The initiative for resolving the debt-limit crisis is shifting back from the White House toward Capitol Hill, where House and Senate leaders are preparing alternative legislative strategies to avoid default.
House Republicans on Friday released details of “cut, cap and balance” legislation, a framework that they say will make it possible for GOP lawmakers to support the president’s request for an increase in the debt limit. In return for approving a $2.4 trillion increase to the debt ceiling, the measure would cut total spending for 2012 by $111 billion, cap federal spending at 19.9 percent of gross domestic product by 2021, and require the passage of a balanced budget amendment to the US Constitution.
President Obama has called the idea not serious. "You'll probably see the House vote on a couple of things just to make political statements," he said Friday.
The emerging deal on the Senate side is seen as being the more likely path to a bipartisan deal. Senate majority leader Harry Reid is working to tweak a proposal by Republican leader Mitch McConnell that creates an expedited legislative procedure for raising the debt limit. Aides say that the final package could also include a broad range of spending cuts, as well as the establishment of a new bipartisan commission tasked with finding further cuts that would be politically feasible.
The Senate is also set to vote on a balanced budget amendment next week, but the vote is expected to fail. Though the measure is supported by all 47 Republicans, who say that a hike in the debt ceiling is not possible without it, it would need 23 Democratic votes to avoid a filibuster, which is unlikely.
Congress is under intense pressure to resolve the issue by Aug. 2, when the US Treasury estimates that the nation will need to borrow more money to cover its spending. After meeting with Senate Democrats on Thursday, Treasury Secretary Timothy Geithner told reporters: “We’ve looked at all options, and we have no way to give Congress more time.”
House Republicans devoted much of a closed caucus meeting on Friday to talk over whether, in fact, the US will default on its debt after Aug. 2. Some conservatives, including GOP presidential primary contenders, have charged that President Obama is bluffing and that the Treasury has enough ongoing tax revenues. Others say the Treasury could simply prioritize payments after Aug. 2, or dip into the Social Security Trust Fund.
But the PowerPoint presentation by the Bipartisan Policy Center at Friday’s GOP meeting signals that there are few viable options and that the US has “no secret bag of tricks to finance government operations past Aug. 2.”
“Treasury has been very clear about what it will and won’t do,” says Jay Powell, former undersecretary of the Treasury with the first Bush administration, now a scholar at the Bipartisan Policy Center in Washington, who addressed the closed House caucus meeting on Friday.
The Bipartisan Policy Center's report signals that, while the US should have enough revenues to service the debt, the government would be forced to default on domestic spending obligations, such as Social Security checks. While that would not be a default on the debt itself, it still could affect the government's credit ratings, feeding mounting concerns that the government is incapable of agreeing on a sustainable fiscal path
Indeed, members of Congress were battered this week with warnings from credit-rating agencies that the threat of a downgrade of the US’s top credit rating is likely if the the US doesn't get its fiscal house in order. On Friday, Standard & Poor’s extended that warning to powerful financial firms “with direct links to, or reliance on, the federal government.”
The prospect of a downgrade – and a likely hike in interest rates and the cost of servicing the $14.3 trillion US debt – rattled lawmakers on both sides of the aisle. Freshman Rep. Mike Kelly (R) of Pennsylvania, who owns a Chevrolet Cadillac dealership in Butler, Pa., recalls trying to sell cars with interest rates at 21 percent. “I know how devastating climbing interest rates can be,” he says.
But the message from these warnings is not that Republicans have to cave in to demands for deep spending cuts, he adds. “Moody’s warned that even if you raise the debt ceiling, if you don’t substantially change what you’re doing, you could still risk default,” he adds.
It’s not clear yet how many freshmen House Republicans will refuse to vote to raise the debt limit under any circumstances. Many won their seats on a pledge to oppose raising the debt limit.
“I came to Washington for a reason – to cut spending so that future generations are not saddled with debt,” says freshman Rep. Chip Cravaack (R) of Minnesota. “It’s up to the president and Secretary Geithner to decide what bills get paid.”
But conservatives say that a framework to lower debt in the longer run, such as a balanced budget amendment, could muster enough Republican votes to pass an increase in the debt ceiling.
“Promises to cut spending and caps are important, but they are not enforceable,” says Brian Straessle, communications director for the House Republican Study Committee. “You cannot bind a future Congress unless you have a constitutional amendment.”
Meanwhile House Democrats, who also met in a closed meeting on Friday, emerged committed to pushing for a “grand bargain” promising savings of $4 trillion over 10 years. Republicans are balking at the inclusion of some $1 trillion of tax increases in that package – a position Democrats describe as reckless.
“We can’t default on our obligations,” said Rep. Jim McGovern (D) of Massachusetts, after Friday’s caucus meeting. “Many in the Republican Party are behaving recklessly. Their behavior is a real danger to our economy.”