Spending Cuts Helps to Avoid Default But Doesn’t Cure US Economy

Barack Obama in his speech minutes after signing the bill to cut spending by $2.4 trillion in two stages and raise the US borrowing limit by the same amount passed the Senate by 74 to 26 votes said that the debt bill finally passed by Congress on Tuesday was only the “first step” towards ensuring the world’s most powerful economy lived within its means.

President Barack Obama pledged americans to "fight for what the American people care most about - new jobs, higher wages and faster economic growth" in his speech minutes after signing the bill to cut spending by $2.4 trillion in two stages.

Obama criticized Congress for only focusing when “there is a timer ticking down” and a “disaster looming”. “It shouldn’t take the risk of default and the risk of economic catastrophe to get folks in this town to work together,” he said in the Rose Garden.

“Our economy didn’t need Washington to come up with a manufactured crisis to make things worse.” Mr Obama pledged to “fight for what the American people care most about – new jobs, higher wages and faster economic growth”.

Having lost the battle to include new tax revenues in the debt deal, the president stressed that he would insist on tax reform and closing loopholes for the wealthy when a special committee of Congress set up by the bill meets in the autumn to agree on the second tranche of cuts.

“We can’t balance the budget on the backs of the very people who have borne the biggest brunt of this recession,” he said, suggesting that the rows that have bogged down Washington for weeks will resurface within months.

President Barack Obama and lawmakers from across the political divide expressed relief over the hard-won compromise to raise U.S. borrowing authority. Nevertheless, U.S. stocks fell sharply as investors fretted over persistent economic and political uncertainties dogging the world’s largest economy.

The $2.1 trillion deficit-reduction plan approved by Congress falls short of S&P’s previous assertion that $4 trillion in deficit-reduction measures would be needed to show that Washington was putting the country’s finances in order.

The Senate’s approval through a 74 to 26 vote of the $2.1 trillion deficit-reduction plan, already passed on Monday by the Republican-controlled House of Representatives, warded off the immediate specter of a catastrophic U.S. debt default.

At the same time the deal to cut federal spending that President Obama signed into law on Tuesday does not actually reduce federal spending.

It is a well-known fact that by the end of the 10-year deal, the federal debt would be much larger than it is today.

The problem facing the nation has been clear for some time. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation’s annual economic output by 2021, largely because of the rising cost of Medicare, Medicaid and Social Security.

Americans will face higher taxes, particularly as investors begin to demand higher interest rates. Economists disagree about the amount of debt a nation can safely carry relative to the size of its economy, but there is widespread concern that 100 percent is too much, and that the weight of debt would begin to suppress economic activity.

“We needed to be more aware that we didn’t derail the economy in the short run, and we needed more deficit reduction in the long run,” she said. If the deal undermines the economic recovery, Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, noted, the decline in tax revenues could worsen the problem.

Senator Harry Reid, the majority leader, took a swipe at the Tea Party members, who stormed Washington in the 2010 mid-term elections promising to control spending.

Failed legislation supported by Tea Party Republicans to force the government to balance the budget indefinitely took negotiations over reducing the $14.3 trillion debt to the wire.

“The result of this Tea Party direction, of this Congress this last few months is very, very disconcerting and very unfair to the American people. It stopped us reaching a conclusion much earlier and we must go forward,” he said on the Senate floor. [via The Telegraph, Reuters and The New York Times]

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