Sunday, 31 July 2011

Obama announces US deficit deal between party leaders

Just two days before a deadline to lift the so-called debt ceiling, the White House and congressional leaders said the compromise would cut about $2.5 trillion from the deficit over the next 10 years but allow Mr Obama’s administration to carry on borrowing money until 2013.

British and Japanese officials warned of disastrous consequences for the global economy if last-minute talks among lawmakers in Washington failed to agree on raising the US borrowing limit and averting a debt default.

Governments across the world fear that because of the key role of the US dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen on Monday if a US debt deal is not in sight by then.

While negotiations continued, the Senate, in a partisan vote, rejected an effort to advance a Democratic approach to resolving the debt issue. The vote was 50-49, or 10 short of the 60 votes needed to move forward on legislation proposed by Reid last week.

That plan would have carried out $2.4 trillion in deficit reduction over 10 years while raising the debt ceiling by $2.2 trillion.

The outcome of that vote was expected and did not directly affect the behind-the-scenes negotiations on a compromise.

Immediately afterward, Senate Majority Leader Harry Reid told fellow senators that while they were “not there yet,” a vote on a possible compromise could still happen.

“We are hopeful and confident it can be done,” he said.

The broadest outlines of the emerging bargain would increase the debt limit in return for spending cuts of about $1 trillion initially.

A joint committee of members of Congress would then need to act on a larger package of cuts that included tax and entitlement reform as the price for a second raise in the nation’s borrowing limit through early 2013 — a date that takes the highly partisan issue off the agenda until after next year’s presidential and congressional elections.

The top Republican in the US Senate, Mitch McConnell, said earlier that he was nearing a recommendation of the tentative agreement to Republicans in the upper chamber. It would, he said, likely extend US borrowing authority past the election, a fundamental demand of Obama.

At the same time, the agreement would include none of the tax increases Obama has sought and Republicans had steadfastly rejected. It also includes, he said, the requirement that both houses of Congress vote on a constitutional amendment to balance the budget. That outcome of that vote, however, would have no effect on raising the debt limit.

Senior White House adviser David Plouffe said both sides are generally in agreement on an emerging package that would cut the deficit in two stages, with key details still being worked out.

But he and Democratic Sen. Chuck Schumer cautioned that there still was no deal and talks on many issues still needed to be settled. Schumer said, however, that there was “relief” in Congress and the White House because serious negotiations were now making headway.

The deal would raise the nation’s debt limit in two steps by about $2.4 trillion and spending would be cut by a slightly larger amount. The first stage — about $1 trillion — would take place immediately and the second later in the year.

Schumer said one of the last sticking points is the creation of a “trigger” mechanism that would hit priorities of both parties if the committee does not come up with a plan for further deficit reduction.

Among the trigger ideas being discussed are automatically reducing spending on entitlement programs such as Medicare — the government health care program for the elderly — along with closing tax loopholes or reducing defense and non-defense programs by an equal amount.

“It should be equally tough on Democrats and Republicans,” Schumer said.

McConnell said the bipartisan committee, which would be asked to come up with a plan by the Thanksgiving holiday at the end of November, would have a “broad mandate” to look at all aspects of government finance, including tax reform.

McConnell said he had spoken to both Obama and Vice President Joe Biden on Saturday. “I particularly appreciate that we are back talking to the only person in American who can sign something into law, and that’s the president of the US,” he said.

McConnell said the deal being worked on, while raising the debt ceiling in two stages, would satisfy Obama’s demand that there not be another divisive debate on the issue before next year’s election. The scenario being discussed would raise the debt ceiling unless there is a two-thirds majority in both houses of Congress to reject it.

McConnell said that there would be no tax increases in the deal, and White House National Economic Council Chairman Gene Sperling said there would be no revenue increases over the next year and a half.
Obama is seeking legislation to raise the government’s $14.3 trillion debt limit by enough to tide the Treasury over until after the 2012 elections. He has threatened to veto any legislation that would allow a recurrence of the current crisis next year but has agreed to Republican demands that deficits be cut — without tax increases — in exchange for additional US borrowing authority.

Without a compromise in place by Tuesday, administration officials say the Treasury will run out of funds to pay all the nation’s bills. The subsequent default could prove catastrophic for the US economy by causing interest rates to rise and financial markets to sink, sending shock waves around the world, they say. With financial markets closed for the weekend, lawmakers had a little breathing room, but not much. Asian markets begin opening for the new work week when it is late Sunday afternoon in the US capital.

“There is very little time” Obama said Saturday in his weekly radio and Internet address. He called for an end to political gamesmanship, saying “the time for compromise on behalf of the American people is now.”
Obama needs Congress to approve an increase in the government’s borrowing authority. In the past increases have been routine, but Republicans, citing the giant US deficit, have demanded huge spending cuts as a condition for approving the increase.

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