D-day for debt compromise

August 2, 2011

Washington Business Journal

Kent Hoover

The back-room deal is done—now all Congress has to do is to approve the compromise that would raise the federal government’s debt ceiling before tomorrow’s deadline.

This morning, Vice President Joe Biden traveled to the Capitol to sell Democrats on the deal. Many liberal Democrats are upset the White House agreed to Republican demands for up to $2.4 trillion in spending cuts as a price for raising the debt ceiling. They’re furious the plan doesn’t require tax increases as part of its deficit reduction strategy.

Some conservative Republicans, especially those aligned with the Tea Party movement, also are unhappy with the deal. The Cut, Cap and Balance Coalition said it opposes the compromise because it doesn’t require Congress to pass a balanced budget amendment to the constitution as a condition for raising the debt ceiling again next year.

Mitt Romney, the front-runner for the 2012 Republican presidential nomination, said today that he can’t support the deal because “it opens the door to higher taxes and puts defense cuts on the table.”

The business community, however, is breathing a sigh of relief that a compromise has been reached and is lobbying members of Congress to pass the deal. If Congress doesn’t pass it, the government could begin defaulting on its obligations Tuesday, which would lead to higher interest rates for everyone.

“The failure to pass this legislation will have long-term negative and damaging effects on the American economy,” said Steve Bartlett, president and CEO of the Financial Services Roundtable. “Congress must act now.”

“We strongly urge the House and Senate to quickly pass this bipartisan compromise bill that would increase the debt ceiling, avert default, reduce spending, and start the process of getting our fiscal house in order,” said Tom Donohue, president and CEO of the U.S. Chamber of Commerce.

What happens now is a bit uncertain. Early today, it was believed the Senate would take up the bill this afternoon, with the House soon to follow. But now, it looks like the reverse will happen with the House voting tonight and the Senate taking the measure up after.

Here's what the compromise plan, worked on Sunday by congressional leaders and endorsed by President Barack Obama, would do:

Raise the debt ceiling by between $2.1 trillion and $2.4 trillion in a staggered manner—$400 billion now, $500 billion after September, and then between $1.2 trillion and $1.5 trillion by the end of the year. This should handle all of the government's borrowing needs until 2013, well after the next elections.

Demand about $2.4 trillion in spending cuts. The first stage of these, accounting for $917 billion in cuts over the next 10 years, would take effect immediately by capping domestic and defense spending. For the rest of the $1.2 trillion-to-$1.5 trillion worth of savings, a special congressional panel would be appointed to propose specific 10-year cuts by the end of 2011.

Allow this panel to consider all options, including tax hikes, as it develops its proposal. The committee has until Thanksgiving to develop its plan, and then both houses of Congress would have to give it an up-or-down vote, without benefit of amendments, by December 23.

Impose cuts of up to $1.2 trillion if the committee fails to find agreement or Congress fails to approve the panel's plan. Cuts would be split equally between defense and non-defense spending. Social Security, Medicare beneficiaries and Medicaid would be protected from these cuts.

Require a vote on a balanced budget amendment to the Constitution. This differs from a bill passed in the House last week that would be mandated that such an amendment be passed before the debt ceiling would be raises.
Lawmakers are racing to enact the plan since the current $14.3 debt cap ends at midnight, creating the possibility for the United States to default on its bills for the first time. When Obama announced the deal Sunday night, he said the agreement was a significant achievement, avoiding a government default that “would have a devastating effect on our economy .”

“In this stage, everything will be on the table,” Obama said. “To hold us all accountable for making these reforms, tough cuts that both parties would find objectionable would automatically go into effect if we don’t act.”

The president urged “members of both parties to do the right thing and support this deal with your votes over the next few days.”

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