Beth Myers, who was Chief Strategist to Mitt Romney during last year’s presidential campaign, said relations between the two parties remained fragile but had improved sufficiently from President Obama’s first term for there now to be meaningful talks. “The mood is less bothersome than it has been for the last four years,” Myers said before a meeting with RBS clients in London. “We are back to some degree of normalcy: talking about how the process is going to run, rather than whether a process even exists.”
US debt is expected to touch the $16.4 trillion limit mandated by Congress, on May 19. The country could technically default unless lawmakers raise that debt ceiling once again. Though the US Treasury is likely to use stop-gap measures to continue borrowing and servicing the debt for several months beyond that, the US could face a fiscal crisis by late summer if a new limit is not agreed.
Deficit hawks in the Republican Party such as Budget Committee Chairman Paul Ryan strongly oppose raising the debt ceiling without first seeing a comprehensive deficit reduction plan in place.
“The deficit hawks see the ceiling as one of the few ways to keep a lid on the debt,” said Myers.
Republicans, who hold the House of Representatives, oppose further tax increases and instead want spending cuts to reduce the deficit. Their Democratic opponents, who control the Senate and Presidency, favour a mixture of tax increases for the wealthiest and modest cuts in so-called entitlement programmes for the less-well off.
“The Republicans swallowed tax increases (in fiscal cliff negotiations) for next to nothing. The people I’ve talked to who are active in these negotiations seem fairly certain they are not going to take any more (tax) bracket increases.”
Despite the divide, Myers said the gap could be bridged.
Republicans might be standing firm on further tax rises but they could be willing to give ground on closing tax loopholes to raise revenue.
In exchange, the White House has indicated it would propose a budget with cuts to social security, pensions and Medicare, with savings partly paid for by a change in the measure of inflation used to calculating pension increases.
“I believe a solution will come from more aggressive tax reform than the Republicans want, and more benefit cuts than the Democrats want,” said Myers, who is one of the most experienced Republican strategists on Capitol Hill. “Republicans want to relieve the debt but they don’t want to go to war on spending cuts.”
A protracted battle over the debt ceiling would send a shudder through global markets as investors began thinking the unthinkable – a US default. Even a brief failure to make payments on treasury bonds would spark confusion, a surge in borrowing costs, a sell-off in riskier assets and could ultimately paralyse the financial system.
Myers said Democrats, who were holding out hopes of overturning the Republican’s majority in the House of Representatives next year, had started to take a more sober view of their chances and had shown greater cooperation as a result. Emblematic of that was the President’s charm offensive towards Republican congressmen, led by his new ‘can do’ chief of staff Denis McDonough.
“The Democrat Party is polling like mad and I think he will come to the conclusion that he cannot get the House back in 2014. He will look for ways for a settlement through small concessions from both sides”.
Standard & Poor’s downgraded the US after the last major debt ceiling battle in 2011, citing what the ratings agency said was the country’s inability to manage its fiscal policy.
The strain America’s generation of baby boomers will soon place on social security and healthcare has added urgency and heat to the debate.
“Our debt is a huge problem and over the medium term we cannot sustain it. That makes this a critical discussion,” she said, adding an important caveat: “Ultimately, I don’t think either party will let a default happen”.
Former Treasury Secretary Timothy Geithner has argued the US should completely abandon the debt ceiling because of its destabilising influence. Myers said that idea was a non starter given that shrinking the debt burden was such a central theme in Republican thinking.
“The question isn’t even on the table. The Republicans wouldn’t bend on that. They believe the debt an existential threat to the United States.”
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