The U.S.’s big, fat political debt problem

April 19, 2011

USA-BUDGET/By Kathleen Brooks

The U.S. has practically zero chance of solving its debt problem in the foreseeable future while politicians line up to contest the 2012 Presidential elections.

We have already heard President Obama lay out his partisan cards. He called for Congress to come up with a plan to trim $4 trillion from the U.S. deficit in the next 12 years. His favoured way to do this: end tax cuts for the rich – a well versed refrain from Democrats throughout the ages.

Ironically it was Obama who extended these tax cuts – for everyone – at the end of 2010, which arguably has contributed to the U.S. becoming the only G10 nation to have a rising budget deficit this year, according to the IMF.

The tax question obviously goaded the Republicans and the Speaker of the House of Representatives John Boehner immediately responded by saying that tax hikes were a non-starter. He argued that the U.S.’s fiscal problems were not down to a lack of revenue, but due to unbridled spending coming out of Washington. So there we have it: deadlock before we have even got started.

The wrangle over funding the 2011 budget that nearly closed the U.S. government earlier this month came down to an ideological fight between left and right, with those on the far right demanding cuts to programmes that didn’t support their ideology such as abortion programmes.

This highlights the level of detail and depth of discussion that will be held over the coming weeks and months to make even more radical cuts than those proposed for this year’s budget. Middle ground is virtually non-existent in Washington right now so a failure to come up with a credible deficit reduction plan in time for President Obama’s June deadline is looking increasingly more likely.

Those of us on the other side of the Atlantic look with bemusement at the goings on in Capitol Hill. Over here micro discussions such as those that take place in Washington just don’t exist. Instead we hear that £7 billion will be cut from the welfare budget, or that the NHS will try to make £1 billion of savings over this parliament. The debate in the UK over the upcoming spending cuts has taken place over the large numbers, very rarely would a prime minister’s questions get into the minutiae of a particularly health programme in say Lincoln or East London.

In fact if you look at the UK, Ireland and even Greece, proposals to cut budget deficits have been pulled off with relative ease. Of course there will be pain to come and there have been some protests against the cuts, but these have been fairly small scale and have so far failed to dent progress in these consolidation programmes.

What is interesting in the U.S. is that public opinion wants the deficit to be cut, and pretty swiftly at that. Outside of the U.S. that would be game over – the cuts could go through. But in the U.S., fights over what to cut could derail the whole process.

Right now bond investors are willing to give the U.S. the benefit of the doubt and it can borrow for 30-years at 4.5 percent interest. But whether or not this will continue, especially once the Federal Reserve ends its quantitative easing programme in June as scheduled, could depend on the extent of the scuffle in Washington.

President Obama may be putting his Democratic stake in the ground now, but going forward he may have to act more like the referee in the U.S.’s battle of the left and right to bring the U.S. back in fiscal line with its European counterparts.

Kathleen Brooks is research director at forex.com. The opinions expressed are her own.

Comments

Another condescending “our system is better than yours” point of view from an European. Is there anyone east of the Atlantic with an unique perspective or does everyone get so much joy out of regurgitating the same point of view, that the need never arises?

And why do Europeans even feel the need to post an opinion on American politics?

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