x Abu Dhabi, UAE Friday 21 July 2017

11th-hour budget plan revives hope that US will avoid debt default

Party politics has left the United States on the brink of a potentially disastrous downgrading of its Triple A credit rating, after a sizeable Tea Party faction among Republicans has fiercely opposed any increase in taxes.

WASHINGTON // With just 11 days to go to raise the US debt ceiling, an 11th-hour budget plan is reviving hopes that the world's largest economy will avoid a potentially catastrophic debt default.

But the plan by a bipartisan group of senators dubbed the "Gang of Six" is still just a sketch. It only affords politicians the chance to sit down and "start talking turkey", in the words of Barack Obama, the US president.

It comes after weeks of horse-trading over how best to grapple with a US$14 trillion (Dh51 trillion) national debt.

This high-stakes debate has been characterised above all by partisan politics. The battling has had little to do with the structural economic issues and more to do with an ideological aversion to taxes among a highly motivated faction on the right of US politics.

Barak Hoffman, executive director of the Centre for Democracy and Civil Society at Georgetown University, said: "This is not an economic problem. This is not a question of capacity to pay. This is a question of whether Congress will authorise the government to borrow money to pay its bills."

The risks Congress is taking are "enormous", Mr Hoffman said. A debt default could unravel financial markets and send the US and global economy into another severe recession.

The damage to the reputation of the United States abroad of failing to meet its financial obligations would also be significant.

It would bolster the arguments of those who believe the US is in terminal decline and curtail military spending at a time it is engaged in several conflicts and, as a result of both, harm the ability of the United States to project power.

It would be a self-inflicted wound. Raising the debt ceiling is historically a formality. Congress has already approved the spending that requires the borrowing. Indeed, Congress has voted to do so 89 times since 1939.

This year, however, legislators in the Republican-controlled House of Representatives have demanded that the administration slashes spending before any more borrowing will be approved.

But with almost every Republican legislator having signed a pledge never to vote for a tax increase, Congress baulked at an administration plan to save $4 trillion over a decade with a mixture of spending cuts and revenue increases.

Without the latter, however, all savings would have to come from dramatic cuts in welfare and health programmes to which neither Mr Obama nor congressional Democrats would agree.

Even establishment Republicans seem to accept that at least some revenue has to be raised for the debt to be seriously reduced. But a sizeable Tea Party faction in the Republican Party has fiercely opposed any such suggestion.

"Small government" fervour swept Republicans back into control of the House of Representatives in last year's mid-term elections.

The 2010 vote came in a political climate poisoned by a recession, and had been characterised by widespread popular anger at massive bank bailouts as unemployment threatened to reach 10 per cent.

The Tea Party, social conservatives and financial libertarians, gained momentum on the back of this anger, which they directed towards the Obama administration. They were particularly upset about the administration's health care plan, which they turned into a symbol of wasteful government spending.

Tea Party candidates ran on a "platform of intransigence", said Mr Hoffman.

"It's not easy to back out of this kind of stridency," he said. "It's difficult to do nuance when you run on a platform that you are not willing to compromise with the Democrats on anything, period."

While the 2010 fervour swept Republicans back into control of the House, it left a party divided. So in thrall to its right flank is the party that an adviser to the campaign of one moderate Republican presidential hopeful in 2012 described his candidate as "far too sensible to get much traction in the current climate".

The Gang of Six plan is tailored to allow both sides to claim victory while addressing the underlying structural economic problems.

A combination of both spending cuts and revenue increases through an end to some tax breaks, the plan seeks to cut the deficit by $4 trillion over the next 10 years.

However, the plan also includes provisions to lower certain income tax rates. This essentially allows legislators to claim that $1.2 trillion will be raised in new revenue, while resulting in a net tax cut of $1.5 trillion.

Even though the Gang of Six proposal is reportedly only a four-page draft, it was enough to see world markets rally on Wednesday. The plan is unlikely to be fleshed out before August 2, however, when the US treasury has said the government will run out of money. Credit agencies have warned that without a deal, the US's triple A rating will be downgraded.

Some stop-gap measures will likely be needed that will allow Congress to raise the debt ceiling without forcing anyone to vote for revenue increases before the 2012 elections.

"It's important to keep this in a political perspective. The long-term implications are irrelevant if you lose the next election," said Mr Hoffman.

"It's only 10 years out that it becomes a problem. But you can hold to this position to 2012 without having to pay the consequences."