After tense negotiations over the weekend, President Barack Obama and Republican and Democratic leaders announced late Sunday that they had reached a deal on the debt ceiling that would be sent to the Senate and then the House on Monday, which Obama said on Sunday night “will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy. “
While the Congressional Budget Office has yet to weigh in on the details (a fact sheet released by the White House provides details on the plan), the package that needs congressional approval by Tuesday to avoid running afoul of the Aug. 2 deadline on the debt ceiling includes:
- Raise federal debt ceiling by at least $2.1 trillion, which is expected to meet borrowing needs until after 2012 elections, in two steps.
- Spending cuts—called “discretionary spending caps” by Obama— of more than $900 billion over the next 10 years, “done in a way not to harm the economic recovery act,” said Obama Sunday night.
- Would create a 12-member congressional bipartisan committee, split evenly between the two parties and the Senate and House, to recommend an additional $1.5 trillion in spending cuts over 10 years by Nov. 23; and expedited voting on the committee’s recommendations by Dec. 23. the recommendations cannot be amended or filibustered.
- If Congress does not agree to committee cuts, automatic spending cuts would take place, split evenly between domestic and defense spending
However, Obama said in his speech that “If the Committee does not succeed in meaningful balanced deficit reduction with revenue-raising tax reform on the most well-off by the end of 2012, the President can use his veto pen to raise nearly $1 trillion from the most well-off by vetoing any extension of the Bush high income tax cuts.” Those are the George W. Bush administration JGTRRA and EGTRRA tax cuts on income, capital gains and dividends due to expire at the end of 2012, a Presidential election year.
While the immediate prospect of default will be avoided if Congress approves the deal, no one seems pleased with the package, according to a report in The New York Times. Many Republicans say it does not go far enough in spending cuts, for instance, while Democrats are unhappy because it includes no increase in revenues, i.e., tax increases—among other reasons.
Reuters reported that the cuts included would do little to stimulate an already bruised and reeling economy, while also failing to ensure that the nation’s AAA credit rating will be saved. Many economists are saying that now is not the right time for spending cuts.
Troy Davig, U.S. economist at Barclays Capital, was quoted in the report saying, “… when the economy is only growing a point and a half, a lot of economists feel that this is not the right time to be finding fiscal restraint. We will be shifting from massive stimulus to massive restraint.”
Reuters reported that, while ratings agencies were not convinced the deal would impact their threat of a downgrade, markets were pleased with the possibility that the impasse was at an end. Early Monday trading resulted in stock gains and drops in gold, the Swiss franc and the yen.
The Washington Post was skeptical about the plan, pointing out that reliance on the 12-member committee, which some are calling a “super Congress,” does not offer favorable odds that this smaller group can solve the problem that the 535 members of the whole Congress has repeatedly failed to solve. Sarah Binder, a historian of Congress at George Washington University, was quoted in the report saying, “They tend not to work. The same conflict that leads to the creation of these groups gets replicated in those groups.”
The committee must find more than $1.5 trillion in cuts by Nov. 23, and present it to the larger Congress as a whole. Congress then is allowed only an up-or-down vote on the recommendations, based on the Base Realignment and Closure (BRAC) process, in which an outside commission compiles a list of military bases recommended for closure. Congress must either approve or disapprove that list as a whole.