The Senate on Tuesday overwhelmingly approved a plan to raise the federal debt limit and cut government spending, ending a bitter partisan stalemate that had threatened to plunge the nation into default and destabilize the world economy.
One day after a climactic vote in the House, the Senate easily approved the measure, 74 to 26, with significant majorities of both parties supporting it. President Obama promptly signed the bill and submitted a formal request to Congress to lift the $14.3 trillion debt ceiling, instantly giving Treasury $400 billion in additional borrowing power.
With the immediate crisis averted, Obama and congressional leaders quickly turned their attention to the next front in the war over the federal budget: a new legislative committee that will have the job of developing a broader plan to control the government’s debt.
The bipartisan panel, to be named this month, is likely to confront the same ideological divide that caused an almost crippling impasse in the debt-limit debate. Republican leaders are warning that they will not include anyone on the panel who is willing to raise taxes, prompting Democrats to threaten a hard line against cuts to Social Security and Medicare benefits.
Foreign investors and economic analysts see further action as crucial to restoring the United States’ financial reputation. On Tuesday, critics in China and elsewhere warned that the initial debt-reduction package, which would cut about $1 trillion from agency budgets over the next decade, is too modest. And they complained that the last-minute agreement will not tackle the dangers that national health and retirement programs pose to the government’s long-term fiscal health.
Meanwhile, the package did not cheer the stock market, where the major indexes tumbled more than 2 percent on worries that the U.S. economic recovery is stalling and that the debt plan might even undermine it by weakening demand in the next year or two.
These fears — that the deal will neither energize the foundering economy nor require substantive changes to address long-term fiscal problems — have discouraged some investors, especially after political leaders in Washington raised expectations in recent weeks that they would reach consensus on putting the nation’s financial house in order.
This disappointment comes at a time when debt troubles are already roiling several European countries, where government leaders have also struggled to move political mountains without delivering the comprehensive reforms that economic analysts say are needed to head off a financial meltdown. Financial markets in Italy and Spain were buffeted Tuesday amid fears that a global economic slowdown would undercut their efforts to get their debts under control.
Speaking in the White House Rose Garden after the Senate vote, Obama called the initial round of spending cuts in the package “an important first step” in forcing the government to live within its means.
“This compromise requires that both parties work together on a larger plan to cut the deficit,” he added. “And since you can’t close the deficit with just spending cuts, we’ll need a balanced approach where everything is on the table.”
The president stressed that the debt-reduction package avoids “cutting too abruptly while the economy is still fragile.” And he vowed to pivot rapidly to deal with a jobless rate stuck stubbornly above 9 percent.
He urged Congress to take “bipartisan, common-sense steps” after its August recess to boost job creation and spur economic growth, including permanently extending the George W. Bush-era tax cuts for middle-class families, which are set to expire next year. He called for patent reform, the passage of trade deals with Asian and Latin American countries, and the creation of an “infrastructure bank” to fund federal projects and put construction workers back on the job.
Although Obama has urged that the new legislative committee consider a range of options for shrinking the national debt, it’s far from clear that everything will be on the table when the panel, composed of six lawmakers from each party, begins looking for further savings.
In an interview, Senate Majority Leader Harry M. Reid (D-Nev.) said that he would like to “put people on it who are willing to do entitlement cuts . . . people with open minds.” But the GOP’s uncompromising stand against tax increases, he said, “makes it pretty hard for me.”
House Budget Committee Chairman Paul Ryan (R-Wis.) argued that Democrats “have already got their tax increases,” including fresh revenue buried in last year’s health-care overhaul. Ryan said he assumes that Obama and congressional Democrats will make good on their pledge to let the tax cuts that benefit high-income households expire on schedule.
“So their tax increases are coming,” he said. Ryan said the new committee “could do a loophole closer here or there. But there’s no way you’re going to have significant revenues in the picture. You’re not going to get tax reform out of this thing.”
Independent budget analysts held out hope that the committee will revive ambitious debt-reduction goals that would require both political parties to make sacrifices.
“That is the key for people to understand: This is just phase one. This doesn’t get us to the promised land,” said Erskine Bowles, who was Bill Clinton’s White House chief of staff and who served as co-chairman of a commission Obama set up last year to recommend ways to control federal borrowing. “This doesn’t stabilize the debt or reform the tax code or slow the rate of growth of health care. There’s lots of work left to do.”
The debt-limit agreement directs the new committee to identify at least $1.2 trillion in additional savings over the next decade. If the panel does not produce a plan by the end of November — or if Congress does not adopt it by the end of the year — more than $100 billion a year would be cut automatically from the budget, starting in January 2013.
Those reductions would be split evenly between defense and non-defense programs, although many Democratic priorities, such as Medicaid and Social Security, would be exempted. The Pentagon, meanwhile, would take a $54 billion hit in the first year alone.
Democrats said the threat of such large automatic defense cuts would give them powerful leverage to renew their demand that Republicans consider tax increases for corporations and the wealthy as part of a solution to the nation’s budget problems.
“Republicans are going to have to decide whether it’s more important to protect special-interest tax breaks or whether it’s more important to protect the national security of the United States,” said Rep. Chris Van Hollen (Md.), the senior Democrat on the House Budget Committee. “That’s the choice they’re going to have to make.”
In an interview, Senate Minority Leader Mitch McConnell (R-Ky.) agreed that the trigger is “really catastrophic” and that the consequences of not coming up with a bipartisan debt-reduction plan would be “unacceptable.” Referring to the new committee, McConnell said, “We all view this as a real deal.”
But Sen. Jon Kyl (Ariz.), the No. 2 Republican in the Senate — who is widely viewed as one of McConnell’s likely picks to serve on the panel — called the fate of the tax issue uncertain.
“What remains to be seen is whether any discussion of taxes is appropriate,” Kyl said. “I think it’s pretty unlikely.”
Staff writer Paul Kane contributed to this report.