The Debt Ceiling and U.S. Credit in the Balance

As the push to resolve the impasse over a deficit deal falters, it has become clear that the disagreements are not in fact over dollars and cents, but are instead a broader chasm between the Republicans and the Democrats over the size and role of government. There is also a growing divide between older Republicans, and the new intransigent tea party wing of the party.  Just last night an attempt to move the process forward in the House failed again.  House Speaker John Boehner (R-Ohio) had initially scheduled a 6 p.m. vote on his measure that would have hiked the nation's debt ceiling for only six months, cut $915 billion in spending (Boehner had gone back and restructured his plan, after the Congressional Budget Office revealed Tuesday that it contained only $850 billion in cuts -- less than the plan put forth by Senate Majority Leader Harry Reid (D-Nev.)). It also set up a 12-legislator bipartisan commission to compel another $1.8 trillion in reductions over 10 years.  Boehner and his leadership team worked for hours on Thursday, but they were unable secure the Republican votes.  The vote was then postponed to later Thursday night, but House Majority Whip Kevin McCarthy (R-Calif.) announced just before 10:30 p.m. that a vote would not occur until Friday at the earliest. 

At this point in time, it is unclear if Boehner will try to bring the bill up again.  Senator Reid’s (D - Nev) proposed plan would cut $2.2 trillion over ten years and raise the debt ceiling enough to last into 2013.  However, procedurally, the House needs to pass a bill for the Senate to act on it.  In addition to Senator Reid’s proposal, there is a bipartisan proposal from the Gang of Six (Senators) to reduce deficits by nearly $4 trillion over the coming decade.  This proposal has Senate support from both parties and President Obama.  The Senate group’s plan, modeled on the recommendations last year of a bipartisan fiscal commission established by Mr. Obama, calls for both deep spending cuts and new revenues through an overhaul of the income-tax code.

Time is running out to meet the August 2nd deadline when the Treasury department will no longer be able to pay its bills.  To muddy the waters more, there are some who think that the date after which the U.S. will be unable to pay its bills may in fact be August 10th.  Even though the Treasury will not be statutorily permitted to borrow more to pay its bills on August 2, the government may have enough cash on hand to pay debts until August 10, according to estimates from Wall Street banks and a Washington research organization, reports the New York Times.   Still, the White House has insisted that August 2nd is a firm deadline.

If the deadline can be moved by eight days, the extra time might buy Congress and the White House some breathing room to negotiate. But it is unclear what effect any further delay might have on the United States' credit rating.

While there are many similarities in the plans being offered by each party, including nearly identical domestic discretionary spending targets for fiscal 2012 and fiscal 2013; no new tax increases; caps on growth of future discretionary spending to inflation; tough enforcement methods; waste, fraud, and abuse-fighting; plans to improve education; and creation of a 12 person Congressional committee to study future deficit reduction. One of the key differences is that the Republican proposed plan would raise the debt ceiling by $2.6 trillion in two phases, with the second one before the 2012 election.  The Democrats are opposed to this provision and President Obama has stated that he will veto a bill with such a provision. 

In the end, a resolution to this deficit will require getting around the largest stumbling block in the whole process, which is several tea party members including Sen. Jim DeMint, the South Carolina Republican who is quoted as saying that “I think it's better to take it past August 2 and wait for something that solves the problem," in an interview with National Journal.  He further postulated that "I think the Democrats and the president will start talking to us about something real if they think we're going past August 2."  DeMint claims that neither plan currently proposed solves the nation’s debt problem and that only the Cut, Cap, and Balance Act, which was defeated last week, would accomplish this.