Bloomberg News

Democrats Consider Adding Spending Cuts to McConnell Debt Plan

July 14, 2011

July 14 (Bloomberg) -- Senate Democrats are considering an option to avert a U.S. default by including spending cuts in the Senate Republican leader’s plan that would in effect give President Barack Obama unilateral power to raise the debt limit.

Senator Charles Schumer of New York, the chamber’s third- ranking Democratic leader, said that while Democrats still want to see a larger deal emerge from White House-led talks, they are considering modifying the plan Senate Minority Leader Mitch McConnell, a Kentucky Republican, offered this week as a “last- choice” option.

McConnell’s proposal would allow Obama to raise the nation’s $14.3 trillion debt limit in phases. Schumer said McConnell’s proposal might be acceptable if a package of bipartisan spending cuts were added to it.

“We believe we have to avoid default obviously, but we have to reduce the deficit and lower the debt,” Schumer told reporters.

Senate Majority Leader Harry Reid said today he is discussing the option with McConnell and White House officials

The president and congressional leaders plan to meet today at 4:15 p.m. local time after yesterday’s round of White House negotiations ended on a tense note and Moody’s Investors Service warned the stalemate could jeopardize the U.S.’s credit rating.

Camp David

Obama considered inviting the lawmakers to Camp David for a weekend negotiating session, according to two people familiar with the matter. Obama press secretary Jay Carney said today that a Camp David summit “is not currently planned,” and that meetings in the coming days are planned for the White House.

Obama told the lawmakers they have until tomorrow to decide whether a deal can be reached to cut the deficit or settle for a way to raise the $14.3 trillion debt ceiling before U.S. borrowing authority expires Aug. 2, two Democratic officials said.

U.S. Treasury Secretary Timothy F. Geithner said today that there is “no way to give Congress more time” on lifting the debt ceiling. He made his comments after meeting with Democratic lawmakers at the Capitol.

The increasing tension between Democrats and Republicans was underscored by dueling accounts of yesterday’s White House meeting and its sour ending. Obama “got very agitated” and left the room after House Majority Leader Eric Cantor suggested a vote on a smaller deal, Cantor said in an interview. “Don’t call my bluff; I am going to the American people,” Obama said, according to Cantor, a Virginia Republican.

‘Childish’

Reid, a Nevada Democrat, said today that Cantor has shown “he shouldn’t be at the table,” adding that “it was childish” when Cantor quit attending earlier negotiating sessions led by Vice President Joe Biden.

Laena Fallon, a spokesman for Cantor, responsed by saying, “This isn’t a question about personalities -- Eric, President Obama or Harry Reid -- it’s about doing what is right for the country.”

Other Democratic officials disputed Cantor’s characterization of Obama’s demeanor. White House officials, meanwhile, concede they may have to accept a smaller accord as Republican opposition to tax increases as part of a deal hardens and both sides acknowledge a government default could send the U.S. economy into a tailspin.

‘Calamity’

Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee yesterday that failure to raise the debt limit would lead to a “huge financial calamity” that could add to unemployment. Unless the debt ceiling is raised, he said, the economy could be in greater peril than when Lehman Brothers Holdings Inc. went bankrupt in September 2008.

Both sides have few options for resolving the standoff quickly. Obama said he would veto any plan that doesn’t raise the debt ceiling through the 2012 elections. Republicans demand $2 trillion or more in spending cuts without any tax increases.

Democratic officials, speaking on condition of anonymity, disputed Cantor’s assertion that Obama’s departure was abrupt and said the president had emphasized he believed the lawmakers were engaging in too much political posturing.

In a sign of concern within the financial community, the U.S.’s Aaa bond rating was put under review by Moody’s, a possible prelude to a downgrade that would trigger higher borrowing costs.

“There is a small but rising risk of a short-lived default,” Moody’s said.

Treasuries declined after Moody’s statement. The 10-year Treasury yield rose four basis points to 2.92 percent at 10:10 a.m. today in New York, according to Bloomberg Bond Trader prices.

Medicare Cuts

As part of a broader $4 trillion accord, Obama was poised to accept cuts to Medicare, Medicaid and possibly Social Security in exchange for $1 trillion in revenue, mostly from repealing President George W. Bush’s tax cuts for the wealthiest Americans after 2012.

Absent that tradeoff, the two sides had identified about $1 trillion in discretionary spending cuts and $500 billion in other savings from agriculture subsidies and other non-health- care-related spending.

That isn’t enough for the $2 trillion minimum in spending cuts that House Republicans are demanding in exchange for raising the debt ceiling through the next election. The White House insists that any deal of that magnitude must include more revenue.

McConnell’s Plan

The stalemate prompted Senate Minority Leader Mitch McConnell this week to offer a “last-choice” plan to give Obama power to raise the debt ceiling, three steps unless Congress disapproves by a two-thirds majority -- a near impossibility with the Senate controlled by the Democrats -- while Obama would also be required to offer spending reductions. Those cuts would be advisory, and the debt-ceiling increase would occur regardless of whether lawmakers enact the cuts, McConnell said. The idea drew criticism from both sides of the aisle, particularly from Republicans who said it would fail to curb spending.

Recounting how the 1995 government shutdown helped President Bill Clinton win re-election the following year, McConnell warned fellow Republicans any impasse that drove down the nation’s credit rating and led to government checks being delayed could have the same result for Obama.

“He will say Republicans are making the economy worse,” McConnell said in an interview with radio host Laura Ingraham. “It is an argument that he could have a good chance of winning, and all of the sudden we have co-ownership of the economy. That is a very bad position going into the election.”

Obama and the lawmakers discussed discretionary and other spending yesterday and plan to discuss health care and revenue, including an employer payroll tax holiday, at a meeting scheduled for today at the White House, a Democratic official said.

--With assistance from Mike Dorning, Heidi Przybyla, Hans Nichols, Kathleen Hunter, Jim Rowley, Julie Hirschfeld Davis, Kate Andersen Brower and Brian Faler in Washington. Editors: Jim Rubin, Don Frederick

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Hans Nichols in Washington at hnichols2@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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