After a drawn-out debate between the House and the Senate, Democrats and Republicans; Congress and the President reached a deal on August 2, 2011, to raise the debt ceiling. Because of the decision and the additional borrowed funds, the United States is safe from defaulting on its debt and will be able to pay its bills. The deal includes the following:
Immediately cuts spending by $917 billion and raises the debt ceiling by $400 billion. It will raise the ceiling by another $500 billion in February, providing funds through early 2013.
Creates a joint committee of twelve members from the House and Senate that will make recommendations for $1.5 trillion in deficit reduction measures, and if the plan is rejected by Congress, several automatic spending cuts will take effect.
Requires Congress to vote on adding a balanced budget amendment to the constitution, which would mandate that future spending cannot exceed revenues. If it passes, the debt ceiling can be raised by $1.5 trillion. If not, then it can only be raised by $1.2 trillion.
Lack of concrete details about how the deficit will be reduced sets the stage for continued political debate in the coming months and years. And with the downgrade of the U.S. securities AAA rating having already taken place, the credit agencies will watch carefully to ensure Congress takes action to steer the country in a financially solvent direction.
Bottom line: Crisis averted—it’s business as usual for now, but this is not the last to be heard regarding U.S. deficit and debt levels. Some reports indicate that this may change the game in Congress from “spend, spend, spend” to “cut, cut, cut.”
Sources: The Associated Press, WSJ.com, The Economist, Politico, KW TMIR August 2011
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