Obama debt panel shapes fiscal “battlespace”

December 2, 2010

It looks like the vote on the panel’s recommendations will be closer than I first thought. Here is my take from my Reuters Breakingviews columnette:

Wednesday’s final plan from President Barack Obama’s bipartisan budget commission might struggle to persuade a majority of the panel itself, never mind Congress. But despite the commission’s seeming toothlessness, the blueprint nonetheless sets the terms for what a budget deal might eventually look like.

Some in Washington have worried financial markets would blanch if the panel failed to reach a “grand compromise” to put Uncle Sam on a sustainable fiscal path. But no investor in U.S. assets should have ever defined success that way. After all, there’s no precedent for this sort of “blue-ribbon panel” achieving success on its own. Former Federal Reserve Chairman Alan Greenspan did head an outside group in the 1980s that added a few more years of solvency to Social Security. But that panel was on the verge of failure until the Reagan White House and congressional Democrats devised their own plan and handed it to Greenspan.

This time around, the politicians involved aren’t close to any agreement. The commission suggests, for instance, raising tax revenue from 2012-2020 by ending nearly $1 trillion in corporate and individual tax breaks. It also proposes reducing social insurance spending by nearly $600 billion over that period. Most of the congressional Republicans on the 18-strong panel won’t support any net tax increase, while most Democrats refuse to cut Social Security or Medicare benefits. These are battles that will be fought in the new Congress and in the 2012 presidential campaign.

So the commission won’t be making anything happen. But it has still drawn up the likely battle lines. And that effort shows scope for future compromise. Democrats and Republicans may disagree on what to do with the extra revenue gained by ending tax loopholes, but there seems to be broad agreement that such “tax expenditures” make poor policy. Republicans showed some willingness to cut defense spending, while Democrats conceded that high corporate tax rates can hurt competitiveness and growth. And a deep dive into the plan reveals the first steps — supported sotto voce even by some Democrats — towards dramatically reducing government involvement in the healthcare system.

None of that will change America’s debt-to-GDP ratio next year. But from the threads spun by Obama’s commission, a new fiscal tapestry will eventually be woven.

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