US Senate approves debt ceiling bill, averts default

02 August 2011 17:59  [Source: ICIS news]

WASHINGTON (ICIS)--The US Senate voted 74-26 on Tuesday to approve an increase to the federal government’s borrowing authority, an action that pulls the US back from the brink of default and potentially catastrophic financial consequences.

With Senate approval - and following Monday night’s endorsement by the House - the measure was on its way to the White House where President Barack Obama was expected to sign it into law promptly.

Under the bill, the federal government would put a hold on current spending and cut expenditures by as much as $2,500bn (€1,750bn) over 10 years, with spending reductions for both domestic and military programmes.

The deal provides for an immediate $1,000bn increase in the nation’s borrowing authority or debt ceiling, which is currently at $14,300bn.

That $1,000bn would be matched by about $1,000bn in first stage spending cuts over 10 years.

An additional $1,500bn in borrowing authority would kick in later this year, providing that a special bipartisan congressional committee comes up with up to $1,500bn in further debt reduction measures by late November.

Congress would have until 23 December to either approve or reject the special committee’s recommended package of debt reductions. 

However, if Congress were to vote against the cuts package or simply fail to pass it, that rejection would trigger an automatic, across-the-board reduction in federal spending equal to $1,500bn.

The bill also provides that Congress must vote on an amendment to the US Constitution that would require that every federal budget going forward would be balanced - meaning that Congress could not spend more money than is available in tax revenues.

If Congress were to approve such a balanced budget amendment, it would have to be ratified by two-thirds of the 50 US states before becoming law.

With passage by the Senate, the debt limit increase measure was expected to be hand-carried to the White House for signing by Obama.

With the president’s signature, the US will avoid possible default on its sovereign obligations, which could have happened as soon as Wednesday, according to the US Treasury Department.

Although the debt increase measure avoids a near-term default by the federal government, its terms might not be sufficient to avoid a downgrade of the nation’s triple-A credit rating.

($1 = €0.70)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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