The People News, a free newspaper serving Cleveland Tennessee (TN) and Bradley County Tennessee (Tn).

Of Bradley County Tn.

AUGUST  2011






Debt-Deficit Deal
Your questions answered

Raising the national debt ceiling and what it will do for the future federal deficit.

Editor's note: Many people are asking what the new debt reduction plan enacted by Congress will do and will is lead to less federal government spending and a balanced budget. Jim Abrams answers some of those questions in an article written for the Associated Press.

By JIM ABRAMS, Associated Press

WASHINGTON (AP) -- An explanation, in questions and answers, of key features in the debt-reduction plan, how it would work and possible impacts on programs:

Q. Why is the raising of the debt limit important?

A. The federal government now must borrow about 40 cents for every dollar it spends. Without congressional action by Tuesday to raise the debt limit, the Treasury would no longer be able to borrow and thus would not be able to pay all its bills. The White House has said that the government sends out 80 million checks a month to Social Security recipients, veterans, and people on disability, in addition to paying federal workers, contractors and military personnel. All that could be disrupted if Treasury can no longer borrow.

In addition, a borrowing default would almost surely drive up interest rates, making it more expensive to obtain mortgage or education loans, and push stock prices down, eating away at investments and retirement funds.

Q. How long will the government be able to continue borrowing under this plan?

A. The current debt ceiling is $14.3 trillion. Under the compromise, that would initially rise by $900 billion. It would later go up by another $1.2 trillion to $1.5 trillion. The amount would depend on the level of new deficit reduction measures that a special joint congressional committee is to come up with by Thanksgiving and Congress must vote on by the end of the year. The combined $2.1 trillion to $2.4 trillion increase would be enough to get the government through next year's presidential election without Congress and the president having to raise it again.

Q. What are the immediate effects of the spending cuts?

A. Probably not that much. Americans are already feeling the pinch from the federal government's new austerity mood in such areas as infrastructure spending and aid for educational programs. The compromise calls for initial cuts of more than $900 billion in federal agency budgets, but that's phased in over 10 years with the bigger cuts coming later in the decade. The Congressional Budget Office says that for next year the cuts would amount to only $21 billion out of total spending exceeding $3.6 trillion.

Bowing to the strong demands of Republicans, there will be no tax increases in this phase of deficit reduction.

The White House has emphasized that sacrifices from spending cuts will be shared by defense and non-defense programs and that Social Security and Medicare benefits as well as low-income programs will be spared.

In broader terms, some economists say that any shrinking of government spending at a time when the economy is hurting could make it more difficult to create jobs, invigorate the housing market or encourage investment in new industries.

Q. What happens next?

A. A 12-member special congressional committee, made up of three Republicans and three Democrats from each chamber, is supposed to write a bill by Thanksgiving for reducing deficits by another $1.5 trillion over the next 10 years. The House and Senate would then vote yes or no by Dec. 23 on the special committee's recommendations, but can't change them. The committee could get the savings by changing entitlement programs like Medicare and Social Security as well as tax law.

There are different interpretations of the committee's mandate. The White House insists that a rewriting of the tax code could mean the bringing in of more revenue from corporations or the wealthy. Republicans are equally insistent that there will be no tax increases involved in tax reform.

If the committee fails to come up with a plan, or it is rejected by Congress, an additional $1.2 trillion in spending cuts would automatically go into effect from 2013. Those cuts would be divided equally between defense and non-defense programs. Social Security, Medicaid and unemployment insurance programs would be exempted from automatic cuts. Any cuts to Medicare would fall on providers, not beneficiaries.

Q. Why did the negotiators set up a special committee?

A. Congress has frequently turned to commissions or special committees when it is confronted with issues that are just too sensitive or controversial for lawmakers to handle. Often these commissions write reports or make recommendations that Congress promptly ignores, but there have been instances of success. In the 1980s a commission promoted changes in Social Security, such as raising the eligibility age for retirement benefits, that strengthened the system. Commissions have also been used to produce lists of military bases to close. Congress could approve or reject the list but not change it. In all cases, lawmakers have approved the list.

The deficit-reduction committee will have considerable leverage. Rejecting its recommendation will trigger automatic cuts that would be painful to both Republicans and Democrats. The White House warned that infrastructure and education programs would be among those on the chopping block.

Q. Will this solve the nation's deficit and debt problems?

A. Not by a long shot. The deal calls for the savings of more than $2 trillion over the next decade. But with the government currently racking up deficits -- the difference between spending and revenues every year -- of more than $1 trillion a year, the prospects for achieving a balanced budget in the near future are dim. Similarly, the national debt, the accumulated amount the federal government owes, is now $14.3 trillion and will continue growing so long as the government spends more, including on interest, than what it raises in revenues.