US debt limit at issue

The
struggle last week to avert a government shutdown may be little more than the
warm-up for a much bigger battle in coming months over raising the debt limit.

The
U.S.
government is projected to slam into the $14.3 trillion legal cap on government borrowing sometime this spring. As the price of their vote to allow the government to go
further into debt, congressional Republicans are demanding far deeper cuts than
the $38 billion they got last week in the deal to fund the government for the
last six months of the 2011 fiscal year.

Failing
to raise the debt ceiling would have much more dire consequences than a
shutdown, with Treasury Secretary Timothy Geither predicting
last week that it would “call into question the willingness of the government
of the United States to meet its obligations,” and “shake the basic foundations of the entire global
financial system.”

That
is why Republicans see the vote as their best chance this year to force President Barack Obama to accept
dramatic reductions in the federal budget, this time perhaps measured in trillions,
rather than billions.

“I
can tell you this: There will not be an increase in the debt limit without something
really, really big attached to it,” House Speaker John Boehner, an Ohio
Republican, said at an April 9 fundraiser in Connecticut.

 

Obama
Plan

The
Obama administration, which omitted plans for tackling the long-term deficit
from its budget plan released just eight weeks ago, is now reversing course,
promising to outline a plan this week for putting the government’s books in
order. The president will address the nation April 13, an administration official
said yesterday.

Obama
will propose changes in Medicare and Medicaid as well as taxes and perhaps
additional defense spending cuts, senior adviser David Plouffe said in
interviews as he made the rounds of Sunday morning television talk shows in the
wake of the fight over the funding for the remainder of this fiscal year.

The
president will “lay out his approach this week in terms of the scale of debt
reduction he thinks the country needs so we can grow economically and win the
future, a balanced approach,” Plouffe said on Fox News Sunday. Obama, he said,
will use a “scalpel, not a machete.”

Lawmakers
can’t avoid raising the debt limit by simply cutting spending, Geithner warned
last week in a letter to lawmakers. With the public debt growing by an average
of $125 billion per month, Congress would have to cut $700 billion from this
year alone, which would mean, for example, eliminating all discretionary spending.

 

‘Massive
Shock’

Cutting
that much, that soon would be a “massive shock” to the economy, Mark Zandi, chief economist
at Moody’s Analytics Inc. in West Chester, Pennsylvania said in an
interview. “I don’t think there would be any question” that would tip the
economy back into recession.

Lawmakers
won’t have much time to work out anagreement. The government will hit the
debt cap by May 16, according to the Treasury Department. After that, the
government will be able use a number of accounting moves and other steps to
stave off default, Treasury said, though by around July 8, it will be out of
options.

Failing
to raise the cap would reverberate throughout the economy, pushing up borrowing
costs for the government as well as individuals and businesses, the administration
says.

 

‘National-Security
Interests’

Congress
needs to raise the limit to maintain vital services and avoid “questions about
our ability to defend our national security interests,” Geithner said in his
letter to lawmakers. The U.S.
would face sharply higher interest rates and would have to stop or delay payments to the military, retirees and others,
he said.

“Default
would cause a financial crisis potentially more severe than the crisis from
which we are only now starting to recover,” he said.

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