US Debt Deadline Closing In

As the 23rd of November 2011 approaches, ongoing discussion on reducing the US deficit has reached a ‘stand-off’. However, the members of a Joint Select Committee – a group of six Democrats and six Republicans drawn equally from the House of Representatives and the Senate Republican – are confident of reaching a deal. Republican Patrick Toomey quotes, “the clock is running out, but it hasn’t run out yet” and Democrat James Clyburn seconds that, saying he was hopeful a deal could be struck.

The committee must find $1.5tn (£930bn) in savings over 10 years. But members are split: Republicans are reluctant to raise taxes unless Democrats agree to reduce social powers. President Barack Obama plans to cut the US deficit by more than $3tn (£1.9tn) in the next decade. His proposals – unveiled in September – include an overhaul of the tax codes that would raise $1 trillion. If a reduction deficit package fails to occur, harder and more immediate cuts will instantly be imposed in ways that will not adhere to both parties’ likings.

Even if politicians could agree on the cuts, $1.5 trillion is insufficient. America’s deficits could be nearly $12 trillion, which will build up on the current net national debt of approximately $10 trillion. Even if the economy continues a normal rate of growth, the debt burden will still increase, and thus another deal will have to be struck later on. Therefore, the urgency of devising a deficit-reduction package that is big enough to instil confidence in investors that America’s long-term problem is being tackled. In short, this will allow a much needed stimulus into the economy.

If the committee fails to issue a resolution a series of spending cuts will occur, split evenly between defence and domestic programmes dear to Republicans and Democrats respectively. Polls have indicated most Americans see a mixed policy of tax increases on the rich accompanied by some spending cuts as the best way to cut the US budget deficit.

Firstly, the Democrats would have to yield their social entitlements such as their programmes of Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor). It speculated that the pensionable age needs to rise and too that of benefits. But the far more major problem is health entitlements, and the Democrats, having only just conducted a massive health-care reform on the cusp of Republican opposition, are deeply reluctant to do anything that might reopen that deal.

The other problem is taxes. It is illogical to believe a deficit reduction can be achieved without any rise in tax revenues. Republicans object to tax rises but are not absolute on this. But the tax code is relatively ambiguous: it sides with the politically favoured and suffers from economic engineering on the part of officials. However, a radical tax reform could allow for lower tax rates and yet increase tax receipts at the same time.

In recent years, many of America’s hardest decisions — including welfare reform and previous rounds of budget cuts — have been taken at times when its political situation has been precarious. The US owes more than $14tn in debt and runs an annual budget deficit of more than $1.4tn. The super-committee, set up in August, must submit its plan to both houses of Congress for a marginal vote by the end of the year – perhaps America’s most defining hour.

Contributed by Wafiq Islam

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