News Column

Debt Ceiling Becomes Latest 'Fiscal Cliff' Hitch

December 7, 2012

By Susan Davis

Debt Limit

The latest partisan battle in slow-moving negotiations to avoid the end-of-year "fiscal cliff" hinges on the debt ceiling and whether Congress should cede its role to the president in authorizing the U.S. government to increase its borrowing limit.

"Look, the only way we ever cut spending around here is by using the debate over the debt limit to do it. Now the president wants to remove that spur to cut altogether," said Senate Minority Leader Mitch McConnell, R-Ky. "I assure you: It's not going to happen."

The hardening positions on the debt ceiling are in addition to Democrats' stance that there can be no agreement unless individual tax rates rise on the top 2% of earners. Republicans continue to oppose higher tax rates, instead proposing new revenue with a tax code overhaul. The two issues are stalling talks, which both parties called gridlocked this week.

In his initial plan to cut deficit spending by $4 trillion over 10 years, President Obama included a request to essentially end the requirement that Congress vote in favor of any request to increase the nation's borrowing limit. The debt ceiling does not authorize new spending. It is the money required to meet existing obligations on items such as Medicare benefits, military salaries and tax refunds.

White House spokesman Jay Carney reiterated Obama's position that no final "fiscal cliff" deal is possible without a debt ceiling resolution.

The $16.4 trillion debt ceiling is expected to hit its limit in mid-February. Obama, backed by congressional Democrats, wants to remove forever the threat of default as part of separate negotiations around the cliff. That is the combination of the Dec. 31 expiration of the George W. Bush-era tax cuts and the Jan. 2 triggering of $1.2 trillion in spending cuts over 10 years that threaten to force the economy back into a recession if they occur unaltered.

Democrats have "at least" 51 votes for Obama's debt ceiling proposal, said Sen. Charles Schumer, D-N.Y.

Obama's proposal roils Republicans who view it as a rare leverage point to extract spending cuts from Democrats. Under House Speaker John Boehner, R-Ohio, the party has embraced an informal rule that any debt ceiling hike be accompanied by an equal or greater amount of cuts. Republicans used that principle in a 2011 deal on the debt ceiling to achieve $1.5 trillion in spending cuts, according to the latest analysis from the Center on Budget and Policy Priorities.

That battle also rattled financial markets and resulted in a Standard & Poor's credit downgrade. The Bipartisan Policy Center released a report last month that estimated the debt ceiling battle also cost the U.S. economy $18.9 billion due to higher interest rates related to the fight.

Allowing the debt ceiling to become a perpetual political battle could wreak havoc on the U.S. economy, Moody's Analytics Chief Economist Mark Zandi told the Joint Economic Committee on Thursday. "It would be nice to extend it past the next presidential election, and it'd be even nicer than that to get rid of it altogether," he said.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Copyright USA TODAY 2012

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters