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America's long-term fiscal challenges

The European debt crisis is being watched closely by US policymakers, as the economic woes could have an impact on the elections in November.
Last modified: 15 May 2012 22:48
Treasury Secretary Timothy Geithner onstage at the 2012 Fiscal Summit in Washington DC [Reuters]

US fiscal policy leaders are watching the European debt crisis closely.

They know that in a global economy European economic woes could have an impact here, spreading like a contagion to US banks, trade, the stock market and, quite possibly, the US election in November.

As the third annual Washington Fiscal Summit, convened by the Peterson Foundation, takes place in Washington, top Obama administration and congressional leaders are meeting to discuss America’s own long-term fiscal challenges.

The nation is facing a series of critical fiscal deadlines by the end of this year.

Tax cuts - sometimes called Bush-era tax cuts - are set to expire and automatic spending cuts to entitlement and defence spending are due take effect in 2013.

Neither Democrats nor Republicans want that to happen and are now arguing, mostly along party lines, on how best to reduce America’s debt and deficit.

Congress is, and has been for months, in a standoff. Republicans are adamant there must be no tax increases.

Democrats are vowing to stop any cuts to social programs that will hurt America’s poor and middle classes.

Sustainable path

Speaking at the Washington Fiscal Summit on Tuesday, Timothy Geithner, US treasury secretary, said: "It’s not that complicated."

He told fellow policymakers that both Democrats and Republicans on Capitol Hill have the ability and responsibility to work together to put the country back on a sustainable path.

The treasury secretary said the failure of politicians to address America’s debt and deficit is something that can’t be put off.

"We can’t run the country on the assumption that the world is always going to have confidence in the ability of the American political system to act," Geithner said.

"We have to earn that confidence over time to justify that confidence. That’s going to require us to do more in the near term to make some progress on this challenge."

Still, the top congressional Republican in the US House of Representatives has already set the stage for another tense standoff with Democrats over America’s rising debt.

House Speaker John Boehner said he’s planning for deep cuts in government spending in exchange for raising the federal debt ceiling which is likely to hit its new limit of $16.4 trillion by the new year.

In prepared remarks, Boehner told policy leaders: "This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance ... we shouldn’t dread the debt limit. We should welcome it.  It’s an action-forcing event in a town that has become infamous for inaction."

Deficit-reduction plan

Former President Bill Clinton, speaking at the policy summit thinks there is a solution to the congressional standoff and called for more balance.

He favours US politicians passing a deficit-reduction plan that would take effect when the US economy meets certain growth benchmarks.

“If you impose austerity,” Clinton said, “and interest rates are zero and private demand is virtually non-existent, then what will happen is revenues will drop more than you can cut spending.

"We should pass a plan as soon as possible, but do what Simpson-Bowles said [a bipartisan deficit reduction plan issued in December 2010], do it when certain growth projections are met and you won’t have to convince anybody because interest rates will start to rise dramatically."

Regardless of which path American lawmakers choose to take, Clinton is a realist about the decision making timeline of Capitol Hill.

He told his audience he is doubtful anything will happen quickly given that America’s politicians are eyeing the political calendar.

Clinton says he expects few decisions to be made regarding how to solve America’s deficit and rising debt until US voters go to the polls, to choose their president and congress on November 6.