Debt Deal Compromise to Spark Debate Over Medicare Cuts, Taxes

President Barack Obama’s signature on a bill raising the debt limit sealed a compromise that averted a U.S. default even as it did nothing to narrow the gulf between Republicans and Democrats over tax increases and spending cuts.

The measure postpones the thorniest fiscal dilemmas for later this year when the 2012 election campaign will intensify. A panel of lawmakers must push through a $1.5 trillion debt- reduction package by year’s end -- or risk automatic spending cuts across the government, including defense and Medicare.

That means the disputes that prolonged negotiations on the debt limit will be refought. The stakes were underscored hours after Obama signed the bill when Moody’s Investors Service said it may downgrade the U.S. credit rating for the first time on concern fiscal discipline may ease and the economy may weaken. In addition, China, the largest foreign investor in U.S. government securities, joined Russia in criticizing American policy makers for failing to ensure that U.S. borrowing is reined in.

Obama, who pressed unsuccessfully during the talks for a “balanced approach” to shrink deficits with tax increases and spending cuts, said the panel must put both on the table.

“We can’t balance the budget on the backs of the very people who have borne the brunt of this recession,” he said in the White House Rose Garden yesterday. “Everyone’s going to have to chip in. That’s only fair. That’s the principle I’ll be fighting for during the next phase of this process.”

Focus on Panel

Attention now focuses on the mandate of the 12-member super-committee of lawmakers. Congress would either have to approve the panel’s recommendations by Christmas or send a balanced-budget constitutional amendment to the states for ratification -- an unlikely scenario given Congress’s makeup -- to avoid the across-the-board cuts.

For all the anxiety in Washington over the debt debate, investors made more money buying Treasury securities in July than any month this year -- earning $183,000 for every $10 million invested. They drove yields on 10-year notes -- a benchmark for everything from mortgage rates to corporate debt - - to the lowest levels since November.

Treasury 30-year bonds rallied the most in more than a year yesterday. Yields on 30-year bonds dropped 17 basis points, or 0.17 percentage point, to 3.91 percent in New York, according to Bloomberg Bond Trader prices. The 10-year note yields touched 2.60 percent, the lowest since Nov. 9.

Two Weeks to Go

Congressional leaders have 14 days to name the group’s members -- the two top Republicans and Democrats in the House and Senate each will name three -- and were already disagreeing about the nature of its work.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he would announce his choices “very soon” and predicted that the panel won’t raise taxes. House Speaker John Boehner, an Ohio Republican, also said he won’t choose anyone who would back a tax increase.

And Representative Paul Ryan of Wisconsin, the Budget Committee chairman, said in a blog post yesterday that the White House was seeking to make it easier for the panel to “propose the kind of large, job-destroying tax hikes that the president tried so hard to get during this round of negotiations.”

Revenue and Reductions

Senate Majority Leader Harry Reid, a Nevada Democrat, made it clear he expected the committee to consider using revenue as well as spending cuts to shrink the deficits.

“The vast majority of Democrats, independents and Republicans think this arrangement we’ve just done is unfair because the richest of the rich have contributed nothing,” he said before calling a vote on the measure. “There has to be some revenue that matches” the spending cuts, he added.

The legislation cleared the Senate yesterday by a bipartisan 74-26 vote, a day after the House passed it 269-161.

The new law cuts $917 billion in spending over the next decade and raises the $14.3 trillion debt limit by $900 billion, with an additional $1.2 trillion in borrowing authority available early next year. That second round of borrowing would trigger spending cuts of an equal amount unless Congress first approves the debt-reduction package or, by a two-thirds vote in both the House and the Senate, passes the balanced-budget amendment.

‘Culture of Overspending’

The measure drew opposition from lawmakers and interest groups on both ends of the political spectrum, with fiscal conservatives arguing that it was insufficient to slash spending and rein in the debt and Democratic-leaning groups saying it savaged programs for the most vulnerable without asking the wealthy to contribute to deficit reduction through higher taxes.

The legislation “continues to perpetuate the culture of overspending and borrowing,” said Senator Kelly Ayotte, a New Hampshire Republican who voted no. “This agreement does not reduce the size of government at all.”

Even many who supported it said they were doing so grudgingly.

“With a heavy heart, there are parts of it that I will struggle to explain and defend, but I can’t let this American economy descend into chaos,” said Senator Dick Durbin of Illinois, the chamber’s second-ranking Democrat. Higher-income people, he said, “should feel that they, too, are called to sacrifice.”

Democratic-aligned political groups blasted the deal and said they would pressure lawmakers who depend on their support to do better in future fights over deficit reduction.

Holding Economy ‘Hostage’

“One party held our economy hostage, while the other party failed to stop them,” said Justin Ruben of MoveOn.org, whose political action committee backs “progressive candidates.” The group’s members “are angry, we are motivated and we will not sit and watch as vital programs like Medicare, Medicaid and Social Security are put on the chopping block to finance more tax cuts to corporations and the wealthy.”

Republicans, too, said the legislation would help frame the issues central to the 2012 campaign. In a memo circulated yesterday, Senator John Cornyn of Texas, the Republicans’ Senate campaign chief, advised 2012 candidates to “remind voters that the only obstacle preventing Congress from passing a Balanced Budget Amendment (BBA) and sending it to the states is the fact that there are too many Senate Democrats, and too few Senate Republicans.”

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at jdavis159@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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