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Thursday, July 28, 2011

Debt deal poses severe political risks for Obama

WASHINGTON, - The U.S. Congress, known for moving painfully slowly, can kick into high gear when it is staring down a deadline important to the entire country -- or when lawmakers are approaching their cherished August recess.

Luckily for those who want to see Congress promptly raise the the United States' borrowing limit after months of squabbling, both of those conditions are now in play.

Members of Congress have two key dates foremost in their minds right now: Aug. 2 and Aug. 5.

On Aug. 2, without an increase in the Treasury Department's $14.3 trillion limit on borrowing, the federal government might not have enough money to pay all its bills.

On Aug. 5, the Senate and House of Representatives are scheduled to begin a monthlong summer recess. When a recess is around the corner, lawmakers are famous for cranking out legislation that has been stalled.

The running joke among journalists who cover Congress is that once lawmakers begin "smelling the jet fumes" of the airplanes that will spirit them to their recess destinations, legislation gets passed.

Republicans in Congress, especially those with links to the Tea Party movement, say enough is enough. It is time, they say, for America to live within its means and the first step towards ensuring national solvency is to prevent Washington from carrying on the borrowing binge by raising the ceiling on what the country can borrow. If that requires big cuts in public spending, then so be it. Like George Osborne, Republicans think getting tough on debt and the deficit will be good for growth, because an austerity programme will keep creditors sweet and result in lower long-term interest rates for businesses and home owners.

Democrats see things differently. They argue that higher public borrowing is needed in the US to compensate for the adjustment private individuals and companies have been making to their finances after the debt bonanza in the years leading up to the financial crisis. Were the government to retrench at the same time as the private sector is tightening its belt, the result would be a double-dip recession.

This is something Obama cannot afford with a presidential election now little more than 15 months away. House prices have been falling for the past four years and there are getting on for 30 million Americans in negative equity. No president has been re-elected with unemployment at anywhere close to its current levels since Franklin Roosevelt.

So what next? The assumption is that some sort of compromise will be agreed, although the suspicion is that – as with Europe's latest debt deal – it will involve giving the can a hefty kick down the road. That means a short-term increase in the debt ceiling, with a long-term deficit reduction plan awaiting the election of a new Congress in 2013.

That, broadly, is what the IMF favours, since the fund is worried that over-hasty deficit reduction would harm the US's short-term growth prospects. Republicans will probably only agree to this sort of deal if they get agreement from Obama that the deficit will be reduced through spending cuts rather than tax increases. For Obama, the risks are obvious. A short-term fix helps him get re-elected, but his second term is spent alienating his own supporters through draconian spending cuts while the Bush tax cuts for the well-off remain untouched.

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