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Pat Toomey: 'Default Not Inevitable'

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The sands in Uncle Sam's debt ceiling hourglass are sliding down. Between April and May, according to Treasury Secretary Timothy Geithner, we will have exhausted the nation's borrowing authority.

Junior Senator Pat Toomey (R-PA) is hoping his "Full Faith and Credit Act" will be the answer. Geithner, however, has called the bill "quite harmful."

What Toomey's billwould do is force the Treasury prioritize payments, paying off debt first and then paying for programs like Social Security. If passed, it would allow the US to hit the debt ceiling without automatically triggering a default on the nation's debt. The bill has support from the House Republican Study Committee but with such harsh words from Treasury and from some Democratic Leaders, the act faces an uphill battle on Capitol Hill. I caught up with the Senator and talked about all things budget reform and tax reform.

LL: Senate considers the debt limit this month. What kind of response have you gotten from your Senate colleagues on your legislation that would require the Treasury to make interest payments on U.S. debt its first priority in the event that the debt ceiling is not raised?

PT: Twenty-one of my colleagues have co-sponsored my Full Faith and Credit Act, and that number continues to grow. Companion legislation has been introduced in the House, where the number of co-sponsors is also strong and growing. My fellow senators get it—we need to make real spending cuts and process reforms that will enable us to restore fiscal integrity. The president’s request that we raise the debt ceiling is the perfect opportunity to get that done. We need to have an honest debate about this now — without the false specter of a government default on our debt.

LL: Senator Kent Conrad calls your idea to make interest payments on our debt its first priority a "dreadful idea"—what do you say to that?

PT: It is disturbing to me that any senior government official could believe that preventing our government from defaulting on our debt could ever be considered a “dreadful idea.” The consequences of a default on our debt would be catastrophic — not least to the millions of Americans who hold U.S. Treasury securities in their savings, their 401k accounts and their pension funds — and must be avoided.

Fortunately, there is no scenario in which a default must occur. In the unlikely event that the debt ceiling is not raised, ongoing tax revenue will cover about 70 percent of all projected government expenditures. Debt service will amount to about 6 percent of expenditures. With ongoing revenue more than 11 times that needed to service our debt, the only way we could default would be for the Treasury to consciously decide to do so. Such a decision would be so

irresponsible that I doubt very much that any Treasury secretary would permit it. Nevertheless, several administration officials have implicitly, and recklessly, threatened such a default. That is why my legislation, which would codify the practice of past Treasury secretaries to prioritize debt service, became necessary.

In opposing my legislation, some in the administration have made a specious argument. They have maintained that the government’s failure to make any obligated payment will be construed by the markets — with all attendant consequences — just as a payment default on U.S. Treasury securities would be construed. This betrays a shocking misunderstanding and underestimation of financial markets. U.S. government bond holders understand that there is a very big difference

between the government, say, delaying payments to a vendor, or suspending cable TV service to federal office, or even furloughing government workers on the one hand, and defaulting on scheduled interest or principal payments on the other. This is not just a matter of opinion. Over the last 20 years there have been four occasions when the debt ceiling was reached and not immediately raised. The resulting delays in payments to vendors and employees were too many to enumerate. But never did we default on our debt and never did the markets confuse the two.

LL: Senators Bob Corker and McCaskill have reintroduced their bill that would dramatically cut spending over 10 years. Does it go far enough in your opinion?

PT: This proposal is a definite step in the right direction, and I applaud their efforts. However, given the magnitude of our fiscal crisis, we need to go further. Historically, the federal government has collected revenue equivalent to just over 18 percent of GDP. Gradually limiting spending to 20.6 percent of GDP by 2022 would still leave us with substantial deficits and growing debt. The Corker-McCaskill approach is a good start but it is not enough.

That is why I am supporting a balanced budget amendment to the U.S. Constitution that would limit spending to 18 percent of GDP and would require a two-thirds vote in each chamber of Congress, as well as presidential approval, to exceed this limit, or to raise taxes. We should remember that the more we reduce the share of our economy consumed by the government, the more prosperous we will be; the more jobs we will create; and the higher the standard of living we will achieve. Reducing our deficits and generating economic growth and job creation are the vital reasons we must reduce spending dramatically.

LL: President Obama has pledged to veto any bill that has earmarks in it. Are you confident he will do that when he has his own party (Senator Harry Reid) is telling him to "back off"?

PT: I hope so, and I commend the president for his leadership on this issue. I have long warned of the dangers of earmarks. Not only is it unfair to taxpayers by wasting their hard-earned money, but earmarks also corrupt the political system and force lawmakers to vote for wasteful bills that expand the size of government because lawmakers rarely, if ever, vote against their own earmarks.

LL: What kind of reforms would you like to see made to Social Security?

PT: Our entitlement programs are in crisis and in dire need of reform. But first and foremost, we must make sure that people who have worked hard and paid into the system for years do not lose out. We must honor our commitment to seniors and those nearing retirement. For younger workers, I have proposed a system of voluntary personal accounts that will give workers greater choice and ownership over their retirement savings and will help put our Social Security system on a long-term sustainable path.

LL: Do you think Republicans will have the political will to make these tough choices?

PT: I hope so. During this past election, the American people made their desire for fiscal responsibility very clear. We should honor their trust by honestly explaining the problems we as a nation face and putting forth serious solutions to address our economic and fiscal crisis.

LL: One of the biggest issues in this deficit problem is revenue generated. Shouldn't tax reform also be a part of this? What would you like to see in terms of tax reform?

PT: As a former small business owner, I know tax reform is sorely needed. We could generate a huge boost in job creation and business expansion if we reward hard work and risk taking; eliminate politicians’ ability to play favorites; and dramatically lower the outrageous cost of compliance. We should replace our current tax system with a fairer, simpler and transparent system that would lower tax rates for all taxpayers.

And as I said at a Senate Budget hearing last week, I am strongly against a European-style VAT tax that some in Washington are pushing. The VAT is a “back door” tax increase that will just enlarge the federal government. We need a clearer, more transparent tax code, and adopting a VAT would move us in the wrong direction.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."