Maryland- based Lockheed Martin Corp. (LMT:US) said in a Securities and Exchange Commission filing on July 25 that it may need to issue “conditional” layoff notices to many of its workers. The Labor Department issued guidance five days later that sending such warnings to defense workers “would be inappropriate.”

The approach of relying on Simpson-Bowles is a logical alternative to the crush of tax increases and spending cuts that could cripple the U.S. economy, said Bob Bixby, head of the Concord Coalition, a nonprofit group that advocates for a balanced budget.

‘More Rational’

“It makes for a more rational cliff,” he said. “Letting the cliff go into effect is simply not good policy.”

The Simpson-Bowles plan would cut individual and corporate tax rates, curtail hundreds of tax deductions and credits, reduce Social Security benefits and Medicare, raise the gas tax and cut federal discretionary spending.

It didn’t win enough support among the debt-commission members to be sent to Congress for a vote. Among the commission members who opposed the proposal was Representative Paul Ryan of Wisconsin, now the Republican vice presidential nominee.

There’s no guarantee that the Senate group’s idea would avoid the same fate as similar attempts by lawmakers and the White House over the past two years to strike a multitrillion- dollar budget-cutting bargain.

“I don’t dismiss the idea out of hand,” said Bill Galston, a former domestic policy adviser in the Clinton administration. “There will have to be a change of perspective on both sides. If both sides come to the conclusion that it’s gridlock or a deal, then we’ll have a deal.”

‘Hold Out Hope’

“If one side continues to hold out hope that it can continue to do things its own way, then we won’t have a deal,” Galston said.

Laura Tyson, a former economic adviser to Clinton and now an economics professor at the University of California at Berkeley, said at a Bloomberg Government luncheon yesterday that she is “optimistic” the atmosphere will be better for an agreement after the election.

“The tone may change,” particularly if Republicans lose seats in the House, she said.

Most of the major bipartisan debt plans offered over the past several years -- including one by former New Mexico Senator Pete Domenici and Alice Rivlin, former budget director for Clinton -- had different blends of the tax and spending changes in Simpson-Bowles, said Bob Stevenson, a Republican former Senate Budget Committee aide.

Bake a Pie

“There are only so many ways to bake a pie,” Stevenson said. While hurdles to gaining approval would be significant in the Democratic-controlled Senate and potentially insurmountable in the Republican-controlled House, “it’s not impossible,” he said.

Coburn said the nation’s debt issue is “severe enough” that inaction isn’t an option. Still, nothing will happen until late this year, he said.

“The real sickness of Washington is nobody wants to fix this until after the election so they can see the landscape,” Coburn said.

The Simpson-Bowles plan would achieve 26 percent of its deficit reduction from revenue increases, 57 percent from spending cuts and 17 percent from interest savings.

In March 2011, a bipartisan group of 64 senators organized by Bennet and Michael Johanns, a Nebraska Republican, sent a letter to Obama urging action on a plan based on the fiscal commission’s work.

Last week, one of the Republican Party’s most ardent tax- cut advocates said if Obama is re-elected, there’s not much point in delaying a compromise on taxes.

Producing Class

“You can’t get a deal with Obama without raising taxes on the producing class of folks,” said South Carolina Senator Jim DeMint, a leader of the limited-spending Tea Party movement. “We might as well cut a deal,” he said. “If Republicans want to maintain the defense, we’re going to have to give tax increases to Obama.”

Today Senator Charles Schumer of New York, the Senate’s third-ranking Democrat, said DeMint’s comments may signal an end to congressional gridlock. “When Jim DeMint is suddenly open to revenues, you know the tide is turning,” said Schumer.

DeMint’s office didn’t immediately return a phone call seeking comment, though a report on Politico.com said DeMint clarified that, while a tax increase would be necessary to get a deal with Obama, he would personally “never” support it.

There is no similar attempt to craft a bipartisan plan in the Republican-controlled House. On Sept. 11, Speaker John Boehner of Ohio said he was “not confident at all” that Congress can avoid the automatic spending cuts. Many lawmakers are skeptical that Congress can accomplish much this year beyond buying time to work out their differences.

House Vote

In March, the House defeated a version of the Simpson- Bowles proposal on a 382-38 vote, demonstrating the difficulty the plan faces with Republicans and also Democrats, who oppose the cuts to entitlement programs.

Pressure for an agreement has become so intense that most investors assume Congress and the president will deliver a plan after the election, said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.

Moody’s Investors Service said in a Sept. 11 report that it will downgrade the U.S. next year if Congress doesn’t come up with a way to stabilize the growing debt. Should the U.S. go over the fiscal cliff, the New York-based rating firm said it would wait to see if “the economy could rebound from the shock” before giving the nation a stable outlook.

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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