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Little reason to think Bowles-Simpson plan will end U.S. budget impasse

The dome of the U.S. Capitol is reflected on the first day of the 113th Congress in Washington Jan. 3, 2013.


Erskine Bowles and Alan Simpson are back, but this time without the rest of the National Commission on Fiscal Responsibility and Reform.

Messrs. Bowles and Simpson, Democratic and Republican stalwarts, respectively, have carried on as debt fighters, using the relative celebrity they earned as co-heads of President Barack Obama's deficit panel to keep up pressure on law makers to compromise on a fix for the country's acute budget shortfall.

With Congress and the White House locked in yet another standoff over the budget, Messrs. Bowles and Simpson Tuesday released the outline of a fiscal plan that aims to shrink the U.S. debt without sucking the life out of the economic recovery.

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Mr. Obama will like that last part.

The president on Tuesday was back on the bully pulpit, warning that $1.2-trillion (U.S.) in across-the-board spending cuts set to begin March 1 would kill jobs and crush economic growth. The president called on law makers to blunt the impact of the so-called "sequester" by passing a smaller package of spending reductions and tax increases, and negotiate a broader agreement as part of a new budget.

"Nobody should want these cuts to go through," said Mr. Obama. "The last thing our families can afford right now is pain imposed unnecessarily by partisan recklessness and ideological rigidity here in Washington."

Messrs. Bowles and Simpson agree that immediate spending cuts should be avoided, or at least diluted.

"The United States must pursue a growth agenda," they say in an overview of their proposal. "In order to protect the recovery, the sequester should be avoided and deficit reduction should be phased in gradually."

Score one for the White House.

But it's unlikely that Mr. Obama will be quick to embrace the latest Bowles-Simpson proposal. That's because they call for a more aggressive attack on the debt than the president appears willing to make.

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Messrs. Bowles and Simpson say the United States will lose credibility in bond markets unless the debt is reduced to something smaller than 70 per cent of gross domestic product by early next decade, and "kept on a downward trajectory thereafter."

To do that, they recommend a combination of budget measures equal to $2.4-trillion over a decade. Mr. Obama has mooted a far less ambitious $1.5-trillion target, and indicated in his state of the union speech earlier this month that he would be satisfied with "stabilizing" the debt at about 70 per cent of GDP.

That's barely more than Messrs. Bowles and Simpson would seek in cuts to spending and benefits.

They suggest about $1.2-trillion in savings from budget cuts, stricter caps on discretionary spending, lower interest payments and changing the way benefits are indexed to inflation. They also would overhaul federal health programs to save about $600-billion, more than Mr. Obama's pledge to seek Medicare and Medicaid savings of $400-billion.

Score one for the Republicans.

But that doesn't mean House Speaker John Boehner will be any more enthusiastic about Bowles-Simpson 2.0 than will Mr. Obama.

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Messrs. Bowles and Simpson also say that about $600-billion in new revenue should be raised by ending tax breaks and loopholes, the so-called "tax expenditures" in the convoluted tax code that cost the government more than $1-trillion a year in lost revenue.

Republican leaders say they are unwilling to consider new revenue after Democrats won tax increases on the wealthiest in the "fiscal cliff" agreement. Mr. Boehner says he wants a balanced budget in a decade, not a narrower deficit.

As respected as Messrs. Bowles and Simpson have become, there is little reason to think a new proposal from the debt duo will have an immediate effect on the Washington's current budget impasse.

With less than two weeks to rework the sequester, Mr. Obama was pinning the blame for the cuts on Congress, while Mr. Boehner talked about the "president's sequester."

Bond markets are calm because traders don't much care about the specifics of how the U.S. reduces its debt. That means political pressure to do something about the spending cuts might not come until voters notice their services curtailed, which is why Mr. Obama surrounded himself with emergency responders on Tuesday.

But it could be too late. Washington avoided the "fiscal cliff," but it appears to be headed over the sequester.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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