If legislators again fail to reach an agreement on spending cuts and tax hikes for the new budget by Friday, deficit-reduction talks will have to come to a close as President Obama and congressional negotiators focus all of their attention on raising the debt ceiling before the Treasury’s August 2 deadline. This afternoon, Obama will meet with top congressional leaders at the White House for the fifth straight day of budget talks.
The Treasury has warned that if their deadline passes without Congress raising the debt ceiling above its current $14.3 trillion, the government will go into partial default on its loans. That would cause interest rates to shoot up and the the dollar to devalue considerably against other global currencies, and Moody’s has already said it would downgrade the country’s credit rating.
Wednesday’s negotiations included a Republican-backed call for a short-term extension of the debt ceiling that would not ultimately solve the problem, only delay it. But President Obama was so opposed to the idea that sources say he admitted that his stance could ruin his chances for re-election in 2012, but that he vowed, “I will not yield on this.” Obama promised to veto any such measure. Talks continued for nearly two hours without making any progress toward an agreeable solution.
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Republicans both insist that any increase in the debt ceiling must be matched, dollar-for-dollar, by spending cuts, and that there be no tax increases. Obama has asked that the party compromise on at least one of those issues, but so far to no avail. Obama’s plan would save $4 trillion over the next decade through spending cuts, reforming social programs like Medicare and Medicaid, and raising taxes on the wealthiest Americans. While the first two measures are concessions that Democrats have made out of necessity, in contradiction to the usual party platform, the third measure requires Republicans to yield a long-held stance. Obama’s call for more tax revenue would allow Bush tax cuts for families making over $250,000 a year to expire, while actually decreasing tax rates for Americans with lower incomes. The current plan doesn’t include any true tax rate increases, a concession made by Obama in hopes of making the plan more amenable to the GOP. However, Republicans insist that the expiration of tax cuts for the wealthy would place a burden on job creators.
If no deal is reached, Obama says that those eligible for Social Security may not receive their checks next month, while Federal Reserve Chairman Ben Bernanke has warned that any failure to raise the debt ceiling would be “catastrophic” for the global economy. Republican Senate Minority Leader Mitch McConnell is responsible for the short-term debt-ceiling proposal that would allow the president to increase the ceiling in increments by a total of $2.5 trillion. The plan would require three separate congressional votes approving three separate increases and would require Obama to identify spending cuts equivalent to each. Republicans insist the plan makes too many concessions to the Democrats, but McConnell has said that, “Given a choice between a bad deal and avoiding default, I choose to avoid default,”adding, “if we were to go into default … the practical effect of that will be to allow the president to make us co-owners of a bad economy.”