Q+A-Possible steps to tackle the U.S. budget crunch

By Andy Sullivan

WASHINGTON, Jan 25 (BestGrowthStock) – President Barack Obama, in
his State of the Union speech on Wednesday, is expected to
signal resolve to tame U.S. budget deficits, which have reached
the highest level as a percentage of economic output since
World War Two.

The Senate is expected to vote on Tuesday on a proposal
that would set up a commission to consider unpopular measures
like tax hikes or spending cuts to get deficits under control.

Meanwhile, conservative Democrats in the House of
Representatives have said they will push a variety of other
measures that could return budgets to a sustainable level.

Experts say the time is ripe for such efforts, before
investors lose confidence in U.S. debt and force up interest
rates. But many wonder whether Washington has the stomach for
the remedies needed, or the willingness to work across party
lines in a highly charged election year.

WHAT IS THE PROBLEM?

U.S. debt has more than doubled over the past decade to
$12.27 trillion, thanks to a combination of tax cuts, wars in
Iraq and Afghanistan, elevated domestic security spending and
the deepest recession since the Great Depression of the 1930s.

The government posted a record $1.4 trillion deficit for
the fiscal year ended Sept. 30, 2009, and deficits are
projected to remain stubbornly high over the coming decade as
costs for retirement and healthcare programs rise.

This could spur investors including China, the biggest U.S.
foreign creditor, to demand higher rates for Treasury bonds.
That would push the government’s borrowing costs dramatically
higher and crowd out spending in other areas.

“America has probably the worst economic future it’s ever
had,” said former Republican Senator Pete Domenici. “We could
end up a second-rate world power without doing anything. It
would just happen.”

WHY A COMMISSION?

Commissions are a time-honored Washington method of
outsourcing difficult decisions. Commissions have allowed
Congress to close outdated military bases over the past two
decades and shore up Social Security in the early 1980s.

But far more find their proposals simply gather dust.

A commission could help get the budget under control
because Congress has not shown the will do it without outside
pressure, backers say. Obama is expected to call for a
commission in his State of the Union speech.

WHAT ARE THE OPTIONS?

Currently there are three commission proposals taking shape
in Washington:

* CONGRESS. The Senate is expected to vote on Jan. 26 to
set up a commission made up of 8 Democratic lawmakers, 8
Republican lawmakers and two Obama administration officials.
Congress would be required to hold an up or down vote on its
findings when they would be issued after the November
congressional elections.

But interest groups from the left and right have attacked
the idea and it is expected to fall short of the 60 votes
needed for passage, though Obama’s support could help persuade
a few who are on the fence.

* WHITE HOUSE. If the measure fails in Congress, Obama
could set up a task force by executive order. It would also
consist of 18 members, but only 12 would come from Congress and
the rest would be appointed by the administration.

Democratic congressional leaders have pledged that they
would not ignore its findings, but the panel would have less
legal authority than one set up by Congress. It would also be
bipartisan by design, but many Republicans have said they would
not participate, viewing it as a vehicle for Democrats to
impose tax increases.

* OUTSIDE EXPERTS. A blue-chip panel of retired politicians
like Domenici and other budget experts on Jan. 25 said they
would examine the issue over the course of the year and come up
with a set of recommendations after November elections.

Congress would be free to ignore this group’s
recommendations, but presumably they would carry some weight
and provide a resource for lawmakers currently in office.

OTHER OPTIONS:

The House of Representatives has twice passed legislation
that would require most new spending or tax cuts be offset by
cuts elsewhere in the budget, which would at least keep the
deficit from growing. Backers like House Majority Leader Steny
Hoyer said a similar approach helped the government turn its
deficits into surpluses in the 1990s, but skeptics in the
Senate see too many loopholes in the current version.

The Senate is expected to vote this week on a modified
version of so-called “paygo” legislation that would phase out
those loopholes. The estate tax and alternative minimum tax
would not currently be subject to paygo restrictions, but those
exemptions would phase out after two years and an exemption for
elevated Medicare spending would be phased out five years.

Separately, a group of 50 fiscally conservative “Blue Dog”
Democrats said they would push a 15-point agenda to get
deficits under control, from spending caps to a balanced-budget
amendment. With an election looming, their measures could
attract support from other lawmakers seeking to show voters
they are responsible stewards of their tax money.

Stock Market Investing

(Editing by Todd Eastham)

Q+A-Possible steps to tackle the U.S. budget crunch