Update: Fiscal Cliff Watch: Many Fear Emerging Deal Not Enough

Published Dec 19, 2012. By John Shaw. In Market News International.

 

Update: Fiscal Cliff Watch: Many Fear Emerging Deal Not Enough

-Adds Boehner Statement: House Will Vote on Plan B Thursday -But Budget Experts Say Emerging Package Better Than Cliff Plunge -Strength of Deal Will Hinge On Long-Term Tax, Entitlement Reforms

 

WASHINGTON (MNI) - Given the immediate fiscal cliff threat that still looms over the American economy, the difficulties of divided government, and the spotty negotiating history between President Barack Obama and House Speaker John Boehner, it may seem ungenerous to ask a simple question:

Is the emerging budget agreement, still far from a certainty, adequate for the fiscal challenges the U. S. confronts?

Obama said Wednesday a budget agreement with Boehner can be reached quickly since they are not that far apart, and it would represent "the largest piece of deficit reduction that we've seen in 20 years."

"This is a deal that can get done," Obama told reporters, adding the package under discussion would stabilize the public debt as a share of the economy for a decade.

However, budget experts say the package under discussion is far from a heroic plan and can not be described as a fiscal game changer.

Still, the emerging Obama-Boehner framework contains some positive elements and if followed-up by major tax and entitlement reforms in the next six months it can be viewed as a step in the right direction.

Boehner said Tuesday he would like the package to include $1 trillion in spending savings with another $1 trillion in additional revenues. The Speaker said he expects substantial additional savings would be achieved next year through tax and entitlement reforms.

Bob Bixby, executive director of the Concord Coalition, said, "What they are talking about is fairly significant. It represents real progress, it's not just a symbolic downpayment. But it also isn't the Grand Bargain we need.

"The package they are talking about is big enough that it will require both parties to use real political capital to push it through Congress. But unfortunately, it's not big enough to solve our deficit problem. I'm afraid the leadership will be so worn down getting this through Congress they won't be able to follow this up with additional deficit reduction packages," he said.

Bill Frenzel, a former Republican congressman and now a guest scholar at the Brookings Institution, said the emerging Obama-Boehner framework represents only modest progress.

"We have a short-term fiscal cliff problem and a longer-term deficit and debt problem," Frenzel said.

"What the President and Speaker are talking about seems pretty timid to me. I know they both face huge political obstacles with caucuses that will eat them for breakfast if they make too many concessions. But I just don't think they are going far enough. What they are talking about doesn't really solve our problem. It averts the cliff but not a whole lot more than that. I doesn't do enough," he adds.

Senate Budget Committee Chairman Kent Conrad said in a speech Wednesday at the National Press Club that the emerging plan averts the fiscal cliff, provides some certainty for the American economy, and can be the basis for additional fiscal progress.

But he said he would have preferred a "far more robust" plan with between $4 trillion and $5 trillion in budget savings over a decade.

A report released this week by eight U.S. think tanks that hosted four "Strengthening of America" fiscal forums this fall argues the U.S. faces a huge fiscal challenge that will take years of disciplined and purposeful work to address.

"It is almost certain that no plan enacted this month will be large enough or comprehensive enough to put the federal budget on a sustainable path. At best, it will be a 'down payment' on further deficit reduction. While this would be preferable to the alternative, we must not try to avoid near-term distress by courting long-term catastrophe," it says.

The report argues that policymakers should achieve at least $4 trillion in savings from a realistic baseline this year.

"And even that would not be sufficient unless the policies enacted to achieve that level of deficit reduction are capable of producing growing savings over time. Both size and composition matter. So too, does timing. Any plan must be phased-in so as not to do harm to the fragile economic recovery. But enacting a plan now with verifiable and growing savings and deficit reduction will spur economic recovery by instilling confidence that the United States is ready, willing and able to do what it must get its fiscal house in order," it adds.

Before the sides can even achieve the first step of averting the fiscal cliff they still need to reach an agreement. Right now there is a revised White House plan and Boehner's "Plan B" which Obama rejected outright.

Obama said he has gone "at least half way" toward the Republican Congressional leadership in an effort to get a deal done by Christmas, and it is "puzzling" that they have not yet accepted.

He said Boehner's plan would grant tax cuts to the wealthiest Americans while raising taxes and cutting unemployment insurance benefits for the middle class. This "violates the principles" that were debated in the presidential election.

But Boehner's proposal is not finding traction in Congress either, and even if it passes the House does not have the support to make it out of the Senate, although Obama said he would veto it if it did.

Even so, Boehner said the House will vote Thursday on his approach which would involve extending Bush era tax cuts on incomes of $1 million or less. It remains unclear if there will be other provisions attached to the measure such as an AMT fix or an adjustment in estate taxes.

Once approved, "the president will have a decision to make. He can call on the Senate Democrats to pass that bill, or he can be responsible for the largest tax increase in American history," Boehner said.

Obama said Republicans would be voting for a package that has some tax increases and no spending cuts - the exact opposite of what they have been supporting for years.