LEADERS AT SUMMIT TALKS TURN ATTENTION TO DEFICIT CUTS / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

June 26, 2010

Leaders at Summit Talks Turn Attention to Deficit Cuts

By JACKIE CALMES and SEWELL CHAN

TORONTO — Despite President Obama’s pitch at the summit meeting for developed nations here for continued stimulus measures to prevent another global economic downturn, the United States will go along with other leaders who are more concerned about rising debt and join in a commitment to cut their governments’ deficits in half by 2013, administration officials said on Saturday.

That goal is the proposal of Stephen Harper, the prime minister of Canada and the host of the two-day Group of 20 conference of developed nations. Mr. Harper wanted it to be part of the communiqué on global economic policy that the group adopts before concluding on Sunday, and he had the support of European leaders, including David Cameron, the new prime minister of Britain, who has proposed the most ambitious austerity plan of spending cuts and tax increases in his country in a half-century.

Mr. Cameron and Mr. Obama, in their first private meeting since Mr. Cameron took office, acknowledged their different approaches toward balancing the need to promote greater economic growth and job creation in the short term with the long-term desire to reduce national debts, which reached dangerous heights during the downturn. But they played down those differences.

Mr. Obama said the two leaders were bound to have different approaches given their country’s separate budget outlooks; Britain’s debt is bigger than that of the United States, measured against the size of their respective economies. “But we are aiming at the same direction, which is long-term sustainable growth that puts people to work,” Mr. Obama said.

Mr. Cameron added, “Those countries that have big deficit problems like ours have to take action in order to keep that level of confidence in the economy which is absolutely vital to growth.” He joked that he could not afford to pay for the helicopter ride that Mr. Obama had given him Saturday from the isolated site of the Group of 8 talks to the subsequent G-20 session in Toronto.

The separate approaches represented by Mr. Obama and Mr. Cameron reflected the splintering that is occurring within the G-20 as the global economy recovers, if haltingly, amid some fears of another recession. In three previous summit meetings since the financial and economic crisis began in 2008, the Group of 20 has coordinated on stimulus measures, banking regulations and anti-protectionist measures.

The Obama administration did have allies at the meeting in opposing rapid moves to withdraw governments’ stimulus measures. The Brazilian finance minister, Guido Mantega, told reporters that the debt-reduction targets could compromise economic growth and would be “too draconian” for certain countries to meet. “It is clear that we need to cut, but at what speed?” he asked. Japan has also taken a position more closely aligned with the United States’.

Treasury Secretary Timothy F. Geithner emphasized the American position again Saturday as he arrived here for the beginning of the G-20 talks. Speaking to reporters, he said that for all the progress the G-20 countries had made since late 2008, “the scars of this crisis are still with us.”

Trying to bridge the differences among leaders here, he said: “Our challenge, as the G-20, is to act together to strengthen the prospects for growth. This will require different strategies in different countries. We are coming out of the crisis at different speeds.”

Mr. Obama came to the table this weekend with a strong hand to press his case to foreign leaders for tougher banking regulations, after Congress agreed to a far-reaching overhaul of the American regulatory system. But he was hindered in his effort to persuade other governments to keep stimulating their economies.

Even as Congress allowed Mr. Obama to pack the big victory on banking regulation as he left for the Group of 20 summit talks, the Senate separately dealt him a significant setback that no doubt resonated with the foreign leaders here pushing fiscal austerity: Democratic leaders shelved an economic stimulus package of aid for the long-term unemployed and financially squeezed states, along with assorted tax cuts.

The setback underscored the difficulty Mr. Obama has had in making the case for stimulus. At home as abroad, Mr. Obama is confronting the limits of the consensus that took hold after the economic crisis began in 2008, which favored bigger deficits to spur job creation. At stake, as the administration sees it, is continued global recovery or a relapse into another recession.

Yet even within Mr. Obama’s administration there are fault lines on how much additional stimulus is desirable.

Some news reports in recent days suggested that Peter R. Orszag, the budget director who recently announced that he would be leaving in late July, was resigning partly out of frustration that he had lost the argument for deeper and quicker reductions in projected deficits. Advisers and associates of Mr. Orszag insist that is not so, however, and Mr. Orszag was moved to address the issue late Friday in his blog on the Web site of the Office of Management and Budget.

Saying that “it was simply time for me to move on,” Mr. Orszag recounted the deficit-reduction steps that Mr. Obama has proposed: a three-year freeze after this fiscal year for nonsecurity domestic appropriations, $1 trillion in reductions over the coming decade and a bipartisan fiscal commission — a priority of Mr. Orszag’s — that will try to make recommendations, with a Dec. 1 target, for reducing the debt.

“The president has made it clear to his economic team that he is seriously committed to tackling our fiscal problems,” Mr. Orszag wrote.

Indeed, Mr. Orszag has complained to associates that the debate over job creation versus deficit reduction is a false one; the only disagreement is over timing. In advance of the G-20, Mr. Geithner, who is closer in his thinking to Mr. Orszag, and Lawrence H. Summers, the director of the White House National Economic Council, and a proponent of more short-term stimulus measures, co-wrote an op-ed column in The Wall Street Journal to project a united front on the issue.

“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” they wrote. “Without growth now, deficits will rise further and undermine future growth.”
European countries generally are running annual deficits of about 6 percent of the size of their economies — twice as large as the limit that the European Union tries to enforce. Even before Mr. Cameron took action in London, Germany’s chancellor, Angela Merkel, and Nicolas Sarkozy, the president of France, had begun turning from stimulus to immediate deficit reductions.

Mr. Harper of Canada praised Mr. Cameron for his austerity initiative on Friday, saying it was the sort of fiscal constraint the rest of the G-20 nations should adopt. On Saturday, an adviser said Mr. Harper was lobbying the other leaders to commit to fully implement “existing” stimulus plans — suggesting no additional spending or tax cut measures — and to cut their annual deficits in half by 2013 and put them on a downward trajectory after 2016.

That is a more ambitious and constrictive path than the one Mr. Obama has proposed as the goal of his fiscal commission. He has proposed that the United States cut its annual deficit to 3 percent of the gross domestic product by fiscal year 2015.