Bloomberg News

Senate to Vote on Debt-Limit Plan to Avert Default on Deadline

August 02, 2011

(For a special report, see EXT6 <GO>.)

Aug. 2 (Bloomberg) -- Congressional leaders voiced confidence the Senate will ratify a U.S. debt-limit increase to avert a default today while cutting $2.4 trillion in spending over the next decade.

The Senate plans to vote at noon, and President Barack Obama is scheduled to make a statement in the Rose Garden immediately afterward. The House voted 269-161 yesterday for the measure, which raises the debt ceiling enough to fund the government until 2013 and threatens automatic spending cuts if a bipartisan committee doesn’t identify reductions that Congress will accept.

“Finally, Washington is taking some responsibility for spending money we don’t have,” said Lamar Alexander of Tennessee, the third-ranking Senate Republican. “Make no mistake, this is a change in behavior from spend, spend, spend to cut, cut, cut.”

Second-ranking Democrat Dick Durbin of Illinois said his vote for the plan “does not come without pain” because it will reduce funds for disease research and education programs for poor children. Lawmakers must “be prepared to raise revenue” in future efforts to cut the deficit, he said.

Treasuries rose, pushing 10-year note yields to the lowest level this year, as a government report showed consumer spending unexpectedly fell in June.

10-Year Notes

Yields on benchmark 10-year notes dropped three basis points, or 0.03 percentage point, to 2.72 percent at 10:13 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 103 15/32.

Stocks extended losses. The Standard & Poor’s 500 Index fell for a seventh straight day, losing 0.8 percent to 1,277.09 at 10:53 a.m. in New York. The Dow Jones Industrial Average fell 65.05 points, or 0.5 percent, to 12,067.44.

The legislation falls short of the long-term deficit savings that Obama initially sought. The political obstacles to reaching even the lower target are formidable, though the measure’s sanctions improve prospects “a bit,” said Peter Orszag, Obama’s former budget director.

“The fundamental problem is that we are hyper-polarized, and that does not go away,” said Orszag, now a vice chairman of Citigroup Inc. and a contributor to Bloomberg View. “This deal is not going to solve that.”

Tax System Overhaul

Senator Mark Warner, a Virginia Democrat, said yesterday the agreement fails to address the “core problem” of how to overhaul the tax system and curb spending on entitlements such as Medicare that drive the deficit. Still, he said, he plans to vote for it because “it helps us avoid default.”

Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., said the debt ceiling compromise won’t make a “significant dent” in U.S. deficits.

“In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today.

Representative Paul Ryan, a Wisconsin Republican who is chairman of the House Budget Committee, said today on CNBC that lawmakers must confront spiraling costs of entitlement programs.

“Medicare is driving itself into bankruptcy; Medicaid is bankrupting states,” Ryan said. “Our health-care entitlements are the core driver of our debt. Programs need to be reformed and strengthened if they’re going to be saved.”

Discretionary Spending

A $917 billion down payment in discretionary spending reductions contained in the measure is back-loaded so more than two-thirds of the cuts come after 2016. The spending reduction next year is $21 billion, less than two-tenths of a percent of U.S. gross domestic product.

Amid signs that the economic recovery slowed almost to a standstill earlier this year, Michael Feroli, chief U.S. economist for JPMorgan Chase & Co., said he expects the spending cuts next year to “add modestly” to the drag on growth from expiring provisions of the economic-stimulus package and the scheduled Dec. 31 end of a temporary payroll tax cut.

Vice President Joe Biden, who met with House Democrats yesterday to rally votes for the compromise, said the plan has “one overwhelming redeeming feature” -- removing the threat of a default on U.S. obligations after a months-long struggle between the White House and congressional Republicans over raising the $14.3 trillion debt limit.

‘Growing the Economy’

“We had to get this out of the way to get to the issue of growing the economy,” Biden told reporters as he left the meeting.

While the measure specifies the $917 billion in discretionary spending cuts over 10 years, the rest is left to a panel of 12 members of Congress, split evenly between the two parties.

That “super-committee” is supposed to come up with recommendations by Nov. 23, with a guaranteed up-or-down vote by Congress to prevent obstruction through parliamentary maneuvers. If Congress doesn’t act, automatic spending cuts begin in 2013.

Still, the sanctions run up against a history of failure when Congress has tried to motivate itself with threats of penalties. No Congress can bind a successor, and the impact of sanctions relies primarily on the political embarrassment of reversing course.

Enforceable Targets

The 1985 Gramm-Rudman-Hollings Act set enforceable budget targets that Democrats credit with pressuring Republican President Ronald Reagan to agree to tax increases. Still, during the five years of the law, the spending reductions required were reduced in one case by Congress and in another overridden by a subsequent budget agreement.

Among the sanctions that would trigger political pushback if Congress didn’t meet its goals is an automatic cut of up to $500 billion in military spending, which would come on top of $325 billion in defense-spending reductions already in the deal.

“If the American military is cut as much, in the worst case, as the proposal would cut it, it’s the beginning of the end of America as a great international power,” Senator Joseph Lieberman, a Connecticut independent, said on the Senate floor yesterday.

While the new joint committee will have broad jurisdiction to reduce the deficit through both spending cuts and tax increases, congressional rules present obstacles to using the Bush-era tax cuts to meet that goal.

The Congressional Budget Office’s revenue baseline assumes those tax cuts will expire as scheduled at the end of 2012. Republicans want a future revenue level equal to extending all the cuts, while the administration wants to raise about $1.8 trillion above that level over the next decade by only letting tax cuts for high-income earners expire. Measured against the CBO’s yardstick, either approach would be viewed as a tax cut, not deficit reduction.

Though White House press secretary Jay Carney said the committee could choose to use a different yardstick, at least one Republican would have to agree for majority support.

--With assistance from Mike Dorning, James Rowley, Lisa Lerer, Heidi Przybyla, Kathleen Hunter, Brian Faler, Richard Rubin, Tony Capaccio and Roger Runningen in Washington, Susanne Walker in New York and Matthew Brown in London. Editors: Mark McQuillan, Laurie Asseo.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net; Catherine Dodge in Washington at cdodge1@bloomberg.net

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


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