United States Public Debt

US must resolve bitter budget feud

PUBLISHED : Monday, 18 July, 2011, 12:00am
UPDATED : Monday, 18 July, 2011, 12:00am

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The eurozone debt crisis is real enough, with fears of contagion making markets jittery. Alongside it, the deadlock in negotiations over raising the US debt ceiling has seemed a touch surreal. The partisan acrimony that has polarised American political discourse is real enough, but surely not the unthinkable prospect of a US debt default that could send shock waves through the financial world.

With two weeks to go before the August 2 deadline, however, brinkmanship in the talks is bringing the unthinkable too close for comfort, with President Barack Obama having angrily walked out of a negotiating session, according to one - disputed - version of it. As a result, ratings agencies Moody's and Standard and Poor's have served notice of a possible debt rating downgrade if the ceiling is not lifted in time to avoid a default, which would raise the country's borrowing costs, and China has called on Washington to protect the interests of investors. It is not the first time Beijing has appealed to the US to put its house in order and protect the country's creditworthiness. During the global financial crisis Premier Wen Jiabao expressed worries about the security of China's massive investment in US Treasury bonds, now standing at US$1.153 trillion. This time a Foreign Ministry spokesman has called on Washington to adopt responsible measures. Hopefully commonsense will guide efforts to break the deadlock that are continuing in both houses of the US Congress and the White House. But China has every reason to speak out, given what it has at stake and the extraordinary way in which the US is handling a grave matter of its own making.

The main stumbling block to raising the debt ceiling above US$14.29 trillion is in the Republican-controlled House of Representatives, where the tea party faction is demanding savage budget cuts and no new revenue, even from closing loopholes in tax law that was always intended to raise it. It has extended a bitter feud with the Democrats over government spending into rejection of every compromise entertained by other factions, including Obama's offer to slash the deficit by US$4 trillion over 10 years and trim 'untouchables' like Medicare and Medicaid.

Obama's bottom line is now US$1.5 trillion in return for enough debt-raising to get the federal government through next year's presidential election. Congressional leaders are working on complex plans that would lift the debt ceiling through next year in return for a balanced-budget constitutional amendment, or a political device for Obama to raise the ceiling without a vote by lawmakers, which would enable Republicans to deny responsibility. A simple deal of the kind presidents and lawmakers have agreed to break past budget impasses would be better, but anything is preferable to the alternative of no deal.