Will Obama Dare to Commit to Spending Cuts?

“Be careful what you wish for because it might come true,” the proverb goes. The compromise proposed yesterday by six senators to reduce the medium and long-term budget deficit has changed the tone of the debate, but it is too early to say whether it will be the starting point for the solution required by the rating agencies to maintain the United States’ AAA rating.

The compromise has several advantages: it rallies senators from both parties. Over 10 years, it aims to reduce nearly $4 trillion of the U.S.’s expected deficit; one quarter of the savings would come from increases in tax revenue, while the rest would be the result of spending cuts. Finally, it provides new mechanisms for fiscal discipline.

For the first time, the Democrats are willing to touch sacrosanct social programs for health and pensions; for the first time, Republicans are willing to accept tax hikes. This “big compromise” would be part of a comprehensive tax reform that simplifies the tax code, eliminates tax loopholes and reduces the marginal tax rate but also eliminates many deductions popular among the middle class.

The disadvantages are significant. The first is that the plan is too ambitious to be passed before August 2, the date on which the public debt ceiling must be raised if the U.S. wants to avoid a default by the Treasury. We will have to proceed step by step.

The other problem is the lack of detail. But the devil is in the details. When the Democrats discover how social programs will be hit, they may change their tone. The same goes for conservative Republican senators opposed to tax hikes.

But the main problem lies elsewhere: in the House of Representatives. There is no indication that Republicans in the House of Representatives will support this plan. Nothing says that the House Democrats will support it either. Everyone in the House must face their voters in November 2012. They don’t have the luxury of the senators, who have six-year terms. Only a third of the Senate faces reelection next year.

The last important element: to date, Barack Obama has managed an extraordinary feat of never publishing any document in which he commits to reducing government spending. He has only spoken of this possibility in general terms. His entire campaign indicates that he works to save the social programs that the Republicans would like to sabotage. He calls for higher taxes, but he has never said whether he is truly ready to cut spending.

If things finally get serious, if we finally start to get to the heart of the matter, he must firmly commit to unpopular measures, but will he have the courage to do so?

We note, however, that House Republicans have already submitted and even voted on two huge savings plans. They are thus exposed to voters’ anger. They are suffering in the polls, but no one can say that they lacked courage. However, they are only renouncing tax increases. Now, the endgame begins.