After an analysis found that Republican Speaker John Boehner’s budget plan cut spending by $350 billion less than the $1.2 trillion over ten years that he said it would, a House vote was pushed back from Wednesday to Thursday while he reworks the bill. In order for lawmakers to increase the national debt (NYSE:TLT) ceiling by the August 2 deadline set by the U.S. Treasury, they first need to agree upon a new budget.
Hot Feature: Your Cheat Sheet to the History of the U.S. Debt Ceiling.
While it is necessary to raise the debt ceiling in order to prevent the government from defaulting on its obligations, it is also important that any budget plan coming out of Congress significantly cuts the deficit, otherwise the country’s top credit rating could still be downgraded, resulting in raised borrowing costs and crippling economic recovery.
Though Boehner is rushing to prepare his plan, it is highly unlikely it will pass given opposition from Democrats and Tea Party Republicans in both the House and Senate, and President Obama’s saying that he would veto plan putting off the issue to another vote. Congressional Democrats oppose the deal because it relies too much on spending cuts without increasing revenue, while Obama insists that the deal is both unbalanced and doesn’t allow for an adequate increase to the debt ceiling, leaving the issue to further debate in the near future. The Tea Party falls on the opposite side of the spectrum, unwilling to back a bill containing any tax hikes whatsoever. The White House announced Tuesday that they were working with Congress on a “Plan B”.
Congress’ inability to come to a quick and decisive resolution has been dragging down world financial markets. While there has been no significant panic in the markets, with American investors expecting that Congress will act in time, many have been looking for safer investments, including the Swiss franc (NYSE:FXF) rising to a record high against the dollar (NYSE:UDN), which has fallen against the Australian and Singapore dollars and the Japanese yen (NYSE:FXY). It has also been pushing up the price of safe-haven commodities like gold (NYSE:GLD) and silver (NYSE:SLV).
While Americans seem confident the government will find a resolution, outside investors aren’t so confident. European markets have taken the biggest hit, and according to Stephen Green, head of research for Greater China at Standard Chartered Bank, the bank’s Chinese clients have little faith in the U.S. government’s ability to not only reach a deal, but to improve the country’s long-term fiscal health.
The size of the American economy means that any fiscal crisis would be felt around the world. France’s budget minister, Valerie Pecresse, has urged Washington to reach a deal. “The global economy needs an American agreement,” said Pecresse. Of course, so do the American people. According to a Reuters/Ipsos poll, a 56% majority of American support a deal that combines tax increases and spending cuts that has been pushed by Obama and Democrats, but has been largely dismissed by Republicans in Congress.
Democrat and Senate Majority Leader Harry Reid is preparing a plan for that 56% — a plan that would cut $2.7 trillion from the deficit over the next decade, more than twice that of Boehner’s plan. However, neither plan is large enough to guarantee that the U.S. sovereign credit rating will not be downgraded. The nearly $4 trillion in cuts that would have come from the Obama-Boehner plan that fell apart last week may have done so, but Boehner walked out on those discussions last Friday, effectively ending the possibility of any “grand bargain”. President Obama now supports Reid’s plan.