A coming age of austerity? Maybe

June 18, 2010

A Reuters Breakingviews column:

Europe’s newish cult of austerity may have some converts in Washington. The U.S. Senate is having surprising trouble passing a routine spending bill that grows the budget gap. Bipartisan resistance could hint that deficit hawks are starting to gain the upper hand in Congress.

The upper chamber rejected a bill that would have added $80-billion over 10 years to the national debt. Now that’s hardly a massive addition given the United States may tack on $10-trillion or more in total new debt over that period. The bill was also laden with politically popular goodies: more unemployment benefits, summer jobs for teens and the extension of an R&D tax credit for business. Yet 52 senators still rose to block the bill: 12 Democrats and 40 Republicans. The uprising has forced Finance Committee Chairman Max Baucus to scale back the legislation.

The Senate struggle should be a political reality check for White House critics who demand it propose a pricey plan to create jobs. Voters are growing ever-more concerned about ever-growing national debt. And Congress is clearly skittish about grandiose spending ideas such as one think-tank’s dreamy scheme to have Uncle Sam spend US$40-billion a year to directly hire the unemployed to renovate parks.

Indeed, as the failed vote shows, the Senate won’t even freely spend money on programs that were previously rubber-stamped even if not paid for. Now many in Congress are demanding new expenditures be offset by tax increases (such as on investment manager income) or spending cuts elsewhere. This attitudinal change may bode well for Obama’s deficit commission, charged with keeping America solvent.

But there may be two more immediate impacts. First, congressional leaders could be pressured to try to actually pay for permanently extending middle-class tax cuts due to expire at year end. Even a two-year extension for 2011 and 2012 would cost nearly $300-billion. Second, the hunt for revenue may result in bigger-than-expected hikes in investment taxes. The working assumption had been that dividend rates, for instance, would rise from 15% to 20% next year, not 40% as the budget currently presumes. But doing that would cost $25-billion a year. The outcomes of those battles will show if this new fiscal religion is more than just a passing fad.

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