President calls for $1.5T deficit bargain

President Obama used the State of the Union to call on Congress to go beyond small fiscal fights, such as delaying the $85 billion sequester, and return to a grand bargain on the deficit.

Obama argued that Washington has already enacted $2.5 trillion in deficit reduction and needs only a $1.5 trillion deal to “stabilize” the debt relative to size of the economy.

“Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion — mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans.  As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances,” Obama said. “Now we need to finish the job.”

In an economic plan released in conjunction with the speech, the White House argued that the bargain could consist of $900 billion in spending cuts and entitlement changes and $600 billion in new revenue from corporate and individual tax reform.

To get to the $2.5 trillion figure, Democrats count savings from lower spending caps in the August 2011 Budget Control Act, but not the $1.2 trillion in savings from sequestration and other automatic cuts over nine years. They also count cuts made in the April 2011 spending resolution and some $600 billion in revenue from the fiscal cliff deal enacted in January. That deal allowed taxes to rise on annual household income of more than $450,000 per year.

{mosads}Republicans say that the Democratic math is insufficient since after the end of the next decade the debt would start growing unsustainably again. They want a plan to balance the budget within 10 years to get to a situation where budget surpluses can be used to pay down the debt, which is now just shy of $17 trillion. 

To acheive this goal, the GOP wants the sequestration cuts paid for by spending cuts alone, while Democrats want to use a mix of tax increases and spending cuts.

Obama said that some compromise should be found. 

“I realize that tax reform and entitlement reform won’t be easy. The politics will be hard for both sides. None of us will get 100 percent of what we want. But the alternative will cost us jobs, hurt our economy, and visit hardship on millions of hardworking Americans,” he said.

Obama used the address to warn against manufactured crisis such as a battle over raising the debt ceiling that looms on May 19 or one over a government shutdown that looms on March 27.

“Let’s agree, right here, right now, to keep the people’s government open, pay our bills on time, and always uphold the full faith and credit of the United States of America,” he said.