THE TALK last week was all about the danger of the nation defaulting, of parliamentary deadlock, and an administration desperately scrabbling to meet a looming inflexible deadline. Some $500 billion in debt due to be rolled over in August. One scenario has immediate cuts of 44 per cent in government spending, pensions, welfare, health slashed. Politicians’ July holidays have been cancelled and sleeves rolled up amid dire warnings of apocalyptic consequences if the deal is not done .... no, not Athens, but across the Atlantic, a not dissimilar, intensely ideological battle in Washington.
The US treasury has warned that the country could default on its debt on August 4th if Congress fails to raise the country’s borrowing limit of $14,300 billion. That has not been possible because of the inability of Republicans and Democrats to agree how to reduce the ballooning deficit by a Republlican target of $2,000 billion over 10 years to pave the way for a deal that they both believe in: increasing the debt ceiling. Senior officials suggest a deal must be done by July 22nd to allow time for passing the required legislation.
To date some $1,000 billion in spending cuts have been agreed, with a few hundred billion dollars more in savings that are close to agreement. Last Wednesday President Barack Obama appealed to both sides to compromise on a “balanced” approach that cuts spending and also raises revenue. In doing so he returned to the theme of the mid-term elections in insisting Republicans must accept tax increases on the super-rich and the elimination of special tax breaks for owners of yachts, corporate jets and thoroughbred racehorses. All told some $400 billion. Earlier this year he proposed $760 billion in new revenue, in part by limiting tax breaks for households whose earnings are in the top 2 per cent, a move that would raise $300 billion over 10 years
Republicans, however, insist on spending cuts alone, although some of their leaders privately suggest they could back closing tax loopholes but warn of the difficulty of selling such a deal to their newly radicalised rank and file, many of them Tea Party supporters and deeply averse to bipartisanship. For them the “no tax rise” slogan is an ideological imperative. Senator Jim DeMint has even added a new litmus test for any presidential candidate: embracing the no-tax pledge and also promising to pass a constitutional amendment to balance the budget.
Republicans also won’t agree to cuts in defence spending, despite the fact that the defence budget has soared – a new study has concluded that US involvement in Afghanistan, Iraq and Pakistan has cost up to $4 trillion over the past decade.
Obama’s engagement now should make a deal more possible, though by no means certain, in the new climate of Republican fervour. But the brinkmanship on both sides is hugely dangerous. As a former US comptroller general and a leading voice for compromise, David Walker, quoted by Bloomberg, warns: “When you’re playing with a tactical nuclear weapon, you don’t want to take the timing device down to the last seconds.”