WASHINGTON — The Senate on Tuesday overwhelmingly approved a plan to raise the federal debt limit and cut government spending, ending a bitter partisan stalemate that had threatened to plunge the nation into default and destabilize the world economy.
One day after a climactic vote in the House, the Senate easily approved the measure, 74-26, with significant majorities of both parties supporting it. President Barack Obama promptly signed the measure and submitted a formal request to Congress to lift the $14.3 trillion debt ceiling, instantly giving the Treasury $400 billion in additional borrowing power.
With the immediate crisis averted, Obama and congressional leaders quickly turned their attention to the next front in the war over the federal budget: a new legislative committee that will be tasked with developing a broader plan to control the government’s debt.
The bipartisan panel, to be named this month, is likely to confront the same ideological divide that caused an almost crippling impasse in the debt-limit debate. Republican leaders are warning that they will not include anyone on the panel who is willing to raise taxes, prompting Democrats to threaten a hard line against cuts to Social Security and Medicare benefits.
Foreign investors and economic analysts view further action as crucial to restoring the United States’ financial reputation. On Tuesday, critics in China and elsewhere warned that the initial debt-reduction package, which would cut about $1 trillion from agency budgets over the next decade, is too modest. And they complained that the last-minute agreement will not tackle the dangers posed by national health and retirement programs to the government’s long-term fiscal health.
Meanwhile, the package did not cheer the stock market, which tumbled nearly 266 points, more than 2 percent, on worries that the U.S. economic recovery is stalling and that the debt plan might even undermine it by weakening demand in the next year or two.
These fears — that the deal will neither energize a foundering economy nor require substantive changes to address long-term fiscal problems — have discouraged some investors, especially after political leaders in Washington raised expectations in recent weeks that they would reach consensus on putting the nation’s financial house in order.
This disappointment comes at a time when debt troubles are already roiling several European countries, where government leaders have also struggled to move political mountains without delivering the comprehensive reforms that economic analysts say are needed to head off a financial meltdown. Financial markets in Italy and Spain were buffeted Tuesday as fears grew that a global economic slowdown would undercut efforts to get their debt under control.
Speaking in the White House Rose Garden after the Senate vote, Obama called the initial round of spending cuts in the package “an important first step” in forcing the government to live within its means.
“This compromise requires that both parties work together on a larger plan to cut the deficit,” he added. “And since you can’t close the deficit with just spending cuts, we’ll need a balanced approach where everything is on the table.”
The president stressed that the debt-reduction package avoids “cutting too abruptly while the economy is still fragile.” And he vowed to pivot rapidly to deal with a jobless rate stuck stubbornly above 9 percent.
He urged Congress to take “bipartisan, common-sense steps” after its August recess to boost job creation and spur economic growth, including permanently extending the President George W. Bush-era tax cuts for middle-class families, which are set to expire next year. He called for patent reform, the passage of trade deals with Asian and Latin American countries, and the creation of an “infrastructure bank” to fund federal projects and put construction workers back on the job.
Although Obama has urged that the new legislative committee consider the range of options for shrinking the national debt, it’s far from clear that everything will be on the table when the panel, composed of six lawmakers from each party, begins looking for further savings.
In an interview, Senate Majority Leader Harry Reid, D-Nev., said he would like to “put people on it who are willing to do entitlement cuts . . . people with open minds.” But the GOP’s uncompromising stand against tax increases “makes it pretty hard for me.”
House Budget Committee chairman Paul Ryan, R-Wis., argued that Democrats “have already got their tax increases,” including fresh revenue buried in last year’s health care overhaul. Ryan said he assumes that Obama and congressional Democrats will make good on their pledge to let the tax cuts that benefit high-income households expire on schedule.
“So their tax increases are coming,” he said. He said the new committee “could do a loophole closer here or there. But there’s no way you’re going to have significant revenues in the picture. You’re not going to get tax reform out of this thing.”
Independent budget analysts held out hope that the committee will revive ambitious debt-reduction goals that would require both political parties to make sacrifices.
“That is the key for people to understand: This is just phase one. This doesn’t get us to the promised land,” said Erskine Bowles, who was President Bill Clinton’s White House chief of staff and who served as co-chairman of a commission Obama set up last year to recommend ways to control federal borrowing.
“This doesn’t stabilize the debt or reform the tax code or slow the rate of growth of health care. There’s lots of work left to do.”
Highlights of budget, debt-limit pact
Congress has passed and the president has signed a measure that pairs an increase in the nation’s $14.3 trillion borrowing limit with spending cuts. The accord also creates a special committee to recommend bigger savings for a vote later this year. Highlights:
DEBT LIMIT: The measure immediately increases the debt limit by $400 billion, with President Barack Obama permitted to order another $500 billion increase this fall unless the House and Senate override him by veto-proof margins; a third installment of between $1.2 trillion and $1.5 trillion would be made available after enactment of matching levels of additional spending cuts recommended by a special joint committee of lawmakers. The full $1.5 trillion could also be available if Congress adopts and sends to the states for ratification a balanced- budget amendment to the Constitution.
SPENDING CAPS: The measure cuts more than $900 billion over 10 years from the day-to-day operations of Cabinet agencies whose budgets are passed each year by Congress. Both security and nonsecurity programs would absorb outright cuts in 2012. Defense hawks are protesting likely cuts to the Pentagon.
ADDITIONAL CUTS: The plan creates a 12-person House-Senate committee evenly divided between the political parties, charged with producing up to $1.5 trillion more in deficit cuts over 10 years.
This second wave of spending cuts would focus on so-called mandatory programs whose spending levels are set by formula. They include Medicare, the Medicaid health program for the poor and disabled, farm subsidies and federal retirement programs.
If a majority of the committee agrees on a plan, it would receive a vote in the House and the Senate. If the panel deadlocks or fails to produce at least $1.2 trillion in additional cuts, or if Congress fails to enact its recommendations, the White House budget office would impose spending cuts across much of the federal budget.
OTHER: The plan also requires the House and the Senate to vote on a balanced-budget amendment to the Constitution; establish “program integrity” initiatives aimed at stemming abuses in Social Security and federal health care programs; and preserve recent funding increases for Pell Grants for low-income college students.
