Republicans expected to scupper Obama's plans for taxing the rich

Published on Monday 18 July 2011 15:30

Republicans holding up an increase in the United States Government's debt limit - a move that could produce the first ever debt default, shaking global markets - were expected to push ahead with a dramatic spending cut plan this week that will not get past the White House.

Republican Congressmen are set to offer a plan that dramatically cuts Washington's spending, rules out any tax increases, and calls for a balanced-budget amendment to the US Constitution that would require the government to not spend more than it takes in.

The effort is mostly an opportunity for the Republican Party, particularly dozens of new lawmakers elected to the House with the support of the conservative Tea Party movement, to showcase their ideological purity by forcing the country on course to a balanced budget.

Congress and President Barack Obama face a 2 August deadline for raising the debt limit above the current 8.92 trillion level. Failure to do that would leave the US unable to meet its obligations to holders of Treasury bonds and domestic obligations such as social security payments and government pension plans. That could create turmoil in world and domestic financial markets and hobble global economies that are still struggling to recover from the financial crisis that began in 2008.

So far the consensus in US bond markets remains that Mr Obama will reach a last-minute deal. But there are warnings that this belief could falter later this month when the US begins hefty sales of new debt to bond investors.

The Republican-controlled House of Representatives appears prepared to set a collision course with the White House. In seeking a "Grand Bargain" that includes massive spending reductions, Mr Obama has vowed to veto any legislative measure that does not also include higher taxes for America's wealthiest citizens and corporations, including the elimination of tax breaks for hugely profitable oil companies.

To avoid that, the Democrat Senate majority leader Harry Reid, and his Republican counterpart, Senator Mitch McConnell, are said to be working on a plan that would allow Mr Obama to raise the debt limit without prior congressional approval, while exacting smaller spending cuts.

It had also been made clear that the Senate will have daily sessions until the matter is resolved.

In a statement Mr Reid said: "The Senate will stay in session every day, including Saturdays and Sundays, from now until Congress passes legislation that prevents the United States from defaulting on our obligations."

Mr Obama responded to critics of his plans, saying: "We can't let politics stand in the way of doing the right thing in Washington."

The president's so-called balanced approach - spending cuts coupled with more taxes on the wealthiest - appears to be gaining ground with voters.A recent Gallup poll found that 69 per cent of Americans favour that approach. Among those who are not wed to an entrenched party view, pragmatism seems to be gaining traction over ideology.

A poll from the Pew Research Center found that among independent voters, concern has shifted from fear that raising the debt ceiling would increase government spending to worry about the impact of the failure to raise it.

If the current debt ceiling isn't increased - which past Congresses have done as a matter of course no matter which party was in control - it will have far-reaching consequences.

Default would produce higher interest rates for consumers on mortgages, car loans and credit cards. It also would make US government borrowing more expensive and could stop government checks going to retirees, potentially causing turmoil domestically but also in world financial markets and international economies.