By James Rowley and Catherine Dodge - Aug 1, 2011 4:21 PM PT
The House approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default.
The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow.
“We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.”
Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.
Representative Gabrielle Giffords, the Arizona Democrat wounded in a shooting attack, drew a long standing ovation as she arrived to vote for the measure, making her first appearance on the House floor since the Jan. 8 assault in Tucson.
Final approval in the Senate would send the debt-limit measure to Obama for his signature and conclude a months-long battle over raising the $14.3 trillion debt ceiling and reining in government spending.
‘Not One Red Cent’
“It’s hard to believe we are putting our best foot forward with the legislation that comes before us today,” said House Democratic leader Nancy Pelosi of California. “Not one red cent” will come from the wealthiest Americans to cut the deficit, she said. Still, she said she supports the plan because it ends economic uncertainty and prevents cuts in Social Security and Medicare.
Treasuries rose, pushing the yields on 10-year notes to the lowest level since November, as an index showed U.S. manufacturing expanded in July at the slowest pace in two years.
Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage point, to 2.74 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 gained 14/32, or $4.38 per $1,000 face amount, to 103 8/32.
U.S. stocks slumped. The Standard and Poor’s 500 lost 0.4 percent to 1,286.94 at 4:19 p.m. in New York after climbing as much as 1.2 percent earlier. The Dow Jones Industrial Average retreated 10.75 points, or 0.1 percent, to 12,132.49 today after rising 139 points.
Democrats and Republicans praised the agreement for averting an economic crisis, even as both sides said the compromise fell short of their goals.
Republicans called the bill a step in the right direction while saying government spending wasn’t pared enough. Democrats expressed concern about making deep spending cuts in a fragile economy and not spreading the sacrifice to the nation’s wealthiest through higher taxes.
“I am voting for this bill not because I like this bill,” said Representative Steny Hoyer, the second-ranking Democrat in the House. “Default for the United States of America is not an option. This would affect all of the people I represent and all of the people of this country.”
Both parties worked today to sell the deal to their rank and file.
“We’re very optimistic we’re going to do well,” Senate Republican leader Mitch McConnell, of Kentucky said after a meeting where he briefed Senate Republicans on the plan.
No Tax Increase
House Republican leaders cast the deal as a victory because it doesn’t raise taxes and makes most of the spending cuts they sought.
“It gives us the best shot that we’ve had in the 20 years that I’ve been here to build support for a balanced budget amendment to the Constitution,” to put “fiscal handcuffs” on Congress, House Speaker John Boehner of Ohio told reporters.
Ryan said his party got two-thirds of the cuts to discretionary spending that it wanted.
“This legislation is typical for compromise legislation,” said Senate Majority Leader Harry Reid, a Nevada Democrat. “Neither side got what they wanted.”
Senator Mark Warner, a Virginia Democrat, said he will support the legislation though it doesn’t do enough to tackle long-term spending and revenue. Warner, one of a bipartisan group that offered a $3.7 trillion deficit-cutting plan, said, “This doesn’t get us to the core problem of how do we take on tax reform, how do we take on entitlement reform.”
Defense Spending Cuts
Senator Lindsey Graham, a South Carolina Republican, said he won’t support the plan in part because of cuts to defense spending. Initially, the Defense Department could see $325 billion in cuts over 10 years as part of the bill’s first round of deficit-cutting, similar to what the Obama administration has proposed, according to an administration official. It’s the second phase of $1.5 trillion in cuts envisioned, with about half coming from national security, that could jeopardize Defense Department operations.
“If fully implemented, the consequences to our nation’s defense infrastructure would be severe,” Graham said in a statement. “What has happened to the party of Reagan who viewed the primary purpose of the federal government was to provide a strong national defense?”
The overall plan would save $2.1 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office.
Money Out of Pockets
Representative Brad Miller, a North Carolina Democrat, said the immediate spending cuts will contract the economy. The measure “is going to take money out of the economy, it is going to take money out of people’s pockets,” he said.
The Treasury Department has said it will reach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress.
“The threat of default is now for certain off the specter of this economy, no longer a headwind” for the U.S. economy, Gene Sperling, director of the National Economic Council, said today on Bloomberg Television.
The measure would raise the debt ceiling in two installments, sufficient to serve the nation’s needs into early 2013. The framework would cut $917 billion in spending over a decade, raise the debt limit initially by $900 billion and assign a special congressional committee to find another $1.5 trillion in deficit savings by late November, to be enacted by Christmas.
If Congress met that deadline and deficit target, or voted to send a balanced-budget constitutional amendment to the states, Obama would receive another $1.5 trillion borrowing boost.
In the case of Congress failing to take either step, or not producing debt savings of at least $1.2 trillion, the plan allows the president to obtain a $1.2 trillion debt-ceiling extension. That would trigger automatic spending cuts across the government -- including in defense and Medicare -- to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.
An initial $400 billion increase in borrowing authority couldn’t be blocked under the deal. While Congress would get a chance to avert both debt-limit increases through disapproval resolutions, there’s little chance opponents could muster the two-thirds majorities needed in both chambers to override Obama’s veto.
Both sides made concessions. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by both chambers of Congress.
The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law was enacted by Christmas.
Even so, Obama has an opportunity to increase revenue in the future if he opts to allow the tax cuts enacted under George W. Bush to expire as scheduled in 2013. He could veto legislation to extend those cuts -- producing an estimated $3.5 trillion.
White House officials said the enforcement mechanisms will help them press Obama’s agenda as further deficit reductions are made, including additional tax revenue.
The automatic spending cuts would include deep reductions in the defense budget, which Republicans oppose. That measure preserves leverage for Democrats in committee negotiations, the officials told reporters on condition of anonymity.
Spending Cuts Delayed
Because any spending cuts would be delayed until 2013, timed to coincide with the expiration of the Bush tax cuts, Republicans would have an added incentive to agree to overhaul taxes, which Democrats want to use for raising revenue.
Republicans argue that while the super-committee could propose tax increases, it wouldn’t likely do so because the rules of the deal require that it assume -- as the CBO does -- the Bush tax cuts expire as scheduled at the end of 2012. That would mean that to count any new revenue toward deficit reduction, the committee would need to both erase the Bush tax reductions and then generate additional revenue on top of that.
In addition to guaranteeing a vote on the balanced-budget constitutional amendment between October and the end of the year, the agreement could give Republicans a chance to renew their push for the measure at the height of 2012 campaigns.