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Budget Office Warns That Deficits Will Rise Again Because Cuts Are Misdirected

September 17, 2013 by

Annual federal deficits will continue to fall in the short term, the budget office reported in its yearly long-term outlook, because of the recent spending cuts in military and domestic programs and rising tax collections in a recovering economy. The report projected the deficit in 2015 to be equal to 2.1 percent of the economy’s output, or just one-fifth of the peak shortfall at the height of the recession in 2009.

But starting in 2016, deficits are projected to rise again as more baby boomers begin drawing from Medicare, Medicaid and Social Security — the fast-growing entitlement programs, which Democrats and Republicans cannot agree on how to rein in.

The accumulating federal debt, which averaged 38 percent of the gross domestic product for the 40 years before the 2008 financial crisis, would rise from 73 percent of the G.D.P. now — above what most economists consider an optimum level — to at least 100 percent in 2038.

Budget experts have been warning since at least the Reagan era that in the early 21st century, aging baby boomers will drive entitlement spending — chiefly for Medicare and Medicaid, and to a lesser degree for Social Security — to levels that will crowd out all other military and domestic spending. Interest on the debt will also be a major and growing expense.

What is different now is that the Republican-controlled House and the White House have been on a two-year run of deficit reduction that has resulted, because of their inability to agree on entitlement reductions and higher tax revenues, in deepening cuts in the budget areas that are not responsible for the projections of mounting debt. Those discretionary spending programs — which include things as varied as Pentagon weapons purchases, air traffic control, science and research, education and national parks — are being squeezed even as entitlement spending grows automatically.

The budget office said that by 2023, the annual deficit would rise to an estimated 3.5 percent of the G.D.P., which is just beyond the level that many economists consider sustainable in a growing economy. By 2038, it would be 6.5 percent.

Under a nine-year plan starting in the 2011 fiscal year, discretionary spending was already being reduced annually. But the across-the-board “sequester” that took effect in March, when Republicans and Mr. Obama could not agree on alternative deficit reductions, has pared domestic and military programs further, resulting in increasing layoffs, furloughs and service cutbacks.

Republicans have supported keeping the sequestration cuts in place rather than accepting Mr. Obama’s proposal for a mix of higher taxes on wealthy people and some corporations and cuts in future entitlement spending. And he has said he will not accept their alternative for deeper reductions in Medicare and Medicaid without tax increases.

Federal spending for the major health programs and Social Security will equal 14 percent of the G.D.P. in 25 years, double the level of the last four decades, the budget office projected. While federal revenues are projected to grow — to 19.5 percent of the G.D.P. by 2038, compared with the 40-year average of 17.5 percent — that rise is not enough to offset the spending for federal benefit programs.

In contrast with entitlement spending, discretionary spending for domestic and military programs by 2023 would fall to 5.3 percent of the G.D.P., from the 7.3 percent of this year — the lowest levels in about 70 years.

“Unless substantial changes are made to the major health care programs and Social Security,” the report said, “those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

Jonathan Weisman contributed reporting.

Article source: http://www.nytimes.com/2013/09/18/us/congressional-budget-office-predicts-unsustainable-debt.html?partner=rss&emc=rss

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Treasury Prods Lawmakers on Raising Debt Ceiling

August 26, 2013 by

WASHINGTON — Unless Congress raises the debt ceiling, the Treasury Department said on Monday that it expected to lose the ability to pay all of the government’s bills in mid-October.

That means a recalcitrant Congress will face two major budget deadlines only two weeks apart, since the stopgap “continuing resolution” that finances the federal government runs out at the end of September.

Members of Congress are sharply divided over what to include in measures financing the government and raising the debt ceiling.

Some Republican lawmakers have said they want to see an increase in the debt limit paired with other measures to decrease the deficit. “We’re not going to raise the debt ceiling without real cuts in spending,” Speaker John A. Boehner of Ohio told reporters last month.

Republicans have also floated the idea of insisting on delaying parts of the Affordable Care Act as part of any deal.

But on Monday, the White House again said it would not allow Republicans to use the debt ceiling as political leverage in negotiations this fall. “Let me reiterate what our position is, and it is unequivocal,” said Jay Carney, the White House press secretary. “We will not negotiate with Republicans in Congress over Congress’ responsibility to pay the bills that Congress has racked up, period.”

The debt ceiling stands at about $16.7 trillion. Congress passed a measure increasing it by about $300 billion in January.

Congress will also wrangle over how to keep the federal government’s lights on. The White House and many members of Congress want to try again for a broader deficit-reduction deal, which might replace the $85 billion in mandatory cuts known as the sequester with a different package of cuts, including changes to social programs and perhaps tax increases.

“The president has put forward a clear compromise proposal, a broad compromise proposal that would reduce the deficit significantly, including through savings in our entitlement programs, in a balanced way,” Mr. Carney said on Monday. “We continue to await a response.”

Administration officials are again warning about the havoc Congress might unleash by failing to raise the debt ceiling.

The Treasury would be able to spend money only as it came in. It might be forced to choose certain payments over others — paying bondholders but not Social Security recipients, for instance. Some analysts question whether the government’s payment systems could even handle such prioritization.

“The rate at which cash will be drawn down depends on factors that are inherently variable and irregular,” Treasury Secretary Jacob J. Lew said in a letter Monday to Mr. Boehner imploring the House to act on the debt ceiling before mid-October. “If investors should become unwilling to loan the United States money, the United States could face an immediate cash shortfall. Indeed, such a scenario could undermine financial markets and result in significant disruptions to our economy.”

The government officially bumped up against its borrowing limit in May. At that point, the Treasury stopped issuing new debt and started employing “extraordinary measures” to ensure that the government had enough cash to make its required payments. But those measures bought only so much time.

If the continuing resolution were to expire without a new patch or appropriations bill, the federal government would shut down, with thousands of employees put on furlough and only essential services, like air traffic control, continuing.

Article source: http://www.nytimes.com/2013/08/27/us/politics/treasury-warns-congress-over-raising-debt-ceiling.html?partner=rss&emc=rss

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Economix Blog: Bipartisan Agreement: Blame Washington

May 3, 2013 by Leave a Comment

11:41 a.m. | Updated

Washington partisans were caught slightly off guard by a better-than-expected report on April jobs numbers. Both sides had clearly been preparing to use disappointing numbers as justification for legislative priorities. But the result was unusually parallel reactions from Democrats and Republicans, who both offered equivocal praise. Neither side was about to let the employment gains deter them from their planned messages about the evils of sequestration, in the case of Democrats, and regulation, in the case of Republicans.

The White House’s reaction was more positive than those of both its enemies and its allies.

“While more work remains to be done,” said Alan B. Krueger, chairman of the president’s Council on Economic Advisers, “today’s employment report provides further evidence that the U.S. economy is continuing to recover from the worst downturn since the Great Depression.”

Mr. Krueger, in a statement, added, “Now is not the time for Washington to impose self-inflicted wounds on the economy,” and urged Congress to replace a series of automatic budget cuts, known as sequestration, with “balanced deficit reduction.”

Representative Kevin McCarthy, the majority whip, named a different set of culprits for an economy that “continues to struggle.”

In a statement, he said, “Our tax code is broken, onerous regulations make it more difficult to achieve all-American energy independence and small businesses and families across the country are filled with confusion and anxiety over the implementation of ObamaCare.”

However, other leading Republicans acknowledged “some signs of hope,” as Representative Eric Cantor, the No. 2 in the House, put it, and “some good news,” in the words of House Speaker John A. Boehner. But Mr. Boehner also said that “repealing the president’s sequester” would be crucial to growing the economy.

Senator Harry Reid, the majority leader, also agrees that across-the-board cuts are problematic, but he had a different take on the source of the problem: “Our job growth would be even stronger if our economy were not hampered by the meat-ax austerity Republicans have insisted upon for the past two years, instead of working with Democrats to forge a balanced approach to deficit reduction.”

Indeed, many had thought April’s might be the first monthly report to reflect the sequestration and the resulting furloughs for federal workers, and Adam Hersh, an economist at the Center for American Progress, a liberal policy group, stuck to that downbeat message:

At this pace, we will not reach full employment until June 2021. The labor market seems to be moving ahead slowly but not steadily, while automatic spending cuts mandated by the sequester have barely only begun to bite on jobs and economic growth. If we continue down the path of spending cuts and fiscal contraction demanded by sequestration, next month it will be much more than furloughed FAA workers and snarled air travelers feeling the pinch of unnecessary austerity.

Economists on the right also saw bad signs for the economy in the long term. Daniel Alpert, a managing partner at Westwood Capital known for more conservative commentary, posted on Twitter:

Jim Pethokoukis of the conservative American Enterprise Institute noted Mr. Obama’s overall failure to meet employment goals.

Article source: http://economix.blogs.nytimes.com/2013/05/03/bipartisan-agreement-blame-washington/?partner=rss&emc=rss

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Today’s Economist: Laura D’Andrea Tyson: The Tradeoff Between Economic Growth and Deficit Reduction

December 14, 2012 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Bill Clinton.

The economy is continuing to recover from its deepest recession since the Great Depression, but the pace of recovery is frustratingly slow. The question is why, and the answer has profound implications for fiscal policy and for the debate over deficit reduction and economic growth that has transfixed Washington.

Today’s Economist

Perspectives from expert contributors.

Since 2010, annual growth of gross domestic product has averaged about 2.1 percent. This is less than half the average pace of recoveries from previous recessions in the United States since the end of World War II, according to a recent study by the Congressional Budget Office. Both potential G.D.P., a measure of the economy’s underlying capacity, and actual G.D.P. have grown unusually slowly compared with previous recovery periods.

Slow G.D.P. growth has meant slow growth in employment. Payroll employment has been expanding at a rate of about 150,000 jobs per month during the last two years, only slightly above the growth of the labor force. Employment growth has been largely consistent with overall G.D.P. growth and with the “jobless” pattern of the 1990-91 and 2001 recoveries.

In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in G.D.P. growth. But G.D.P. growth in the current, jobless recovery has been slower. Another salient difference is that the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has also meant a much higher unemployment rate.

Why has G.D.P. growth been so tepid compared with previous recoveries? Most economists believe that weak aggregate demand is the primary culprit. The 2008 recession resulted from a systemic financial crisis rooted in an asset bubble that gripped the housing market with particular ferocity. Private sector demand contracts sharply and recovers slowly after such crises.
The large and persistent decline in private-sector demand that began the 2008 recession and that explains the painfully slow recovery is apparent in the private-sector financial balance — net private saving, the difference between private saving and private investment.

The private-sector financial balance swung from a deficit of −3.7 percent of G.D.P. in 2006, at the height of the boom, to a surplus of about 6.8 percent in 2010 and about 5 percent today. This represents the sharpest contraction and weakest recovery in private-sector demand in the post-World War II period.

Growth in two components of private demand — consumption and residential investment — has been especially slow in this recovery compared with the average for previous recoveries. This is not surprising.

Residential investment is still depressed as a result of overbuilding during the 2004-8 housing boom and the tsunami of foreclosures that followed. Large losses in household wealth, deleveraging from excessive debt, weak growth in wages and household income, and a decline in labor’s share of national income to a historic low have combined to constrain consumption growth. Wobbly consumer confidence and the concentration of most income gains at the top of the income distribution have also contributed.

The recovery of business investment demand has followed a different pattern. Indeed, the growth of business investment has been slightly stronger during the current recovery than the average for previous ones. But after plummeting to new lows during the recession, the ratio of net business investment to G.D.P. remains depressed by historical standards. Lower net investment compared with the economy’s capital stock is a major reason that the growth rate of potential G.D.P. has been so slow.

Throughout the recovery, business surveys have identified lackluster customer demand and weak sales prospects as the primary factors holding down business investment. Business confidence has remained subdued as a result of uncertainty about the future growth of markets both at home and abroad and more recently about the future course of United States fiscal policy.

Limits on credit availability were also significant deterrents to investment, especially by small and medium-size firms at least through 2010, when banks began to ease their commercial loan terms.

Weak investment demand cannot be explained by low profits and high taxes: the profit share of national income has hit a historic peak and taxes on investment income are at historic lows.

Another factor contributing to the slow pace of the current recovery relative to previous recoveries has been the relatively weak growth of government spending on goods and services by both state and local governments and by the federal government.

Indeed, the contraction in state and local government spending and the associated decline in public-sector employment have been major headwinds restraining G.D.P. growth.

The increase in federal government purchases of goods and services in the 2009 stimulus bill mitigated but did not offset the effects of weak private-sector demand through 2010. But since then, the slowdown in such purchases has been a drag on G.D.P. and employment growth.

After three years of recovery, the economy is still operating far below its potential and long-term interest rates are hovering near historic lows. Under these circumstances, the case for expansionary fiscal measures, even if they increase the deficit temporarily, is compelling.

A recent study by the International Monetary Fund finds large positive multiplier effects of expansionary fiscal policy on output and employment under such circumstances.

And more output and employment now would mean higher levels in the future, because stronger demand now would encourage more private investment and stem the loss of skills and productivity resulting from long-term unemployment and the drop in the labor force participation rate.

The rationale for expansionary fiscal policy is particularly compelling for federal investment spending in areas like education and infrastructure that have large multiplier effects on the current level of output and employment and strong returns over time.

By the same logic, the $600 billion of revenue increases and spending cuts scheduled for next year — the so-called fiscal cliff — would have large negative effects on demand, output and employment and would reduce future potential output as well.

The fiscal cliff packs a powerful punch: there will be 3.4 million fewer jobs by the end of 2013 if Congress allows these policies to take effect.

The economy does not need an outsize dose of fiscal austerity now; it does need a credible deficit-reduction plan to stabilize the debt-to-G.D.P. ratio gradually as the economy recovers. As I contended in an earlier Economix post, the plan should have an unemployment-rate target or trigger that would postpone deficit-reduction measures until the target is achieved. (In a move that signals its abiding concern about the recovery’s strength and resilience, the Federal Reserve has just announced an unemployment-rate target for monetary policy, committing to keep short-term interest rates near zero until the unemployment rate falls to 6.5 percent.)

The goal of deficit reduction is to ensure the economy’s long-term growth and stability.

It would be the height of fiscal folly to kill the economy’s painful recovery from the Great Recession in pursuit of this goal.

Article source: http://economix.blogs.nytimes.com/2012/12/14/the-trade-off-between-economic-growth-and-deficit-reduction/?partner=rss&emc=rss

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Economix Blog: Former Bank of England Official Criticizes British Policies

December 12, 2012 by Leave a Comment

LONDON – Adam S. Posen, the former Bank of England policy maker, is breaking his silence to criticize the British government’s austerity plan, and he is not mincing words.

The government’s economic policies have “eaten away at British economic capabilities,” are “misguided” and left Britain’s economy “malnourished,” Mr. Posen wrote in the January edition of Prospect magazine.

Mr. Posen, who left the Bank of England’s monetary policy committee in August and is expected to take over as president of the Peterson Institute for International Economics in January, said he kept his opinions about Prime Minister David Cameron’s austerity plan to himself while he was a central banker. But now, it was “past time” for him to speak up.

In the article, Mr. Posen admonished the government for stubbornly sticking to deficit reduction as a priority while failing to address a shortfall in investments.

“For two-and-a-half years, the coalition government’s economic policies have focused on the wrong narrow goal, been self-defeating in pursuit of that goal, and in so doing have eaten away at British economic capabilities and confidence,” Mr. Posen wrote.

He added that it was not enough for Mr. Cameron and George Osborne, the chancellor of the Exchequer, “to claim that they have done what they promised to do. Their policies have left the British economy malnourished, and indeed made parts of it quite ill.”

Mr. Posen proposed five steps to help the British economy. The government, he said, should find ways to encourage companies to invest the large cash piles they accumulated during the crisis.

He also suggested increasing competition in the domestic banking sector by selling parts of the stakes the government continued to hold in banks like the Royal Bank of Scotland and Lloyds Banking Group. And the government should create a public bank especially for lending to small businesses, he said.

“There are alternatives available, and the British government should switch to these now,” Mr. Posen said.

Article source: http://economix.blogs.nytimes.com/2012/12/12/former-bank-of-england-official-criticizes-british-policies/?partner=rss&emc=rss

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President Obama Asks Congress to Keep Tax Cuts for Middle Class

November 29, 2012 by Leave a Comment

As the president and Congress hurtle toward a reckoning on the highest federal budget deficit in generations, Mr. Obama says he wants a “balanced” approach to restoring the nation’s fiscal order. But the high-profile public campaign he has been waging in recent days has focused almost entirely on the tax side of the equation, with scant talk about his priorities when it comes to curbing spending.

Mr. Obama has embraced specific cuts to the federal budget in the past and has committed to an agreement with Congress that will include deep reductions in spending. But it would be easy for those who listen to his public pronouncements lately to miss it. In public statements since his re-election, he has barely discussed how he would pare back federal spending, focusing instead on the aspect of his plan that plays to his liberal base and involves all gain and no pain for 98 percent of taxpayers.

Republicans and even some Democrats have expressed frustration that Mr. Obama has avoided a serious public discussion on spending with barely a month until deep automatic budget cuts and tax increases are scheduled to take effect. While the president’s aides said it was important to engage the public on taxes, others say he has not prepared the country for the sacrifice that would come with lower spending.

“The problem is real,” said Erskine B. Bowles, who was co-chairman of Mr. Obama’s deficit reduction commission. “The solutions are painful, and there’s not going to be an easy way out of this.”

After meeting with White House officials this week, Mr. Bowles said he believed “they were serious about reducing spending” but added that “we need to talk more about the spending side of the equation.”

Republican leaders were more scathing, saying the president was more interested in campaigning than sitting down to resolve difficult issues. They said they were willing to raise tax revenue by closing loopholes and limiting deductions, but Mr. Obama has not reciprocated with more restraint of entitlement programs.

“We have not seen any good-faith effort on the part of this administration to talk about the real problem that we’re trying to fix,” said Representative Eric Cantor of Virginia, the House majority leader. “This has to be a part of this agreement or else we just continue to dig the hole deeper, asking folks to allow us to kick the can down the road further. And that we don’t want to do.”

Although Mr. Obama has not scheduled a new meeting with Congressional leaders, he will dispatch top advisers to Capitol Hill for talks on Thursday. Treasury Secretary Timothy F. Geithner and Rob Nabors, the White House legislative director, will pay separate visits to Senators Harry Reid of Nevada and Mitch McConnell of Kentucky, the Democratic and Republican leaders, and Representatives John A. Boehner of Ohio and Nancy Pelosi of California, the Republican speaker and Democratic minority leader.

Mr. Obama met privately on Wednesday with the chief executives of 14 major corporations like Goldman Sachs, Home Depot, Marriott, Coca-Cola, Pfizer and Yahoo to discuss the fiscal situation.

“He seemed flexible, but he said taxes should go up on the top 2 percent,” said one executive who did not want to be named. Most of the executives said they were not opposed to tax increases as part of a deal but stressed that a quick resolution could help the economy.

White House officials rejected Republican suggestions that Mr. Obama has not been serious enough about tackling the growth of entitlement spending. “He is committed, every time he talks about this, to a balanced approach that includes both, you know, revenues, spending cuts and savings through entitlement reforms,” said Jay Carney, the White House press secretary.

White House officials pointed to $340 billion in health care entitlement program savings and $272 billion in reductions to other mandatory programs over 10 years in a previous presidential budget proposal. “Even though that budget proposal’s been out there for a long time, a lot of people aren’t aware of that,” Mr. Carney said. “ He called it “another piece of evidence that the president has been willing to make tough choices.”

One reason a lot of people may not be aware of the cuts Mr. Obama has proposed is that he does not talk about them often. In his first postelection news conference, he focused on tax increases on the wealthy and used the term “spending cuts” just once without elaborating.

By focusing on taxes, Mr. Obama has put Republicans on the defensive. At Wednesday’s event, he challenged them to extend Bush-era tax cuts for family income under $250,000 since both sides agree those should continue. Doing so would effectively mean tax cuts on income over $250,000 would expire at the end of the year since Mr. Obama would not sign a separate bill extending them.

The president’s public lobbying seemed to crack through the solid Republican opposition this week when a prominent conservative, Representative Tom Cole of Oklahoma, urged his party to seek such a quick deal with Mr. Obama extending middle-class tax cuts. Mr. Boehner pushed back against Mr. Cole on Wednesday, saying that would hurt small businesses and the economy.

At the same time, Mr. Obama evidently sees no percentage in talking in detail about spending cuts, acutely aware that his liberal base is unenthusiastic about paring back entitlement programs. Senator Richard J. Durbin, a longtime Illinois ally and the No. 2 Senate Democrat, said this week that Medicare, Medicaid and Social Security should not be part of current budget talks.

As the two sides continued to shadowbox, Mr. Bowles was skeptical, putting the chances of a deal by the end of the year at one in three. “I believe the probability is that we are going over the cliff,” he said, “and I think that will be horrible.”

Jonathan Weisman contributed reporting from Washington, and Nelson Schwartz from New York.

Article source: http://www.nytimes.com/2012/11/29/us/politics/president-obama-asks-congress-to-keep-tax-cuts-for-middle-class.html?partner=rss&emc=rss

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House Republican Urges Party to Yield on Tax Cuts for Most Earners

November 28, 2012 by Leave a Comment

In a private meeting of the House Republican whip team, the group responsible for vote counting, Representative Tom Cole of Oklahoma broke with the rest of the leadership and said the party should join with President Obama for now, Republican aides said. The meeting was first reported by Politico.

“The first thing I’d do is make sure we don’t raise taxes on 98 percent of the American people,” he said in an interview Tuesday night. “We’ll get some credit for that, and it’s the right thing to do.”

The break came after senior Democrats hardened their line on conditions for a deal to head off the automatic spending cuts and tax increases set to kick in this January. Democrats said Tuesday that Mr. Obama would not accept any deficit reduction deal that did not include a long-term extension of the debt ceiling, possibly ensuring that Mr. Obama would not have to deal with another debilitating fiscal showdown for the remainder of his presidency.

Senator Harry Reid of Nevada, the Democratic leader, and Senator Richard J. Durbin of Illinois, the No. 2 Democrat, both said they did not intend to complete a major deficit reduction deal only to have Republicans reopen it each time the government bumped up against its statutory borrowing limit.

“We would be somewhat foolish to work on something on stopping us from going over the cliff, and a month or six weeks later, the Republicans pull the same thing they did before and say, ‘We’re not going to do anything unless this happens or we don’t increase the debt ceiling,’ ” Mr. Reid said. “I agree with the president. It has to be a package deal.”

The stern posture may throw another roadblock in the way of a deal before January, when hundreds of billions of dollars in automatic spending cuts and tax increases kick in, possibly sending the economy back into recession. Conservative Republicans have said they want the debt ceiling left out of any deal to maintain leverage on Washington to keep trimming the deficit.

But the position taken by Mr. Cole suggested Republicans could be softening. An extension of the middle-class tax cuts would significantly diminish, or erase, any leverage Republicans might have to preserve tax cuts for more affluent households and some small businesses. But the leadership’s political position will grow even more tenuous if prominent Republicans like Mr. Cole say it is time for a quick deal that would preserve the tax breaks of 98 percent of households and 97 percent of small businesses.

“I don’t believe in holding the American people hostage to this debate,” Mr. Cole said. “Let’s get what we can now, then go back and try to get the rest. Where there is common ground with the president, we should seize that common ground.”

Democrats on Tuesday laid out a series of demands that either showed confidence in the flexibility of defeated Republicans or indicated a brewing stalemate. Senator Max Baucus of Montana, chairman of the Senate Finance Committee, flatly rejected a Republican proposal to cap tax deductions and credits at $25,000 a household instead of allowing tax rates to rise.

“I just want to point out a $25,000 cap will mean about a quarter of those who will pay more taxes will not be wealthy Americans but middle-income Americans,” Mr. Baucus said. “When that’s fully understood I think the interest in that is going to wane.”

Mr. Durbin said the president would also demand a guarantee that the spending caps in any deal be adhered to and not reopened. Last year, Congress and the president agreed to 10 years of domestic spending caps as part of the deal to raise the debt ceiling, only to see House Republicans try to impose lower spending levels six months later.

Democrats said they would not accept cuts to Medicare or Medicaid as part of the upfront “down payment” on deficit reduction that would be passed next month along with a broader framework on tax and entitlement changes to be worked over in 2013.

In a speech at the liberal Center for American Progress, Mr. Durbin still expressed confidence that beneath all the public posturing, the White House and Speaker John A. Boehner, Republican of Ohio, were making progress toward averting the so-called fiscal cliff.

Mr. Durbin’s speech itself was a measure of conciliation, laying out the case to liberals for a major deficit deal. He made clear that the parties agreed on what a final deal would look like: an initial deficit-reduction down payment to calm financial markets and avoid most of the fiscal jolt that would otherwise hit in January; instructions to Congressional committees to draft tax, spending and entitlement legislation to save around $4 trillion over the next decade; and some form of fallback deficit plan in case Congress fails to pass those changes.

Mr. Durbin said that Medicare should not be tapped for that upfront down payment but that federal health care programs should be part of next year’s deliberations. And he opened the door for money-saving adjustments to Mr. Obama’s signature health care law, so long as it was not gutted or repealed.

The Democrats’ firm position on the debt ceiling was expected by Republican leaders, who went through a near-crisis in 2011 when House conservatives refused to raise the borrowing limit, nearly sending the federal government into default. The government will reach its borrowing limit again early next year. Kevin Smith, a spokesman for Mr. Boehner, said that regardless of how that looming deadline was dealt with, the speaker would insist on his own rule: any increase in the debt ceiling must be accompanied by spending cuts of at least the same magnitude.

Jackie Calmes contributed reporting.

Article source: http://www.nytimes.com/2012/11/28/us/politics/senior-congressman-urges-gop-to-accept-extension-of-bush-tax-cuts.html?partner=rss&emc=rss

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British Recovery Plan Threatened by Weak Growth

November 22, 2012 by Leave a Comment

The Office for National Statistics said government borrowing in October was £8.6 billion, or $13.7 billion, compared with £5.9 billion ($9.4 billion) in October 2011. Corporate tax receipts were down 9.5 percent while spending on social benefits increased 7.7 percent from October 2011.

Although Britain emerged from recession in the third quarter, with a 1 percent increase in economic growth, analysts have cautioned that that was distorted by special factors like the Olympic Games and that the outlook for growth remained feeble.

The figures Wednesday support that thesis, suggesting that the chancellor of the Exchequer, George Osborne, will struggle to hit his target of limiting borrowing for 2012-13 to £120 billion ($191 billion). In the longer term some analysts say they also believe that Britain’s prized AAA credit rating is at risk.

Sam Hill, fixed-income strategist for Britain at RBC Capital Markets, said in a note that borrowing for October had exceeded the consensus expectation of £6 billion ($9.5 billion).

“With data for seven months of the fiscal year now in, the government have borrowed 61 percent of the full year target of £120 billion, about four percentage points higher than trend over the last three years,” he said. “We believe this is consistent with our forecast for an upward revision to the £120 billion borrowing target of £5 billion.”

The lack of clear signs of a return to robust economic growth remains the main concern for most analysts.

“The underlying story of this year is tax receipts coming in weaker than expected,” said Robert Wood, chief economist for Britain at Berenberg Bank in London. “That’s because growth has stalled.”

Mr. Wood said it remained “touch and go” as to whether the government would meet its deficit reduction targets.

“I still think that the credit rating is more likely than not to be downgraded over the next few years,” he added.

The government argued that the figures indicated that it was keeping control of spending.

“The economy is healing, but it still faces many challenges,” said a spokesman for the Treasury, who in line with policy asked not to be identified. “These numbers illustrate that, but also show the government’s plans to bring spending under control are on track for the year.”

The spokesman said that corporate tax receipts were affected by lower-than-expected energy production from the North Sea.

In a separate development, minutes of the last meeting of the monetary policy committee of the Bank of England revealed divisions at the central bank over how to manage a return to growth, with one member calling for more economic stimulus.

David Miles argued that an asset-buying plan, intended to improve growth, could be increased by £25 billion ($40 billion) without stoking inflation. But the committee, which has already pumped £375 billion ($597 billion) into the economy via such quantitative easing, elected not to expand the program.

The panel also discussed reducing the benchmark interest rate from its record low of 0.5 percent, but unanimously voted not to change it.

Article source: http://www.nytimes.com/2012/11/22/business/global/figures-show-fragility-of-british-recovery.html?partner=rss&emc=rss

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Britain Lowers Growth Forecast and Extends Austerity Measures

November 30, 2011 by Leave a Comment

On the eve of a huge strike by public sector workers to protest austerity measures, the British government said Tuesday that it was falling behind with its deficit reduction plan and that the measures would drag on for two more years.

The chancellor of the Exchequer, George Osborne, said Tuesday that because of the slowdown in the euro zone, British economic growth this year and next would be slower than forecast in March and “debt will not fall as fast as we’d hoped.”

He added that Britain could avoid a recession next year only if the euro zone found a solution to its current crisis.

“We’ll do whatever we can to protect Britain from this debt storm,” Mr. Osborne told a packed Parliament. “If the rest of Europe heads into a recession, it may be hard to avoid one here in the U.K.”

The biggest public sector unions in Britain called for a strike on Wednesday. It is expected to cause major delays at airports and hospitals and shut some schools.

More than two million people, including teachers and other government employees, are expected to go on strike over a dispute with the government about pensions, according to the Trades Union Congress.

In Parliament, Mr. Osborne called on the unions to reconsider the strike action and return to the negotiating table, asking why they were “putting jobs at risk.”

“Call off the strike,” he said.

The unions said the strike would go ahead as planned. Len McCluskey, general secretary of the trade union Unite, criticized Mr. Osborne’s economic strategy and compared him to “a pilot who has put his plane into a tailspin and is now wrestling desperately with the controls as the aircraft rapidly loses height.”

The government said British households, which are already squeezed by higher food and electricity prices, would have to endure an additional two years of austerity measures, now until 2017. The economy is growing slower than forecast, hurting Mr. Osborne’s initial 2010 plan to eliminate the budget deficit within five years.

It would also require Britain to borrow an additional £111 billion, or $172 billion, through 2015, a step Mr. Osborne was eager to avoid. The austerity measures would now drag on far beyond the next general election, currently scheduled for 2015.

The British economy will grow 0.9 percent this year, less than the 1.7 percent predicted earlier, and 0.7 percent next year, the Office for Budget Responsibility forecast Tuesday. The agency predicted that the economy would then pick up and grow 2.1 percent in 2013. Debt as a share of gross domestic product would peak at 78 percent in the fiscal year ending in 2015, higher than the 71 percent initially predicted.

Amid fierce criticism from the opposition Labour Party, Mr. Osborne said Tuesday that he would stick to his austerity plan, which includes more than 600,000 job cuts in the public sector and other spending curbs, but that it would still take longer for the debt load to shrink.

Because of that, the government said it would cap pay increases for public sector workers at 1 percent for two years after the end of the current pay freeze.

The step was part of a small set of measures presented Tuesday, which also includes an increase in a bank tax, to generate extra revenue to invest in infrastructure projects and to fight youth unemployment.

But it added to the anger of workers’ representatives, who said the government was now not only “raiding” pensions but wages as well.

Howard Archer, chief economist for Britain at IHS Global Insight, said Mr. Osborne lacked the room for maneuver to offer any investments or tax cuts that could help the economic recovery.

“The economy is staring recession in the face again; he has no money to spend and events in the euro zone pose major downside risks over which he has no control,” Mr. Archer said.

The Labour Party said the new forecast meant that Mr. Osborne’s strategy to cut the budget “is in tatters” and that “plan A has failed colossally.” The Labour Party called on Mr. Osborne to “change course before it’s too late” and scale back an aggressive debt reduction plan that was choking off the economy.

But Mr. Osborne argued that an early adoption of the deficit plan last year helped Britain to keep its borrowing costs low and avoid problems faced by Greece or Italy, where borrowing costs became unsustainable.

Unlike the United States or the members of the euro zone, Britain already has a far-reaching austerity plan along with interest rates at record-low levels. It also has its own currency, which helps keep British exports to the euro zone relatively inexpensive.

When Germany’s 10-year bond yields last week rose above Britain’s for the first time in more than two years, it was widely interpreted by the British government as a vote of confidence in Britain’s budget reduction efforts.

But the damped outlook released Tuesday by the budget office — combined with warnings Monday by the Organization for Economic Cooperation and Development that Britain might fall back into a recession — put pressure on Mr. Osborne’s plan.

Mervyn A. King, governor of the Bank of England, also warned Monday that Britain was increasingly threatened by the crisis in the euro zone.

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Obama Tax Plan Would Ask More of Millionaires

September 18, 2011 by Leave a Comment

With a special joint Congressional committee starting work to reach a bipartisan budget deal by late November, the proposal adds a new and populist feature to Mr. Obama’s effort to raise the political pressure on Republicans to agree to higher revenues from the wealthy in return for Democrats’ support of future cuts from Medicare and Medicaid.

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday.

Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments.

In a speech on Thursday, Speaker John A. Boehner, Republican of Ohio, agreed with Mr. Obama that the deficit-reduction committee “can tackle tax reform, and it should,” to get rid of many tax breaks and allow for lower marginal rates.

“Tax increases, however, are not a viable option for the joint committee,” Mr. Boehner said. Instead, he emphasized that meeting the deficit-reduction target should come largely from overhauling benefit programs like Medicare, Medicaid and Social Security.

The Obama proposal has little chance of becoming law unless Republican lawmakers bend. But by focusing on the wealthiest Americans, the president is sharpening the contrast between Republicans and Democrats with a theme he can carry into his bid for re-election in 2012.

It could also reassure Democrats who have feared that Mr. Obama would agree to changes in programs like Medicare without forcing Republicans to compromise on taxes.

The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class. Mr. Obama has said that many average Americans could see a tax cut if the system is overhauled, since ending many tax breaks would allow for lower rates while raising more revenues from the wealthiest.

The millionaires’ tax is among several changes Mr. Obama will propose in urging Congress to overhaul the federal income tax code next year, both to raise revenues for reducing deficits and to make the tax system simpler and fairer, said the administration officials, who agreed to speak in advance of the president’s announcement on the condition of anonymity.

The millionaires’ rate would affect only 0.3 percent of taxpayers, they said. That would be fewer than 450,000; 144 million returns were filed for 2010.

Mr. Obama’s proposal comes a month after Mr. Buffett began reviving his longstanding objection that he and “my megarich friends” pay a significantly lower percentage of their income in federal taxes — income and payroll taxes — than everyone else, thanks to the tax code’s favoritism toward the rich, and especially toward investors like him.

“My friends and I have been coddled long enough by a billionaire-friendly Congress,” he wrote in an opinion article in The New York Times, a complaint he has repeated in talks and media interviews since. “It’s time for our government to get serious about shared sacrifice.”

Mr. Obama has been citing Mr. Buffett as he promotes his $447 billion job-creation plan. He proposes to offset the cost of that plan and reduce future budget deficits through higher taxes on the wealthy and on corporations after 2013, when the economy will presumably be healthier.

Mr. Obama’s proposed Buffett Rule puts a new spin on that pitch, as he tries to put Republicans in Congress and in the presidential race on the defensive for their rigid stand against higher taxes.

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