Deal is agreed but doubts are rising on what it will deliver
Late night vote expected to get over the line after months of political wrangling over spending cuts versus tax rises
Published 02/08/2011 | 05:00
REPUBLICAN leaders and the Obama administration were set to approve a compromise plan early today to raise the US debt limit by at least $2.1 trillion (€1.5tn) and slash federal spending by $2.4tn. Most analysts said the agreement was vague and much of the detail will only become clear in the months ahead.
The Republican-dominated Congress was due to vote on the agreement after a months-long struggle over raising the $14.3tn debt ceiling before the United States' borrowing capacity was due to expire.
The Democrat-led Senate, which must also approve the plan, was expected to pass the measure by today.
The compromise plan calls for spending cuts over 10 years but no new taxes, creates a powerful new congressional committee to recommend a deficit-reduction package by late November and raises the US borrowing limit into 2013.
On Wall Street, healthcare stocks were among the worst performers as investors feared the debt-ceiling deal could lead to cuts in Medicare and other federal health programmes.
One analyst said the debt deal avoids "economic Armageddon" but little else. Michael Ettlinger, vice-president of economic policy at the Center for American Progress, said it wouldn't help the economy and is not satisfying for President Obama's political base.
The deal will raise the debt ceiling in two instalments and be sufficient to serve US needs into 2013. The framework, as detailed by officials in both parties, would cut $917bn in spending over a decade, raise the debt limit initially by $900bn 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.
Still, that would trigger automatic spending cuts across the government - including in defense and health - to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.
Doubts continue about the AAA rating on US Treasuries. While the compromise will probably assuage immediate concerns about a default in financial markets, the "relief will be short," said Mohamed El-Erian, chief executive of Pimco, the world's largest manager of bond funds.
If S&P "sticks to what it said, it will downgrade" the US debt following the deal, he added said in an interview on ABC News. The ratings company has warned that the US may lose its top AAA sovereign grade depending on the contents of the debt deal.
In the final stage of negotiations, both sides made concessions. Republicans dropped their insistence on withholding some 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.
Those terms were included in a bill the House passed narrowly and along party lines July 29, only to see the measure defeated in the Senate less than 24 hours later.
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. (Additional reporting Bloomberg, Reuters)