Debt ceiling discussions inch forward
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As the August 2nd deadline for raising the debt ceiling looms, Congress continues to ratchet up the rhetoric. Frustratingly, most lawmakers agree that the limit needs to be raised, but what it should be coupled with has emerged as the major sticking point to a deal. If the U.S. doesn’t raise the debt ceiling by the deadline, the federal government will be legally unable to borrow any more money to cover its financial obligations. This poses a significant threat to the stability of the nation’s economy and our already fragile recovery.
However, not reforming the nation’s spending habits also puts the long-term health of the economy in the balance. Any increase in the debt ceiling should be paired with a substantive, actionable plan to put government spending on a sustainable path.
The debt ceiling debate has set the stage for some significant votes in Capitol Hill this week. The Washington Post explains:
A bipartisan effort in the Senate to allow President Obama to raise the federal debt ceiling in exchange for about $1.5 trillion in spending cuts over 10 years gained momentum Sunday, as leaders agreed they would have to act in the next two weeks to avert a potential default by the U.S. government.
Republican leaders will first push forward in the House and the Senate with a constitutional amendment to balance the federal budget. The measure is virtually certain to fail in the Senate, which will then take up the debt limit proposal by midweek.
If that clears the Senate, the House is expected to revise the measure, adding a proposal to reduce the deficit by $1.5 trillion over 10 years — savings that will come through cuts to domestic programs but not new tax revenue. The plan would also create a new congressional panel that would, by the end of the year, seek to come up with a way of reducing the deficit potentially by trillions more through cuts in entitlements and other new tax revenue.
It’s unclear whether the measure will be able to pass a vote in the House.
Meanwhile, Moody’s Investors Service, which has recently warned about a U.S. credit rating downgrade, floated a novel idea. Moody’s suggested the debt limit should simply be abolished. Established as a way to control borrowing, Moody’s notes that it has wholly failed to do so.
The United States should do away with the debt ceiling altogether to bring greater certainty to investors in U.S. Treasury bonds, Moody’s suggested Monday.
Rather than continuing to use the debt ceiling in an effort to keep U.S. borrowing down, the government should look toward Chile, Moody’s suggested. There, “the level of deficits is constrained by a ‘fiscal rule,’ which means the rise in debt is constrained though not technically limited.” Chile is considered to be Latin America’s most fiscally sound country.
And, the report noted, it’s not like the debt ceiling has been effective in keeping U.S. debt down: Congress has in the past raised it often and has not linked it to spending levels.