/ 5 August 2011

United States debt: From the brink of a crisis

United States Debt: From The Brink Of A Crisis

Richard Adams examines the outcome of the deal raising the US government’s debt ceiling.

What is the immediate effect of this deal?
It grants a $400-billion increase in the government’s debt ceiling to stave off the threat of default, with an additional $500-billion increase available from February to be effective on the president’s authority. Further increases of $1.2-trillion to $1.5-trillion will become available if a balanced budget amendment is considered by Congress by the end of the year.

When do the spending cuts kick in?
From the start of the ­government’s 2012 fiscal year on October 1, ­savings of $21-billion are to be made through limits on spending. After that, caps on federal ­spending are meant to save an estimated $917-billion over 10 years by ­slowing the speed of increases. Further cuts and savings are to be identified by a bipartisan “super-committee”. What’s the “super-committee”? A 12-member congressional panel to meet in November and devise a plan to reduce deficits by $1.2-trillion to $1.5-trillion over 10 years. It can consider tax or revenue increases. If it fails to produce a plan acceptable to Congress, the deal triggers steep automatic cuts in spending of a similar size.

How does this trigger work?
The trigger is designed to encourage the committee to produce meaningful ways to cut the deficit. If it fails, across-the-board spending cuts in discretionary spending starting from the fiscal year 2013 will be set in motion, with half coming from defence, which is a painful prospect for many Republicans. Medicaid and social security payments are protected, with limited cuts to Medicare programmes, which is painful for Democrats.

What is the balanced budget amendment?
By the end of 2011 Congress must consider adding an amendment to the US constitution that the federal budget be balanced. If Congress approves the amendment, the debt ceiling can be raised on the president’s authority by $1.5-trillion. But if it is not approved, as is more likely, the debt ceiling can be raised by just $1.2-trillion.

What does this balanced budget amendment mean?
It would give constitutional force to a rule requiring that the budget could not exceed revenues or exceed 18% of US national income unless approved by a super-majority in both houses of Congress.

Will the amendment help balance the budget?
No. Experts say that the amendment as proposed has ­significant practical flaws that make it ­unenforceable. Further, economists argue that it is based on questionable assumptions.

What is Barack Obama’s next move?
A battle is looming over the ­extension of the Bush-era tax cuts. Allowing the tax cuts to lapse, as scheduled for 2012, would produce about $3-trillion in additional ­revenue over the following decade. If Democrats and Obama have the stomach for a fight, they could turn the table on Republicans and block any extension.

Is the plan set in stone?
No. Congress can reopen and amend some or all parts of the deal at any time. Depending on the ­outcome of the 2012 ­presidential election and the state of the US economy in 2013 it seems all but certain that the deal will be revised and possibly even discarded entirely. —