Fiscal cliff: How to judge if debt cuts are real

WASHINGTON (AP) ? President Barack Obama and leaders of the lame-duck Congress may be just weeks away from shaking hands on a deal to avert the dreaded "fiscal cliff." So it's natural to wonder: If they announce a bipartisan package promising to curb mushrooming federal deficits, will it be real?

Both sides have struck cooperative tones since Obama's re-election. Even so, he and House Speaker John Boehner, R-Ohio, the GOP's pivotal bargainer, have spent most of the past two years in an acrid political climate in which both sides have fought stubbornly to protect their constituencies.

Obama and top lawmakers could produce an agreement that takes a serious bite out of the government's growing $16 trillion pile of debt and puts it on a true downward trajectory.

Or they might reach an accord heading off massive tax increases and spending cuts that begin to bite in January ? that's the fiscal cliff ? while appearing to be getting tough on deficits through painful savings deferred until years from now, when their successors might revoke or dilute them.

Historically, Congress and presidents have proven themselves capable of either. So before bargainers concoct a product, and assuming they can, here's a checklist of how to assess their work:

OVERALL DEFICIT CUTS

The House and Senate have four weeks until Christmas. Their leaders and the president want a deal before then. Bargainers are shooting for a framework setting future debt-reduction targets, with detailed tax and spending changes to be approved next year but possibly some initial savings enacted immediately.

Obama has suggested 10-year savings totaling around $4.4 trillion.

Passing a framework next month that sets deficit-cutting targets for each of the next 10 years would be seen as a sign of seriousness. But look for specifics. An agreement will have a greater chance of actually reducing deficits if it details how the savings would be divided between revenue increases and cuts in federal programs, averting future fights among lawmakers over that question.

Better yet would be including a fast-track process for passing next year's tax and spending bills if they meet the savings targets so they can whisk through Congress without the possibility of a Senate filibuster, in which 41 of the 100 senators could kill a measure they dislike.

Another sign of sincerity: An enforcement mechanism that imposes savings automatically if lawmakers gridlock over details. Legislators' efforts now to avert January's combination of automatic tax boosts and spending cuts underscores the effectiveness of forcing them to act.

Less impressive would be verbal pledges by the White House and congressional leaders to meet deficit-cutting goals without passing legislation inscribing the figures into law.

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TAXES

A deal that specifies where revenue would come from would lay important groundwork for next year's follow-up bill enacting actual changes in tax laws.

The biggest clash has been over whether to raise income tax rates on earnings over $200,000 annually for individuals, $250,000 for families. Obama wants to let them rise next year to a top rate of 39.6 percent but has suggested he would compromise. Boehner and other Republicans oppose any increase above today's top marginal rate of 35 percent. Instead, they advocate lower rates and eliminating or reducing unspecified deductions and tax credits. Settling that would resolve the toughest impediment to a deal.

Raising money from higher rates, closing loopholes or a combination of the two would create real revenue for the government. The problem is many tax deductions and credits , such as for home mortgages and the value of employer-provided health insurance, are so popular that enacting them into law over objections from the public and lobbyists would be extremely difficult.

With the price tags of tax and spending laws typically measured over a decade, delaying the implementation date can distort the projected impact of a change on people and the government's debt.

Tax cuts written to expire in a certain year can put future lawmakers under political pressure to extend it. That is what Obama and Congress face today with the January expiration of tax cuts, including many enacted a decade ago under President George W. Bush.

Even more questionable are assumptions that overhauling tax laws will boost economic activity and thus produce large new revenues for the government. Many Republicans and ideologically conservative economists contend that's the case, but most economists say there is no sound way to estimate how much revenue can be generated from strengthening the economy by revamping the tax system. Many believe the amount is modest.

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SPENDNG

A serious agreement should specify how much savings would come from entitlements, meaning those big, costly benefit programs such as Social Security and Medicare. It also should say how much would come from discretionary spending, which covers federal agency budgets for everything from the military and national parks to food safety inspections and weather forecasts.

Why the need for specificity?

Because spending for entitlements occurs automatically, accounts for nearly two-thirds of federal spending and is the fastest growing part of the budget. Discretionary spending has been shackled by past budget deals and, according to the nonpartisan Congressional Budget Office, is moving toward falling below 6 percent the size of the economy by 2022, the lowest level in at least 50 years.

A sincere effort to control expenditures would focus on entitlements, the true source of the government's spending problem. An agreement that envisions deep discretionary cuts risks a reliance on savings that future lawmakers could find unbearable and rescind.

Savings that come from weeding out waste, fraud and abuse, which sounds good but are difficult to find, or rely on one-time sales of federal assets should be treated with suspicion.

Deep cuts that take effect in the future, say after Obama leaves office in 2017, might be better than imposing them now and hurting an already weak economy by reducing spending.

But delayed cuts also open the door for Obama's successors and future Congresses to roll them back. In 1997, Congress voted for cuts in Medicare reimbursements to doctors; those cuts have grown so large that lawmakers now vote annually to restore the money.

Postponing the implementation of spending increases already scheduled to take effect, such as federal health insurance subsidies under Obama's health care overhaul, saves money upfront but makes no permanent changes that would ease future spending pressures.

Another debatable source of deficit reduction would be the hundreds of billions of dollars the Obama administration says the government is saving by winding down wars in Iraq and Afghanistan. While there is no question those expenditures are dropping, the government has run huge deficits while those wars were waged, so there's no money being left unspent as those wars end.

Source: http://news.yahoo.com/fiscal-cliff-judge-debt-cuts-real-131727977--finance.html

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