Sunday, September 19th, 2021

The debt ceiling parameters

Posted: Monday, August 1, 2011

The President and congressional leaders announced an agreement Sunday night July 31 to raise the debt limit ending a long, partisan stalemate that threatened to send the nation into default. The agreement may finally resolve a self-created crisis that has consumed Washington, rattled Wall Street and shaken confidence in the American political system both at home and abroad.

If the debt ceiling is not raised by Tuesday, August 2, Americans could face rising interest rates and the value of the U.S. dollar may drop compared to other currencies, among other problems. As the cost of borrowing rises, individual mortgages, car loans and student loans could become significantly more expensive. Some financial experts have warned that America's triple-A credit rating could be downgraded.

The deal would raise the debt limit in two stages. The first increase would total $900 billion, with Treasury gaining access to $400 billion in additional borrowing authority immediately. The other $500 billion would come later this fall - unless two-thirds of the members of both chambers of Congress objected - permitting Treasury to pay the bills through early next year.

The second increase would hike the debt limit between $1.2 trillion and $1.5 trillion, also subject to a resolution of congressional disapproval. However, the process virtually guarantees that the debt limit will rise, because Republicans lack the votes in the Senate to override Obama's veto of the disapproval. The announcement caps a weekend of frantic negotiations as both parties worked to beat Tuesday's deadline for a default.

The bipartisan deal is not final until rank-and-file members from both parties give it a green light, but Republican leaders expressed confidence their side would approve it. The deal could clear Congress as soon as tonight - barely 24 hours before Treasury officials have said they would begin running short of cash to pay the nation's bills.

A number of changes were made to the framework the White House and congressional negotiators hammered out.

The modifications include:

Deficit reduction through domestic discretionary savings: The deal now stipulates $917 billion in cuts over 10 years.

Deficit reduction target for special congressional committee: The current goal is $1.8 trillion in deficit reduction over 10 years. The language currently on the table requires the committee to use current law as the baseline for deficit reduction. Current law assumes expiration of all Bush tax cuts in 2013 as well as a 50 percent reduction in the $1,000 child credit and no adjustment to the Alternative Minimum Tax. Since many of these tax cuts are likely to remain.

Fallback cuts if the special committee fails: If the committee fails to send a report to Congress by Thanksgiving with the $1.5 trillion in cuts, a slightly smaller amount of cuts, $1.2 trillion, would be carried out automatically. Half the savings would come from defense spending, the other half from non-defense discretionary spending and some entitlement spending. Exemptions currently exist for low-income programs, Social Security, and Medicaid. Medicare cuts would affect providers only.

Balanced Budget Amendment implications: As currently drafted, the agreement says Congress must vote in the House and Senate this year on a balanced budget amendment to the Constitution. In addition, next year's debt limit increase is tied to deficit reduction from the special committee or sending a balanced budget amendment to the states for ratification.

Tax reform: It is not required that the special committee overhaul the tax code. In the negotiations, President Obama has made it clear he will veto any extension of the Bush tax cuts for the wealthy (families earning more than $250,000), unless the committee eliminates costly tax subsidies as part of tax reform.