Ratings Service Warns Politics Could Delay Budget Deal, Downgrades Outlook

Reuters

In this Feb. 14 photo, The National Debt Clock hangs from a building near Times Square in New York.

As the White House and lawmakers call for renewed cooperation to tackle the deficit, a leading rating agency isn't buying it. 

Standard & Poor's Ratings Service warned Monday that politics may be getting in the way of a budget compromise, and -- in an announcement which sent stocks tumbling -- said it was lowering the outlook for U.S. sovereign debt to "Negative" from "Stable" due to the risk posed by the growing deficit. 

Putting Washington on notice, S&P warned that it might be compelled to lower the country's rating if Congress can't reach a budget deal that brings the deficit under control. 

The announcement puts added pressure on lawmakers and the White House as they pitch dueling budget plans. Republicans called it a "wake-up call" to get spending under control. But the Obama administration disputed S&P's finding and said negotiators are, to the contrary, ready to bridge their differences. 

White House spokesman Jay Carney said the political process will outperform the agency's expectations, downplaying the significance of the announcement. 

"We see momentum going that way," a senior Treasury official told Fox Business Network, referring to the possibility of an agreement before the next election. "A lot is going on behind the scenes. ... I'm not saying it won't be messy." 

The official pointed to negotiations underway among a bipartisan group of senators, who are trying to produce a plan when Congress returns from recess. 

"Both political parties now agree that it is time to begin bringing down deficits as a share of GDP," Mary Miller, assistant secretary for financial markets at the Treasury Department, said in a written statement. "We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation." 

The agency reaffirmed the investment-grade credit ratings on the United States' long-term and short-term debt. S&P says the U.S. has a high-income, diversified and flexible economy that has helped it to encourage growth while containing inflation. 

But the country's ballooning deficit could offset those positives over the next two years. The agency noted that the deficit grew to 11 percent of gross domestic income in 2009. That is much higher than the average of 2 percent to 5 percent in the previous six years. 

The statement from S&P reflected what it called the "significant risk" that deadlock in Washington could last through the 2012 elections, leaving the government without a medium-term deficit strategy for another several years. 

"Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years," S&P's credit analyst Nikola G. Swann said in a statement. "The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012." 

Swann said a compromise that tackles the deficit could lead the ratings service to reverse its outlook. 

"Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating," Swann added. 

Miller, though, said the economy is "strengthening as it emerges from the recent recession." And she pointed to the deficit-reduction plan outlined last week by President Obama in arguing that the country is ready to reverse course. 

"As the president said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility," she said. 

The president outlined a plan he said would reduce the deficit by $4 trillion over 12 years. Republicans, though, said the plan relied too heavily on tax hikes and did not do enough to address entitlement spending. Republicans are pushing their own long-term budget proposal, which would overhaul Medicare and Medicaid, and are pushing for spending reforms as a condition for their support on raising the $14.3 trillion debt limit. 

The federal government is expected to hit that ceiling by next month, and the S&P announcement quickly became a political football in that debate Monday. 

Sen. Mark Kirk, R-Ill., said the debate over the debt limit offers lawmakers the chance "to save the dollar and our economy." He said S&P offered a "stark warning" for the country if lawmakers "miss this chance or if Congress sends the president a blank check."

Rep. Paul Ryan, R-Wis., author of the Republicans' budget proposal, said the failure to reach an agreement threatens the country's "economic security" and continued to hammer the president for his deficit speech last week. 

"A campaign speech is no substitute for a serious, credible budget. The president and his party's leaders must put an end to empty promises and work with us to avert this looming economic crisis," Ryan said. 

But Rep. Peter Welch, D-Vt., issued a statement arguing that the announcement reinforces the need to approve the debt ceiling increase no matter what -- since failing to increase the debt limit could cause the country to default. 

"The markets have doubts about America's ability to get its fiscal house in order. And they are right," Welch said, adding that Republicans would unleash "the financial hounds of hell" if they play politics with the debt ceiling. 

The Associated Press contributed to this report.

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Obama Pitches Budget Deal, Tells Senators to Run With Details

Reuters

While deficit commission co-chairman Alan Simpson suggests prayer is the answer to finding long-term debt reduction, President Obama is counting on a small group of senators to turn his 2012 budget proposal submitted two months ago into a long-term plan to reduce the government's tab.

That's no easy task. The president's budget submission in February allows for a $1.2 trillion deficit in 2012 alone, and $9.4 trillion additional debt over 10 years, according to an analysis by the Congressional Budget Office. 

But after continued reports of record-breaking debt numbers and a proposal from House Budget Committee Chairman Paul Ryan to reduce debt by $6.2 billion over 10 years, the president this week outlined his own offering -- a plan that called for $4 trillion in savings over 12 years, in part by increasing current tax rates for families earning $250,000 or more. 

"It is a balanced plan that asks for shared sacrifice in order to provide shared opportunity for all Americans," Obama said Thursday after a meeting with his deficit commission co-chairmen. 

The proposal doesn't come with any new budget revisions being sent to Congress, a decision that was not an afterthought, according to the Office of Management and Budget.

"The 2012 budget already exists," an OMB spokeswoman told Fox News on Thursday. "The framework outlined yesterday builds on the president's 2012 budget to provide a comprehensive, balanced approach to deficit reduction. The president's goal was to lay out his vision, not to write specific legislation or present every detail and say take it or leave it. This charts a path forward."

That decision didn't please the Senate Budget Committee ranking Republican Jeff Sessions, R-Ala.

"The president has obviously recognized that the budget he submitted was inadequate," Sessions told FoxNews.com. But instead of offering a revised budget, which is required by the Congressional Budget Act, Obama is taking the stage to try to discredit Ryan, he said. 

"They have no intention of actually following through the speech with concrete proposals that Congress can evaluate," he said. "The idea he's proposing can't be evaluated because it's just talk."

Without a revised budget, getting from Obama plan 1.0 to Obama plan 2.0 appears to be a task left at the doorstep of the Gang of Six -- three Republicans and three Democrats who served on the failed deficit panel but are committed to looking for a middle ground on debt reduction.  

Jack Lew, the president's budget chief, called it a "significant challenge" to get "from here to where we need to go," but said the most popular commentary in Washington is to say it's impossible to reach an agreement.

"When Congress gets back ...  the vice president will meet with leaders and lay out the issues that they need to work through, with a pretty tight deadline, with the goal of having progress by Memorial Day" and a vote in June, he said.

"The important thing is that we have action," said Erskine Bowles, a deficit commission co-chairman who met with Obama and his co-chairman Simpson on Thursday. 

Calling the Gang of Six "very brave, bold senators," Bowles said it will likely be up to it to come up with legislative language for a vote.

"I don't think anybody has a crystal ball, but I do think we have a framework set up," he said. "Every single plan is talking about $4 trillion of deficit reduction. That's the key and now what we have to do is take the best ideas out of all plans and get to real action."

"I think they will put out their plan, and then if anybody else wants to put in a plan we suggest that they do so, and that would be a wonderful thing, and then we'll just mess around the plans and see where's the best results," Simpson added. 

But their confidence belies the trouble the Gang of Six is having reaching an agreement.

Sen. Kent Conrad, D-N.D., a member of the Gang of Six, told Fox News that everything is on the table -- entitlements, domestic spending and revenue in the form of tax reforms. 

But Conrad, who as Budget Committee chairman is responsible for submitting a Democratic budget in the Senate, said he's been holding off so as to give every chance for the group to come together. 

"I think that's what's required at the end of the day," he said. "Look, neither party can do this on its own. This is a circumstance in which one party controls the House, one controls the Senate. Of course the president has his own views, so if we don't come together, nothing is going to happen."

But Sessions said he's perplexed by the decision to leave it to six senators unknown to most of America. 

"The Gang of Six, I'm not sure how they were selected or how they're expected to perform, and we have no confidence they will reach any agreement," he said, adding that maybe it could come up with some ideas, but the group is limited in latitude. "They're not able to do much more than sit around a room and give and take a little bit."

Ryan, R-Wis., whose legislation is expected to get a House vote before Congress leaves this week for a two-week spring break, said he's more encouraged that his bill will pass now that the president has failed to lead with a revised budget and offered what he described as a slanted speech to the nation. 

"When the commander-in-chief sort of brings himself down to the level of the partisan mosh pit that we've been in, that we are in, it makes it more difficult to bring that kind of leadership," he said.

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Boehner Plays Down Claims of Budget Deal, Says GOP to 'Fight' for Cuts

AP

House Speaker John Boehner and other GOP leaders discuss budget negotiations on Capitol Hill in Washington March 29.

House Speaker John Boehner dashed cold water Thursday on claims that the two parties had agreed on how much to cut from the rest of this year's budget, saying Republicans would "continue to fight" for an earlier budget proposal Democrats adamantly oppose. 

Democrats had earlier claimed negotiators were working on a proposal for around $33 billion in spending cuts. Vice President Biden reported "good progress" on budget talks, and Senate Majority Leader Harry Reid, D-Nev., went so far as to claim the parties had "agreed upon a number." 

But while that target is indeed on the table, Boehner said Republicans have not agreed to it. 

"There's no agreement on numbers, and nothing will be agreed to until everything is agreed to," Boehner said. "We're going to continue to fight for the largest spending cuts that we can get." 

He said that means Republicans will keep fighting for the GOP-backed budget that passed the House last month and stalled in the Senate. That budget proposal would cut $61 billion from last year's levels, and contains myriad cuts to organizations like Planned Parenthood which Democrats decry as mere political score-settling. 

Democrats have hammered the message that Republicans are reticent to come down from the $61 billion mark because they're under pressure from Tea Partiers. "I'm sure it's not easy trying to negotiate with the Tea Party screaming in his right ear," Reid said in a statement Thursday. 

Both parties are casting the other as "extreme," amounting to a public-relations battle that has made the negotiations themselves all the more fragile. 

The tentative split-the-difference plan would end up where GOP leaders started last month as they tried to fulfill a campaign pledge to return spending for agencies' daily operations to levels in place before President Obama took office. That calculation takes into account the fact that the current budget year, which began Oct. 1, is about half over. 

The $33 billion figure is well below the cuts the House passed last month, but it still represents significant movement by Senate Democrats and the administration after originally backing a freeze at current rates. 

"There's no reason why, with all that's going on in the world and with the state of the economy, that we can't avoid a government shutdown," Biden told reporters after a meeting in the Capitol with Senate Democratic leaders. 

Some Tea Party-backed GOP lawmakers want the original $61 billion. With a Tea Party rally set for Thursday on Capitol Hill, it's unclear how many of the 87 freshmen Republicans elected last fall could live with a smaller compromise.

Both sides said the figure under consideration is tentative at best and depends on the outcome of numerous policy stands written into the bill. 

Some conservatives appear insistent on the full range of spending cuts, but others recognize that compromise is required to win Obama's signature and support from Democrats who control the Senate. 

Far bigger fights are ahead on a longer-term GOP budget plan that takes a more comprehensive approach to the budget woes. Also looming is a must-pass bill to allow the government to borrow more money to meet its commitments. Republicans hope to use that measure to force further spending cuts on the president. 

"I don't believe that shutting down government is a solution to the problem. Republicans and Democrats need to work out a compromise," said Rep. Charles Bass, R-N.H. "Let's get this over with and get on to the budget." 

But Rep. Mike Pence, R-Ind., who earlier warned that "It's time to pick a fight," wants party leaders to hang tough. 

The legislation would bankroll the day-to-day operating budgets of federal agencies -- including the wars in Iraq and Afghanistan -- through Sept. 30, the end of the current budget year. 

The Associated Press contributed to this report. 

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