Obama and Leaders Reach Debt Deal

President Obama and Congressional leaders of both parties said late Sunday that they had agreed to a framework for a budget deal that would cut trillions of dollars in federal spending over the next decade and clear the way for an increase in the government’s borrowing limit. The tentative agreement calls for at least $2.4 trillion in spending cuts over 10 years, a new Congressional committee to recommend a deficit-reduction proposal by Thanksgiving, and a two-step increase in the debt ceiling.

The debt limit would be increased by $900 billion in the first installment, subject to a Congressional vote of disapproval that President Obama would be able to veto. To prevent a default, $400 billion would be added immediately. A second increase of $1.2 trillion to $1.5 trillion would be available subject to a second vote of disapproval by Congress. At the same time, a new joint Congressional committee would be created to find cuts roughly matching the increase in the debt limit. If the evenly divided committee failed to agree on a plan, Congress would either have to approve a balanced budget agreement to the Constitution or accept an across-the-board cut in spending in line with the committee’s goal, with 50 percent of the savings coming from the Pentagon beginning in 2013. Medicare would also sustain cuts, though the reductions would be capped; Social Security and other programs would be exempt. The rationale for picking favored programs like the Pentagon for Republicans and Medicare for Democrats was to provide a strong incentive for the new committee to avoid a deadlock and deliver a deficit reduction plan that could clear Congress.

With the health of the fragile economy hanging in the balance and financial markets watching closely, the leaders said they would present the compromise to their caucuses on August 1 in hopes of enacting it before an August 2 deadline to avert default. Gene Sperling, a top economic advisor, said the deal protected Pell grants for college students and Medicaid spending, but perhaps more important, did not allow government to be held “hostage” by a Republican threat of default.