UPDATE 3-U.S. committee's deficit plans show deep divisions

Thu Oct 27, 2011 11:58pm BST

* Republican plan sees tax reform helping economy

* Republican, Democrat plans seen as political insurance

* Boehner says deal "going to take a lot more work" (Recasts, adds reaction)

By Donna Smith and Richard Cowan

WASHINGTON, Oct 27 (Reuters) - U.S. Republicans proposed a $2.2 trillion deficit reduction plan heavy on spending cuts and light on tax increases that highlighted a yawning divide with Democrats over how to ease the country's huge debt burden.

The Republican plan was presented at a closed-door session on Wednesday of a congressional "super committee" that has been tasked with finding at least $1.2 trillion in cuts over 10 years, congressional aides told Reuters on Thursday. [ID:nN1E79Q19L]

With the panel facing a looming Nov. 23 deadline, the plans unveiled by Republican members of the committee, and their Democratic counterparts on Tuesday, failed to narrow partisan differences over the contentious issue of taxes and appeared to do little to advance negotiations.

Instead, Republicans and Democrats traded barbs over their competing plans. A Democratic aide called the Republican initiative a "joke," while Republican aides called the Democratic offer "not serious."

The Republican plan proposes cutting $500 billion from the Medicare health insurance program for retirees, in part by raising premiums, congressional aides said. It would also cut $185 billion from the Medicaid health plan for the poor and $100 billion from other healthcare programs.

It includes a tax overhaul that would close loopholes and breaks for targeted industries, but those savings would be used to lower overall tax rates. Republicans say that approach would generate hundreds of billions of dollars in tax revenue from the increased economic growth that would presumably follow.

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FACTBOX-U.S. deficit committee members [ID:nN1E7721BX]

FACTBOX-Tax breaks on reform hit list [ID:nN1E7701SV]

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The Republican plan and the $3 trillion Democratic proposal, which is split almost evenly between spending cuts and tax increases, were expected to be discussed at a meeting of the super committee on Thursday.

Analysts said that by offering competing plans, the two sides are laying the groundwork to blame each other should the committee fail and $1.2 trillion in automatic spending cuts are triggered, beginning in 2013.

"All this is a form of political insurance," said Steve Bell of the Bipartisan Policy Center. "They are taking insurance out in case the super committee is perceived as a failure."

CONSEQUENCES OF FAILURE

House of Representatives Speaker John Boehner, the top U.S. Republican, said on Thursday it was important for the super committee to achieve success but acknowledged "it's going to take a lot more work."

A New York Times/CBS News poll this week showing that only 9 percent of Americans approve of Congress. Many lawmakers face re-election in the congressional and presidential elections set for November 2012.

"There's a better than 50-50 chance they'll get something together because they have to," said John Feehery, a political strategist and former Republican congressional leadership aide. "Politically, Congress needs a big win."

Boehner said the focus of deficit reduction efforts should be almost exclusively on cutting benefit programs.

"When you look at what is yet to be done by the super committee, almost all of that is going to fall in the area, I think, of mandatory spending, which is more than two thirds of the budget," he told reporters.

Mandatory programs range from Medicare and Medicaid to the Social Security retirement plan and food stamp program for the poor. It also includes federal workers' pension plans.

If the committee fails to agree on a deal, it would compound worries by credit rating agencies that Washington is incapable of addressing long-term fiscal imbalances that are projected to grow as the baby boom generation born between 1946 and 1964 retires and draws on Medicare and Social Security benefits.

Credit agencies have threatened to lower the stellar U.S. bond rating if lawmakers fail to significantly cut deficits. Such a move could push up interest rates throughout the U.S. economy and reverberate through global markets. [ID:nN1E79Q1Z1]

Standard & Poor's cut the U.S.'s AAA rating by one notch in August after a bruising fight between Republicans and Democrats over raising the U.S. debt limit. (Additional reporting by Thomas Ferraro and Rachelle Younglai; Editing by Ross Colvin and Eric Walsh)

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