Cutting the US budget deficit 'will require sacrifice by all'

It is the moment that Uncle Sam is meant to get serious about his spendthrift ways. A panel created by Barack Obama to address America's monumental budget deficit has finally come forward with a list of recommended corrective steps and the message they carry is as abrupt as it is obvious: getting it done will require sacrifice by all.

The package, the result of months of behind-closed-doors wrangling by the 18-member commission, aims to restore balance to the federal budget through a combination of cuts and adjustments to spending programmes, including sacred cows such as military defence and support for retirees, as well as revenue-raising devices like more tax on petrol.

The budget woes of the US are not unlike those of some European countries, including Britain, where spending cuts are the new political reality. But the US has for years faced a special problem: the social security system that pays out billions to keep food on the table of its retirees is on a direct path to insolvency unless something drastic is done.

"This debt is like a cancer that will truly destroy this country from within if we don't fix it," Erskine Bowles, a co-chair of the deficit reduction panel and former chief-of-staff to Bill Clinton, warned as he unveiled the new proposals.

Even if cutting spending was the clarion call of nearly every candidate in this month's midterm elections – especially on the right – the response to the plan was a general and predictable outbreak of horror and outrage.

Highlights include increasing the retirement age from 67 to 69 (though not before 2075 when anyone who might object won't be alive any more) and a simplification of the tax code that would see the scrapping of such popular provisions as the deductibility of mortgage interest payments for homeowners. Also envisioned are surprisingly savage cuts in military spending that would see, for example, funding for US bases oversees cut by a third.

Mr Bowles, who presented the main planks of the package along with former US senator Alan Simpson, a Republican from Wyoming, also pointed to an increase in the tax on petrol and steps to reinforce elements of Mr Obama's healthcare reforms further to reduce costs. Most measures would be phased in slowly to avoid derailing the economy with the initial goal of reducing the national debt by $4 trillion (£2.5 trillion) over the next 10 years.

The package seemed to have the virtue of imagining cuts in virtually every area of government and a revamping of the tax code over as wide a horizon as possible to raise revenues.

It is thus either a hodgepodge or a comprehensive effort, depending on your point of view. Always guaranteed was resistance from all along the political spectrum.

Nancy Pelosi, the outgoing House Speaker, called the measures "simply unacceptable". Americans for Tax Reform, a conservative advocacy group popular with the Tea Party, fulminated instantly that they are "merely an excuse to raise net taxes on the American people".

The fate of the Bowles-Simpson document is uncertain. In theory, the commission must present it to Congress before a 1 December deadline assuming 14 of its 18 members support the proposals. That may not happen. Assuming it does receive support, the lame-duck Congress is then meant approve it before year's end. But nothing about the process will be binding.

For his part, Mr Obama, speaking in Seoul at the start of the G20 summit, begged both sides on Congress to give the package serious consideration at least.

"If we are concerned about debt and deficits, then we're going to have to take actions that are difficult and we're going to have to tell the truth to the American people," he said.

"We need to be straight with the American people. We can't just engage in political rhetoric."

US cuts vs UK cuts

Government

US Suggested domestic savings total $100.2bn, including proposals to reduce Congressional and White House budgets by 15 per cent, freezing federal salaries for three years and cutting federal workforce by 10 per cent. Just reducing unnecessary printing costs would save an estimated $400m.

UK Departmental budgets will be cut by 19 per cent on average. Up to 490,000 public sector jobs could be lost and council budgets are to fall by 7.1 per cent.

Healthcare

US Payments to doctors, lawyers and drug companies to be reduced. Patients would pay more in deductibles and co-payments. Veterans to pay more for healthcare.

UK NHS budget to rise by 0.4 per cent over the next four years, though savings of £20bn in efficiency and productivity are being sought.

Tax

US A cut in the corporate tax rate from 35 per cent to 26 per cent. To make up for lost revenue, tax on petrol (now 18.4 cents a gallon) would increase by 15 cents.

UK Corporation tax to go from 28 per cent to 24 per cent over next four years.

Defence

US Recommended cuts to save an estimated $100bn, including reducing overseas military bases by a third (saving $9.2bn); a three-year freeze on non-combat military pay plus salaries, bonuses and other compensation for staff at the Department of Defence (saving $14.5bn)

UK Spending at the MoD has decreased by 7.5 per cent, with the budget standing at £46.1bn. 17,000 jobs will be lost across the military services, and 25,000 civilian staff will go too. Harrier jump jets and the 'Ark Royal' aircraft carrier have been axed and plans for Nimrod spy planes cancelled.

Welfare

US Suggested changes to Social Security should ensure its solvency for 75 years, the payroll tax cap would rise to $190,000, and the retirement age would increase to 69 by 2075.

UK At least £7bn in cuts to be made. Retirement age is to rise from 65 to 66 by 2020, with a gradual increase in the state pension age from 65 to 66 as of 2018.

Enjoli Liston