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In a bid to end the protracted stalemate over raising the debt ceiling, President Obama and senior Democrats have met to hash out a solution that they hope will be palatable to the Republicans.
Senate Majority Leader Harry Reid (D-NV) unveiled the Democrats’ plan on Sunday night after the latest round of talks with Republicans broke down. It offers a $2.7 trillion package of cuts, an increase in the debt ceiling through 2012, and (perhaps most crucially) none of the tax increases that Republicans found so galling.
“We hope Speaker Boehner will abandon his ‘my way or the highway’ approach, and join us in forging a bipartisan compromise along these lines,” Reid said in a statement.
The Democrats’ maneuver comes as the Speaker of the House of Representatives, John Boehner (R-OH), announced that the Republicans would press for a short-term increase to the debt ceiling along with $3-4 trillion-worth of spending cuts and a program of long-term deficit reduction.
Under US law, Congress sets a maximum cap on the amount of money that the government can borrow. Currently, that cap is set at $14.294 trillion. On August 2, the government is projected to reach that cap and, according to the US Treasury, failing to increase the debt ceiling would leave the government in default of its obligations.
Although both Republicans and Democrats agree in principle that a default would be a bad thing, many Republicans are eager to use the issue as leverage in their bid to achieve their long-term financial objectives. Spurred on by the Tea Party, the Republicans want to see drastic spending cuts put in place before any increase in the debt ceiling is voted through. Because they control the House of Representatives, a certain amount of bipartisan agreement is essential before any plan can pass into law.
Vice President Joe Biden led bipartisan talks aimed at finding common ground which produced a plan for $1.5 trillion in cuts over 10 years, mostly through discretionary spending. But further agreement proved impossible when the Republican participants refused to countenance any tax increases.
Last week, the Republican-controlled House passed the Cut, Cap and Balance Act. It would have cut total spending by $111 billion in Fiscal Year 2012 and scaled back total federal spending by a percentage of the Gross Domestic Product. Also, it would have increased the debt ceiling, provided that the states ratified a balanced budget amendment to the Constitution. Obama made it quite clear that he would veto the act if it ever reached his desk, but it ended up dying in the Democrat-controlled Senate.
No doubt the president and his party leaders hope that their latest proposal will win the Republicans’ approval by giving them much of what they have been clamoring for. Even if this plan becomes law, America’s credit rating may still be downgraded, which could result in higher interest rates for mortgages, credit cards, and student loans.