Barack Obama ready to concede cuts in bid to head off opposition in Congress

Published on Tuesday 12 April 2011 15:25

President Barack Obama will today set out his plan to tackle America's national debt, hoping a compromise of tax increases and spending cuts will head off another political showdown.

Just days after an 11th hour budget deal was struck to avoid a government shutdown, Washington is already gearing up for its next battle over the fiscal future. Mr Obama's plan, to be outlined this evening, comes in response to a Republican bill that would slash the deficit by more than $5 trillion (3.07trn) over ten years, largely through spending cuts. However, opponents say the plan, from House budget committee chairman Paul Ryan, lacks balance.

Instead, the president is expected to go for a mix of funding reductions and an end to Bush-era tax cuts for the well-off. One blueprint could be a plan already being prepared by a bipartisan Senate group amounting to around $4 trillion in debt reduction. It is likely that the White House will position the president's approach as a compromise in a bid to reach consensus with Republicans. If it doesn't, it could result in another bruising fight in Congress.

The US is currently bound to a limit on government borrowing of just short of $14.3trn, a total it is fast approaching.

Treasury secretary Timothy Geithner has told Congress to vote for an increase to the ceiling by the end of July or risk the US defaulting, with "Armageddon-like" consequences. Dean Baker, co-director of Washington-based Centre for Economic and Policy Research, said any default would "shake the US economy to its core".

He added: "It would be worse than the financial crisis of 2008. It will be a huge hit that would likely lead to the collapse of major banks."

With so much at stake, it is unlikely Congress will fail to comply to demands to raise the debt ceiling.

But it is feared that Republican and Democrat politicians could engage in a game of chicken as the looming deadline nears, with the Democrats likely to blink first. On Friday, Congress unveiled a plan to cut a further $38 billion from federal funding just an hour before a government shutdown.

The level of cuts was far higher than Democrats had said they would accept. More than half of the money slashed will hit education, labour and health initiatives.It is, therefore, possible the president will go as far as he can to reach consensus.

It has been reported Mr Obama will outline spending cuts to his flagship Medicare and Medicaid programmes in his keynote speech tonight.