By David Usborne
WASHINGTON – President Barack Obama, who once lectured Europe on why spending and investment is the best cure for a recession, was yesterday contemplating the consequences of an emergency debt-ceiling deal that will suck more than $2 trillion (£1.2trn) out of a still shaky US economy over the next 10 years.
Enormous concessions from the White House to satisfy demands largely driven by the radical Tea Party flank of the Republicans provided the key to unlock the door to a deal, approved in the House of Representatives last night. It would enact deep spending cuts in return for a new authorisation to raise the US debt ceiling and draw America back from the brink of defaulting on its debt.
To the disgust of many in his own party, Mr Obama caved on his demands that the deal have “balance” between spending cuts and increases in tax revenues. Of the latter, there are so far none.
What emerged is a new austerity programme for a humbled America that goes directly against the instincts of the Democrats and their leader. Tough new caps designed to trim spending by $2.3trn before 2021 will severely impair Mr Obama’s ability to get the economy back on its feet or launch a credible jobs programme that must be the centrepiece of his re-election effort.
There was distaste for the concocted contract from many quarters last night even though it did win approval in the lower chamber last night by 267 votes to 161. Passage by a wide majority in the Senate seemed assured today. The bill will then go to Mr Obama for his signature and the extraordinary crisis that has consumed this town in the super-heated days of summer and appalled most ordinary Americans will be over – for now.
Even those who voted yes last night did so mostly holding their noses. The no votes brought together a coalition of right-wing conservatives who thought cuts too meagre and progressive liberals of the opposite view.
In just one moment of uplift, there was a surprise visit to the House by Gabrielle Giffords, the Arizona congresswoman who was shot in the head in February.
Once the ink is dry on the Oval Office desk, the threat of default will be lifted, albeit at the 11th hour. It might or might not be enough to persuade ratings agencies to leave America’s triple-A credit status intact.
What emerged from all the arm-wrestling is a complicated series of steps that will keep the debt-ceiling scaling up at least through to the end of next year and to tackle the budget deficit. It came out of one of the most acrimonious episodes ever seen in Washington; all sides last night were singling out those elements that made it look like a victory for them and a loss for their foes.
As a first step, the debt ceiling will be raised by $400bn, while caps on spending are put in place to ensure savings of nearly $1trn over 10 years. Some will come from defence – though not affecting the wars in Iraq or Afghanistan – but most will be from so-called discretionary spending on things like student loans, policing the environment and programmes for the poor. Discretionary spending, which does not include state pensions or old-age medical care, accounts for only 12 per cent of the US budget.
And the fighting will soon resume. By the end of November, a bipartisan super-committee on Capitol Hill must produce a plan to save a further $1.3trn over the 10-year period. More defence cuts will then be on the table as will be reform of the tax code and some effective increases in tax revenues, the White House said.
But Republicans think otherwise, and the tax issue will be the flashpoint in November. “I think that’s the case the President’s going to make, that if we’re going to do additional deficit reduction in the Fall, it should be tax reform, closing loopholes for the wealthy and big corporations,” David Plouffe, an adviser at the White House, said.
Then there is a rare trigger provision: if the committee cannot agree on the next steps, cuts across the board, including at the Pentagon but not touching the social security fund or the medical benefits received by the old, the $1.3trn will take effect automatically.
The process also includes provisions dear to the Tea Party, that Congress votes on a constitutional amendment thereafter to have only balanced federal budgets. But the chances of such an amendment happening remain slim.
Winners and losers from the debt deal
Barack Obama: Loser
The President had to accept deeper spending cuts than he wanted, though the debt ceiling deal would at least see him through to the other side of the presidential election next year. Whether he is then still in charge is open to question after he was forced to agree a deal without tax rises demanded by his liberal base. The legislation would save some $917bn over the next 10 years. A congressional committee, that will report back later in the year, will make suggestions on saving another $1.3 trillion and Mr Obama will seek extra tax revenues from this committee to placate his grass-roots support. But he has a lot of explaining and cajoling to do.
The Democrats: Losers
Democratic support for the deal was muted with Nancy Pelosi, the party’s leader in the lower house, expressing doubts that too much had been given away in the deal. “We are very concerned that a bill that makes these big cuts and has not one red cent from the wealthiest people in our country… is very disconcerting,” she told reporters. However, the party will be comforted by the fact that Medicare and social security remain ring-fenced under the terms of the legislation.
The Republicans: Winners
The senior US Republican lower house Speaker, John Boehner, got the cuts he wanted without immediate tax increases. But his failure to persuade the right wing to back an earlier version of the plan has allowed enemies to paint him as a captive of the Tea Party. And the party will have to accept defence budget cuts.
The Tea Party: Winners
The upstarts of the American political scene have had a central role in the saga. Their refusal to accept tax rises and their clarion calls for cuts have led the agenda. The Republican grouping – with Michele Bachmann as its figurehead – may still yet demand more before a deal can be finalised. A weary public could blame it for extending the crisis. But its leading figures appear to revel in the spotlight.
The American public: Losers?
With a 9.2 per cent jobless rate needing to be addressed, few Americans have relished a political dispute that has raged through the summer. Education spending is set to be cut, and analysts say that without tax rises, the cuts will fall disproportionately on the poorest.
See Related: Tea Party Archive