US Debt Deal Cuts Spending by $2 Trillion Next Decade, Raises Debt Ceiling by $2.4 Trillion

House passes debt limit bill

as Rep. Giffords makes 1st appearance in Congress since shooting

By DAVID ESPO AP Special Correspondent

Aug 1, 2011, 8:06 PM EDT

WASHINGTON (AP) --

Emergency legislation to scrape past an economy-rattling national financial default sped through the House Monday night a scant day before the deadline for action. The moment was made all the more electric by Rep. Gabrielle Giffords' first appearance in Congress since being shot in the head six months earlier.

The vote was 269-161, but all eyes were on Giffords, who drew thunderous applause as she walked into the House chamber unannounced and cast her vote in favor of the bill.

A final Senate sign-off for the measure is virtually assured on Tuesday.

"If the bill were presented to the president, he would sign it," the White House said, an understatement of enormous proportions.

After months of fiercely partisan struggle, the House's top Republican and Democratic leaders swung behind the bill, ratifying a deal sealed Sunday night with a phone call from House Speaker John Boehner to President Barack Obama.

"The legislation will solve this debt crisis and help get the American people back to work," Boehner said at a news conference a few hours before the vote.

The Democratic leader, Rep. Nancy Pelosi, was far less effusive. "I'm not happy with it, but I'm proud of some of the accomplishments in it. That's why I'm voting for it."

So, too, many of the first-term Republicans whose election in 2010 handed the GOP control of the House and set the federal government on a new, more conservative course.

"It's about time that Congress come together and figure out a way to live within our means," said one of them, Sean Duffy of Wisconsin. "This bill is going to start that process although it doesn't go far enough."

The measure would cut federal spending by at least $2.1 trillion over a decade - and possibly considerably more - and would not require tax increases. The U.S. debt limit would rise by at least $2.1 trillion, tiding the Treasury over through the 2012 elections.

Without legislation in place by the end of Tuesday, the Treasury would run out of cash needed to pay all its bills. Administration officials say a default would ensue that would severely damage the economy.

Beyond merely avoiding disaster, Obama and congressional leaders hoped their extraordinary accord would reassure investors at home and around the world, preserve the United States' Aaa credit rating and begin to slow the growth in America's soaring debt. In a roller-coaster day on Wall Street, the Dow Jones industrial average surged, then sank and finally finished down for a seventh straight session but only slightly.

In all, 174 Republicans and 95 Democrats voted for the bill, while 66 Republicans and 95 Democrats opposed it. After months of suspense, the vote was anti-climactic,

Not so the moment when Giffords' presence became known.

She greeted some fellow lawmakers who crowded around her and blew kisses to others, beaming the whole while. Her hair was dark and close cropped and she wore glasses - nothing like the image America had of her six months ago when she was shot while greeting constituents outside a supermarket in Tucson.

She did not speak with reporters.

As for the legislation, after months of wrangling over a deal, there was little time left for lawmakers to decide how to vote.

The White House dispatched Vice President Joe Biden to the Capitol to lobby recalcitrant Democrats in both houses.

"They expressed all their frustration," he conceded after a session with lawmakers of his party in the House.

He said the deal "has one overwhelming redeeming feature" - postponing the next debt limit battle until 2013 and putting the current fight behind. "We have to get this out of the way to get to the issue of growing the economy," he said.

Republicans lobbied their rank and file as well, and the results were far more positive for them than a week ago when they were forced to delay a vote on an earlier measure.

GOP leaders swiftly drew public pledges of support from some first-termers as well as veteran defense hawks - two areas of concern with the agreement.

Rep. C.W. (Bill) Young, chairman of the committee that handles the defense budget, said, "We're confident that we can make this happen without affecting readiness and without affecting any of our soldiers."

There were critics on both sides of the aisle, some of them anguished.

"I did not come to Washington to force more people into poverty," said Rep. Jim McGovern, D-Mass.

"At the end of the day, Washington's spending still has us sprinting toward a fiscal cliff. And this bill barely slows us down," said Rep. Mark Mulvaney, R-S.C.

There is little suspense about the outcome for the debt-limit legislation in the Senate on Tuesday.

A member of the Republican leadership in the Senate predicted strong GOP support. "Maybe 35 (of 47) will support it in the end. There will be some who will pull back," said Sen. Mike Crapo of Idaho.

Already, the legislation was emerging as an issue in the 2012 presidential campaign.

Rep. Michele Bachmann of Minnesota and former Massachusetts Gov. Mitt Romney announced their opposition, while Newt Gingrich issued a statement without saying how he would vote.

The final legislation reflected the priorities of the two political parties.

It would immediately increase the debt limit by $400 billion, with another $500 billion envisioned unless Congress blocks it. At the same time, it would cut more than $900 billion over 10 years from the day-to-day operating budgets of Cabinet agencies. For the budget year that begins Oct. 1, spending would be held $7 billion below current levels.

The measure also establishes a 12-member House-Senate committee that will be charged with producing up to $1.5 trillion in additional deficit cuts over a decade. If the panel succeeds, Congress will be required to vote on the recommendations without possibility of changes.

If the panel deadlocks or fails to produce at least $1.2 trillion in deficit savings, then spending cuts are to take effect across much of the federal budget. The Pentagon, domestic agencies and farm subsidies would be affected, as would payments to doctors and other Medicare providers. But individual benefits under Social Security, Medicaid, Medicare and programs for veterans and federal retirees would be exempt.

At the same time, the debt limit would rise by at least another $1.2 trillion, and perhaps - depending on the results of the committee's work - as much as $1.5 trillion.

Additionally, the legislation requires both the House and Senate to vote on a balanced-budget amendment to the Constitution.

The measure also increases funding for Pell Grants for low-income college students by $17 billion over the next two years, financed by curbs on federal student loan subsidies.

The result of weeks of negotiations and harsh arguing, the final result represented a product of divided government that gave neither side everything it wanted. Leaders in both parties were emphatic on that point.

"As with any compromise, the outcome is far from satisfying," conceded Obama in a video his re-election campaign sent to millions of Democrats. In a tweet, the president was more positive: "The debt agreement makes a significant down payment to reduce the deficit - finding savings in both defense and domestic spending."

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Associated Press writers Jim Abrams, Stephen Ohlemacher, Alan Fram, Julie Pace, Donna Cassata, Andrew Taylor and Larry Margasak contributed to this report.

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Budget deal's initial spending cuts too small to hurt economy in the short run

By CHRISTOPHER S. RUGABER AP Business Writer

Aug 1, 2011, 8:07 PM EDT

WASHINGTON (AP) --

 The deal reached by Congress to raise the debt ceiling and cut more than $2 trillion in public spending should have only a minor impact on the economy for the next two years.

Almost all the cuts would be made in 2014 or beyond. The approach heeds a warning by Federal Reserve Chairman Ben Bernanke and many private economists: Cutting too much too soon could harm the weak economic recovery.

Yet the deal won't do much to help the economy, either, at least in the short term, economists said.

Under the debt deal, discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut $21 billion in 2012 and $42 billion in 2013, according to an analysis by the Congressional Budget Office.

Combined, those cuts come to less than 1 percent of the nation's $14 trillion economy. The impact "should be relatively minor," says Brian Gardner, senior vice president at Keefe, Bruyette and Wood, an investment bank.

The spending cuts would increase to $75 billion in 2015 and $156 billion in 2021, the CBO estimates.

Overall, the first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion.

Reduced government spending could mean less money for highway construction, housing assistance, government-sponsored scientific research or any number of other federal programs.

Companies that work on Defense Department contracts could suffer, too. The stocks of Lockheed Martin Corp., General Dynamics Corp. and Raytheon Co. all sank about 1 percent Monday.

If lawmakers fail to reach a deal on a second round of cuts, the Pentagon's budget would be cut automatically by about $500 billion. That measure is designed as a threat, to make sure congressional negotiators have strong incentives to compromise.

Delaying the deepest cuts buys time for the economy to recover. Right now, it can't absorb shocks very well: Unemployment is still 9.2 percent, people are spending less, worker pay has stagnated, and economic growth is the slowest since the end of the recession in June 2009.

Worries about the economy, including the weakest manufacturing in two years, were one reason the stock market couldn't sustain a rally after the debt deal was struck. The market was flat Monday.

The Federal Reserve meets next week. Economists will watch for any signals that the Fed is considering new steps to help the economy, such as re-investing its government bond holdings indefinitely to keep interest rates down.

The debt deal could restore some confidence among individuals and businesses by removing the fear that the U.S. government would default on its debt for the first time, says Troy Davig, an economist at Barclays Capital.

Overall, the deal could subtract about 0.2 percentage point from economic growth in 2012, Davig estimates. While that is a relatively light blow, the economy only grew at an annual rate of 1.3 percent in April, May and June.

In the first three months of the year, the economy grew even more slowly, at a rate of 0.4 percent. The third straight quarterly drop in government spending contributed to the slower growth.

While Bernanke and other economists had warned against cutting too much in the first few years, they also urged Congress to reduce spending over the long term, arguing that solidifying the nation's finances would help the economy.

"Bernanke will be pleased at least with the direction of the agreement," says David Jones, chief economist at DMJ Advisors, a Denver economic consulting firm. "There are no major cuts in the early years but at least a determination to make significant cuts over the 10 years of the deal."

Democratic lawmakers favored smaller cuts over the next two years to avoid hurting the fragile economic recovery, said staffers from both parties with knowledge of the negotiations. Republicans wanted upfront cuts totaling tens of billions of dollars more. The staffers spoke on condition of anonymity because they were not authorized to discuss the negotiations.

Republicans insisted on cuts in exchange for allowing an increase in the limit on how much money the government can borrow. Without the increase, the government would not have been able to pay all its bills after Tuesday, the White House said.

While the deal enables the government to avoid a default, credit agencies could still downgrade their ratings of U.S. debt. That would make it more expensive for the government to finance its debt, and lead to higher interest rates for everyone.

There is little in the debt package to promote economic growth, economists say. A "grand bargain" with reforms to the tax code, cuts in entitlement spending and more long-term deficit reduction would have put the U.S. debt on a sounder footing, they say.

Some other measures meant to stimulate the economy expire at year's end. For example, a 2 percentage-point cut in the Social Security tax that will give most American households $1,000 to $2,000 to spend is set to expire after this year.

Obama wants to extend the Social Security tax cut, White House spokesman Jay Carney says. That could prove difficult with a committee focused on finding up to $1.5 trillion in budget cuts at the same time.

Michael Feroli, an economist at JPMorgan Chase, forecasts that cuts in federal spending and the end of the tax cut could reduce economic growth by 1.5 percentage points in 2012.

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AP Business Writers Martin Crutsinger and Daniel Wagner contributed to this report.

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Debt and spending deal picks up momentum in Senate

By ANDREW TAYLOR Associated Press

Aug 1, 2011,11:08 AM EDT

WASHINGTON (AP) --

A crisis-conquering deficit-reduction agreement struck by the White House and congressional leaders after months of partisan rancor picked up momentum in the Senate Monday, as a member of the Republican leadership predicted at least 30 GOP votes.

"Maybe 35 will support it in the end. There will be some who will pull back," Sen. Mike Crapo, the deputy Republican whip, told reporters, as climactic votes approached in both the House and Senate on the long-sought spending plan.

Majority Leader Harry Reid, D-Nev., said a vote could come as early as Monday as he opened the day's session by declaring the deal shows that the often-dysfunctional Senate can come together when it counts. "People on the right are upset, people on the left are upset, people in the middle are upset," he said. "It was a compromise."

Crapo's assessment came as Vice President Joe Biden, who played an instrumental role in successful weekend efforts to hammer out an accord, went to Capitol Hill to sell the plan in separate meetings with House and Senate Democrats.

Relief around the world was indisputable, with Asian shares on Monday enjoying one of the best sessions in weeks. The advance continued in Europe. Wall Street opened higher, but faltered on a report that a key manufacturing index had dropped sharply in July.

"We have averted an economic crisis," declared Sen. Dick Durbin of Illinois, the Senate's second-ranked Democrat.

Whatever momentum could be claimed for the deficit-reduction plan, Congress still has precious little time to avert a potentially devastating default on U.S. obligations. And there was little dispute that the endgame product contained plenty to offend lawmakers of both parties, and tea party sympathizers as well.

Sen. John McCain conceded as much, saying he'd have to "swallow hard" to vote for it because of cuts in defense spending. But the Arizona Republican said lawmakers had little choice in the face of the specter of default.

Said Crapo: "It is always dangerous to crawl out on a limb and make a prediction about how the vote will go on something as controversial as this. But I believe in the end we will see pretty strong support in the Senate on both sides."

"I am probably a no," freshman Rep. Joe Walsh, R-Ohio, a tea party favorite, told Fox News. " ... We need a bold solution and this isn't it."

Another House Republican, Michael Turner of Ohio said he was not ready to endorse the package as he left a closed-door meeting of House GOP lawmakers. Turner is a member of the House Armed Services Committee, and potential cuts to defense spending could be an issue among some Republicans.

The compromise plan agreed to late Sunday would mix a record increase in the government's borrowing cap with the promise of more than $2 trillion in spending cuts.

After a tense weekend of bargaining, President Barack Obama and top congressional figures jointly announced the agreement late Sunday. It provided an instant boost to Asian financial markets and a huge dose of relief to an administration and Congress frazzled by months of partisan warfare and the chance that a default could send the still-fragile economy into recession.

Top Obama aide David Plouffe said Monday the deal was worthy of passage despite the no-holds-barred battle that amounted to a "three-ring circus."

The Senate seems likely to vote first on the measure while House GOP leaders work to assemble support for it. Democratic votes are certain to be needed to pass the measure in the Republican-dominated House, just as Republicans will be needed to clear the measure through the Democratic Senate. Liberal Democrats were already complaining that Obama had given away too much to GOP leaders.

"Now, is this the deal I would have preferred? No," Obama said. "But this compromise does make a serious down payment on the deficit reduction we need, and gives each party a strong incentive to get a balanced plan done before the end of the year."

The legislation would slice more than $2 trillion from federal spending over a decade and permit the nation's $14.3 trillion borrowing cap to rise by up to $2.4 trillion, enough to keep the government afloat through the 2012 elections - a key objective for Obama, whose poll numbers have sagged as the summertime crisis dragged on.

House Speaker John Boehner, R-Ohio, telephoned Obama at mid-evening to say the agreement had been struck, then immediately began pitching the deal to his fractious rank and file.

"It isn't the greatest deal in the world, but it shows how much we've changed the terms of the debate in this town," he said on a conference call, according to GOP officials. He added the agreement was "all spending cuts. The White House bid to raise taxes has been shut down."

House Democratic Leader Nancy Pelosi, D-Calif., was publicly noncommittal. "I look forward to reviewing the legislation with my caucus to see what level of support we can provide," Pelosi said in a written statement. But Democratic officials said she was unlikely to do anything to try to scuttle the package.

Passage seemed likely if not wholly assured. Support from Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., should guarantee Senate approval, but the House could prove more difficult because of defections from left and right alike.

"This deal trades people's livelihoods for the votes of a few unappeasable right-wing radicals, and I will not support it," said Rep. Raul Grijalva, D-Ariz.

Tea party favorite and presidential candidate Michele Bachmann, R-Minn., countered that the deal "spends too much and doesn't cut enough. ... Someone has to say no. I will."

The government presently borrows more than 40 cents of every dollar it spends, and without an infusion of borrowing authority, the government would face an unprecedented default on U.S. loans and obligations - like $23 billion worth of Social Security pension payments to retirees due Aug. 3.

The increased borrowing authority includes $400 billion that would take effect immediately and $500 billion that Obama could order unless specifically denied by Congress. That $900 billion increase in the debt cap would be matched by savings produced over the coming decade by capping spending on day-to-day agency budgets passed by Congress each year.

A special bipartisan committee would be established to find up to $1.5 trillion in deficit cuts, probably taken from benefit programs like farm subsidies, Medicare and the Medicaid health care program for the poor and disabled. Republicans dismissed the idea that the panel would approve tax increases.

Any agreement by the panel would be voted on by both House and Senate - and if the panel deadlocked, automatic spending cuts would slash across much of the federal budget. Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.

Plouffe said in a morning network television interview that the administration wasn't giving up on pushing for new tax revenues down the road.

"The only way to really reduce the deficits significantly in a smart way is to make sure there is smart entitlement reform and closing of loopholes and tax reform," he said.

The pact was sealed during a weekend of talks in which GOP leaders Boehner and McConnell dealt directly with the White House, especially Biden. The final battle was fought over Pentagon spending cuts, with Democrats emerging with a face-saving victory for $350 billion in defense spending curbs.

But Republicans set the parameters of the debate, with Boehner successfully winning spending cuts equaling the amount of the debt increase - though the cuts phase in over time and future Congresses will have ample temptation to find ways around stringent spending caps called for in the pact.

Obama said such appropriated accounts would be left with the lowest levels of spending as a percentage of the overall economy in more than a half-century.

The measure capped a long saga: first, meetings in a Biden-led group that fell apart over revenues; then, efforts by Obama and Boehner to forge a so-called grand bargain, cutting the deficit by $4 trillion or more over a decade, including new revenues agreed to by Boehner.

In the end, the deal was a split-the-differences compromise, with plenty for both sides to dislike. House GOP defense hawks came out on the losing end. So too did Democratic liberals seeking tax increases.

Plouffe was interviewed on ABC's "Good Morning America," CBS's "The Early Show" and NBC's "Today" show. McCain appeared on CBS.

Lawmakers to vote on last-minute debt deal

By Andy Sullivan and Laura MacInnis

WASHINGTON | Mon Aug 1, 2011 12:05pm EDT

WASHINGTON (Reuters) -

Congressional leaders rushed to line up Republican and Democratic votes on Monday for a White House-backed deal to raise the U.S. borrowing limit and avert an unprecedented debt default.

With scars still fresh from the months-long brawl over increasing the $14.3 trillion debt ceiling, a new fight was shaping over the incendiary topic of taxes.

Global markets showed signs of relief that the United States appeared to be dodging default, but fears that the country might still lose its triple-A credit rating even with a debt deal contributed to a fizzle in a brief stocks rally.

"We avoided the possibility of a default, but now concerns are turning to a possible downgrade," said Phil Streible, senior market strategist with futures broker Lind-Waldock in Chicago.

Votes were expected later in the day in the House of Representatives and Senate on a plan to cut at least $2.4 trillion over 10 years, form a powerful new congressional committee to recommend a deficit-reduction package by late November, and raise the U.S. borrowing limit through 2013.

The non-partisan Congressional Budget Office confirmed that the debt deal would reduce budget deficits by at least $2.1 trillion over 10 years.

U.S. lawmakers split into Democratic and Republicans camps to hear appeals from their party leaders to approve the deal which emerged from feverish negotiations as the clock ticked toward a Tuesday deadline. Party leaders are hoping for sizable majorities in order to give the deal credibility.

If Congress fails to approve the deal by Tuesday, the United States will no longer be able to borrow money to pay all of its bills.

The Democratic-led Senate is expected to pass the deal, but it could face a harder path in the House of Representatives where both conservative Tea Party supporters and liberal lawmakers have expressed dissatisfaction with it.

Vice President Joe Biden, who helped negotiate the deal, traveled to Capitol Hill to urge Democrats to approve it and try to answer their concerns about potentially painful cuts to social programs.

Representative Tom Cole, a vote counter for the Republican party, said he expected the Republicans House to pass the plan with a "strong vote."

U.S. stocks rose more than 1 percent at the open on Monday, but quickly fell back in late morning trading, continuing a sag that gathered steam last week. The U.S. dollar rose modestly against the yen and the Swiss franc, a favored safe haven for nervous investors in recent weeks.

It was hard to identify winners from a bitter fight that was finally winding to a conclusion after Sunday's 11th-hour compromise agreement.

President Barack Obama had to accept deeper spending cuts than he wanted and will have to defend them to his liberal base ahead of his 2012 re-election campaign.

House of Representatives Speaker John Boehner, the top U.S. Republican, got cuts he demanded without immediate tax increases, but had to fight an image of being inflexible, a captive of his party's Tea Party wing.

Americans anxious to reduce the country's 9.2 percent jobless rate became increasingly frustrated as the debate raged on through the summer.

TAX FIGHT AWAITS

Taxes looked to be one of the next battlefields.

While the framework of the new deficit reduction plan does not call for new taxes, Democrats see the new congressional committee being formed as a vehicle for gaining more revenue through reform of the tax code.

Boehner, who is seeking to bring anti-tax Tea Party members on board, said on Sunday the framework agreement made it effectively "impossible" to use it to raise taxes.

The White House sees the issue otherwise. If tax reform does not succeed in the new committee, President Barack Obama will allow tax cuts put forward by former President George W. Bush to expire in 2013, White House officials said.

White House senior adviser David Plouffe insisted that new tax revenues were on the table.

"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," he told NBC's "Today" show.

(Additional reporting by Jeff Mason and Thomas Ferraro; Writing by Steve Holland, Editing by Jackie Frank )