The debt ceiling (continued)
With the Treasury about to run out of money, John Boehner, Barack Obama and their acolytes remain at loggerheads over budget cuts
WASHINGTON, DC |
THE closer the federal government comes to hitting the limit imposed by Congress on its borrowing and thus defaulting on some of its obligations, the more frantically members of Congress churn out schemes to avert the impending disaster. As The Economist went to press, the House of Representatives was poised to vote on the latest plan, put forward by John Boehner, the speaker and leading Republican voice in the debate about the debt ceiling. But the measure’s prospects seem uncertain in the House and even bleaker in the Senate. Several more plans wait in the wings, but all face the same difficulty: passing muster both with the Republican scourges of government who run the House and the more reluctant budget-cutters from the Democratic Party in charge of the Senate and the White House. Meanwhile, the Treasury insists it will run out of money after August 2nd, whereupon it will have to stop paying at least some bills.
Since Republicans took control of the House at the beginning of the year, they have given warning that they will not simply wave through an increase in the debt ceiling, as Congress has usually done in the past. Never mind that in April a majority of them voted for an interim budget that assumed that the debt ceiling would be lifted, and for a longer-term budget resolution that would require it to leap by almost $9 trillion over the next decade. America’s deficits, they argued, were unsustainable, and the bargaining power conferred on them by the need to raise the debt ceiling presented a wonderful opportunity to stop the rot.
In a speech in May Mr Boehner explained that he would want dramatic reductions in government spending in exchange for an increase. “We should be talking about cuts of trillions, not just billions. They should be actual cuts and programme reforms, not broad deficit or debt targets that punt the tough questions to the future.” As recently as last week he was discussing just such a deal with Barack Obama, who despite having presented a spendthrift budget earlier in the year had professed a willingness to trim future deficits by as much as $4 trillion. On July 22nd, however, Mr Boehner withdrew from the negotiations, saying that Mr Obama was too eager to raise taxes—something that almost all Republicans in the House had sworn not to do. (By most accounts, Mr Obama was talking chiefly about eliminating or reducing loopholes and exemptions in the tax code, albeit on a grand scale.)
Even as Messrs Boehner and Obama were falling out, the Senate rejected a bill passed by the House that would have slashed spending next year, capped it in future and prevented the debt ceiling from being lifted until Congress approved an amendment to the constitution that barred the federal government from running deficits even as it made it harder to raise taxes. That, the Democrats complained, was far too draconian. The harried Mr Boehner responded on July 25th with a lesser measure that he said would cut spending by $915 billion, and raise the debt ceiling by a little less—only enough to keep the government going for about six months. The bill would also set up a panel of 12 congressmen to recommend another $1.8 trillion of cuts, which if enacted would prompt another $1.6 trillion rise in the debt ceiling. Tax rises would be ruled out from the start.
Many of Mr Boehner’s foot-soldiers in the House are unhappy with this proposal. They complain that it abandons the principles he laid out in May, by resorting to committees and spending caps rather than detailed reforms. Thirty-nine of them have vowed not to vote for any increase in the debt ceiling unless it is accompanied by a balanced-budget amendment—something that Mr Boehner’s bill only offers a vote on. Worse, the non-partisan Congressional Budget Office (CBO) declared on July 26th that his sums did not add up, prompting him to delay a vote on the bill while he rejigged it.
Even if Mr Boehner’s plan scrapes through the House, Harry Reid, the leader of the Democratic majority in the Senate, says it is “dead on arrival” in his chamber: his entire caucus has signed a letter opposing it. Not only does it set the stage for another crisis just a few months from now, Democrats complain, but it also rigs future negotiations on reducing the deficit in the Republicans’ favour. The White House, too, is threatening a veto.
That is the state of play. The fact that Mr Boehner’s plan is too extreme for the Democrats in the Senate and too mild for many Republicans in the House shows how hard it will be to get any other scheme approved by both chambers. Mr Reid has proposed one, which would cut spending by $2.4 trillion or so and raise the debt ceiling by the same amount, enough to keep the government going past next year’s elections. But Republicans don’t like it because almost half of the savings come from winding down the wars in Iraq and Afghanistan—something that was already on the cards. Meanwhile, Mitch McConnell, the leader of the Republican minority in the Senate, has a scheme to transfer the authority to raise the debt ceiling to the president, which would at least spare Republicans the embarrassment of voting for an increase, even if it does not cut the deficit at all. And there is lots of talk about a short-term increase, if no lasting plan can be agreed on.
Compare world debt levels over time with our updated interactive debt guideIn the end, the leaders of the two chambers are likely to put some sort of amalgam of all these plans to a vote, and can probably wring enough votes out of their underlings to secure passage. Mr Obama, for his part, would presumably sign any bill that had won the approval of the Democrats in the Senate. The alternative, most observers assume, is simply too horrible: payments withheld from pensioners, soldiers, government contractors and the like, higher interest rates, chaos in the financial markets and the harm to an already sickly economy that all this would bring.
So far the markets have shown only muted signs of disquiet. Stock prices have continued their slow but steady downward drift of the past week. The dollar slipped against some safer currencies, especially the Swiss franc. The price of insuring against an American default rose. And in auctions of government debt this week, the cost the American government pays to borrow ticked up ever so slightly. But these mild movements seem predicated on the assumption that Congress will pull a rabbit out of a hat within the next few days. The longer the rabbit takes to appear, however, the less quiescent the markets will become. And even if the debt ceiling is raised, ratings agencies are still threatening to downgrade America’s debt—because the long-term fiscal outlook is so grim.