Congressional leaders voiced confidence that the Senate will vote today to ratify a U.S. debt-limit compromise that will avert a default even as it defers decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits while slowing economic growth.
The House voted 269-161 yesterday to approve the measure, which raises the national debt ceiling enough to fund the government until 2013 and threatens automatic spending cuts to enforce a goal of cutting $2.4 trillion over the next decade.
That goal falls short of the long-term deficit savings that President Barack Obama and Republican leaders initially sought. The political obstacles to reaching even the lower target are formidable, though the measure’s sanctions improve prospects “a bit,” said Peter Orszag, Obama’s former budget director.
“The fundamental problem is that we are hyper-polarized, and that does not go away,” said Orszag, now a vice chairman of Citigroup Inc. and a contributor to Bloomberg View. “This deal is not going to solve that.”
Senator Mark Warner, a Virginia Democrat, said the agreement fails to address the “core problem” of how to overhaul the tax system and curb spending on entitlements such as Medicare that is driving the deficit. Still, he said, he plans to vote for it because “it helps us avoid default.”
Dealing With Entitlements
Representative Paul Ryan, a Wisconsin Republican who is chairman of the House Budget Committee, said today on CNBC that lawmakers must confront spiraling costs of entitlement programs.
“Medicare is driving itself into bankruptcy; Medicaid is bankrupting states,” Ryan said. “Our health-care entitlements are the core driver of our debt. Programs need to be reformed and strengthened if they’re going to be saved.”
A $917 billion down payment in discretionary spending reductions contained in the measure is back-loaded so more than two-thirds of the cuts come after 2016. The spending reduction next year is $21 billion, less than two-tenths of a percent of U.S. gross domestic product.
Amid signs that the economic recovery slowed almost to a standstill earlier this year, Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said he expects the spending cuts next year to “add modestly” to the drag on growth from expiring provisions of the economic-stimulus package and the scheduled Dec. 31 end of a temporary payroll tax cut.
U.S. stocks opened yesterday with a rally on news of the debt deal, sending the Standard & Poor’s 500 Index up 1.2 percent in the first hour of trading before a report showing slower-than-forecast growth in manufacturing sent stocks down.
Treasuries advanced today, sending yields on 10-year notes to the lowest level since November. The 10-year Treasury yield fell six basis points, or 0.06 percentage point, to 2.69 percent as of 7:43 a.m. in New York.
Vice President Joe Biden, who met with House Democrats yesterday to rally votes for the compromise, said the plan has “one overwhelming redeeming feature”: removing the threat of a default on U.S. obligations after a months-long struggle between the White House and congressional Republicans over raising the $14.3 trillion debt limit.
“We had to get this out of the way to get to the issue of growing the economy,” Biden told reporters as he left the meeting.
After briefing lawmakers from his party on the plan, Senate Republican leader Mitch McConnell of Kentucky told reporters: “We’re very optimistic we’re going to do well.”
While the measure specifies the $917 billion in discretionary spending cuts over 10 years, the rest is left to a panel of 12 members of Congress, split evenly between the two parties.
That “super-committee” is supposed to come up with recommendations by Nov. 23, with a guaranteed up-or-down vote by Congress to prevent obstruction through parliamentary maneuvers. If Congress doesn’t act, automatic spending cuts begin in 2013.
Still, the sanctions run up against a history of failure when Congress has tried to motivate itself with threats of penalties. No Congress can bind a successor, and the impact of sanctions relies primarily on the political embarrassment of reversing course.
The 1985 Gramm-Rudman-Hollings Act set enforceable budget targets that Democrats credit with pressuring Republican President Ronald Reagan to agree to tax increases. Still, during the five years of the law, the spending reductions required were reduced in one case by Congress and in another overridden by a subsequent budget agreement.
Among the sanctions that would trigger political pushback if Congress didn’t meet its goals is an automatic cut of up to $500 billion in military spending, which would come on top of $325 billion in defense-spending reductions already in the deal.
“If the American military is cut as much, in the worst case, as the proposal would cut it, it’s the beginning of the end of America as a great international power,” Senator Joseph Lieberman, a Connecticut independent, said on the Senate floor yesterday.
While the new joint committee will have broad jurisdiction to reduce the deficit through both spending cuts and tax increases, congressional rules present obstacles to using the Bush-era tax cuts to meet that goal.
The Congressional Budget Office’s revenue baseline assumes those tax cuts will expire as scheduled at the end of 2012. Republicans want a future revenue level equal to extending all the cuts, while the administration wants to raise about $1.8 trillion above that level over the next decade by only letting tax cuts for high-income earners expire. Measured against the CBO’s yardstick, either approach would be viewed as a tax cut, not deficit reduction.
Though White House press secretary Jay Carney said the committee could choose to use a different yardstick, at least one Republican would have to agree for majority support.
In the end, Representative Vern Buchanan, a Florida Republican, said the compromise on the deficit was the best deal his party could get.
“Time’s up, the ballgame’s over,” said Buchanan, as he left a meeting of fellow House Republicans. “It’s time to get it done.”