July 19 (Bloomberg) -- President Barack Obama embraced a $3.7 trillion debt-cutting plan by a bipartisan group of senators that would combine tax increases and spending cuts, saying it could offer a way out of the congressional deadlock over raising the U.S. borrowing limit.
“We now are seeing the potential for a bipartisan consensus,” Obama said today at the White House. He called the proposal by the so-called Gang of Six “broadly consistent” with what he has sought and “a very significant step” in so far fruitless negotiations between Republicans and Democrats over boosting the nation’s $14.3 trillion borrowing authority before a threatened default on Aug 2.
Obama said talks with congressional leaders from both parties would resume at the White House this week. U.S. stocks and Treasuries extended gains after the president spoke, signaling optimism that lawmakers can reach an agreement.
At the Capitol, the bipartisan group led by Republican Senator Saxby Chambliss of Georgia and Senator Mark Warner of Virginia pitched its plan for an immediate $500 billion in spending cuts followed by a longer-term effort to force bigger reductions and $1 trillion in tax increases. The plan calls for lowering tax rates and limiting the growth of entitlement programs such as Medicare and Social Security.
About 50 senators, roughly evenly divided between the two parties, attended a closed-door briefing on the plan, a sign of potentially widespread support for the kind of “grand bargain” to reduce the debt that Obama is urging. One member of the Republican leadership, third-ranking Senator Lamar Alexander of Tennessee, publicly endorsed the plan.
“In the next 24 hours, you’re going to see a significant portion of the Senate come behind this -- bipartisan -- maybe 60 members, and let’s see how things roll,” said Republican Senator Tom Coburn of Oklahoma, who rejoined the Gang of Six today after he abandoned the talks in May over an impasse on Medicare cuts. “This doesn’t solve our problems, but this creates the way forward where we can,” he said.
Senator Joseph Lieberman, a Connecticut independent, said in the “best of all worlds” the proposal would be approved as part of the debt-ceiling increase.
Still, Tea Party-backed fiscal conservatives oppose any debt compromise that includes more taxes.
It Won’t Fly
“Tax increases aren’t going to fly in the House,” said Republican Representative Kevin Brady of Texas, a member of the tax-writing Ways and Means Committee. “That’s not going to change.”
Some lawmakers cast doubt on whether it would offer a quick solution to the current conflict, in which Republicans have insisted on coupling spending cuts with any borrowing boost.
“There are a lot of practical, procedural difficulties” to advancing the plan during the next 13 days, and “I’m just being practical, trying to be realistic,” said Senator Max Baucus of Montana, the Democratic chairman of the Finance Committee, which has jurisdiction over taxes. “The real question is: What can we accomplish prior to Aug. 2?”
Senate Majority Leader Harry Reid of Nevada said he asked Warner to report back to him by tomorrow about which elements of the group’s plan might be included in a backstop proposal he is working on with Republican leader Mitch McConnell to provide $2.4 trillion in new borrowing authority in installments.
No Quick Vote
Reid said the Senate’s rules wouldn’t allow such a plan to be passed quickly. “I don’t want to do anything to jeopardize the enthusiasm people have for the Gang of Six, but I am the person who runs the Senate.”
The White House believes the plan can help Obama make the case for a “balanced” approach -- including tax increases as well as spending cuts -- to cutting the deficit, according to an administration official who spoke on condition of anonymity to discuss internal deliberations. Still, it will need more vocal public support from Republican senators to overcome House Republicans’ resistance to tax increases, the official said.
McConnell of Kentucky was noncommittal. “I don’t have an opinion yet,” he told reporters.
House Speaker John Boehner, an Ohio Republican, was also leaving his options open. “This plan shares many similarities with the framework the speaker discussed with the president, but also appears to fall short in some important areas,” spokesman Michael Steel said in an e-mail.
House Majority Leader Eric Cantor, a Virginia Republican, said in a statement issued tonight on the Gang of Six proposal that “while there are still portions that are unclear and need more detail, this bipartisan plan does seem to include some constructive ideas to deal with our debt.”
The House remained focused on a measure that would slash spending while conditioning a $2.4 trillion debt-ceiling increase on passage of a constitutional amendment to balance the budget and make it more difficult to raise taxes. That bill, approved 234-190 tonight, stands little chance of being endorsed by the Democratic-controlled Senate, and Obama said he would veto it.
Boehner said he was considering what would follow the House vote.
“It’s responsible for us to look at what Plan B would look like” because “there are a lot of options available to us,” the speaker said.
McConnell and Reid are negotiating on a separate track on their plan to let Obama raise the debt ceiling unilaterally while proposing commensurate spending cuts. They were discussing empowering a bipartisan group of lawmakers to propose those reductions and setting out consequences if the debt savings weren’t achieved.
Reid is keeping keep the Senate in session daily -- including weekends -- until the debt ceiling impasse is resolved. The House’s Republican leaders informed members today that the chamber may be in session this weekend.
The re-emergence of the Gang of Six, which had faded as its work dragged on without an agreement, held out hope for a longer-term agreement on reining in the debt.
It would institute an initial $500 billion of spending cuts, then lay out targets and enforcement mechanisms for forcing more future reductions, including between $85 billion and $202 billion in Medicare and other health spending, $80 billion from defense, $70 billion from education and labor programs and $11 billion from agriculture programs, according to a summary.
It would also call for a broad tax overhaul that would raise $1 trillion by limiting breaks for health, charitable giving, homeownership and retirement while lowering individual and corporate tax rates. And it would scrap the Alternative Minimum Tax, a parallel system designed to prevent higher-earners from avoiding taxes.
The plan and Obama’s endorsement boosted optimism in the markets.
“This is the biggest on-the-announcement move we’ve had” in the debt-limit negotiations, said Carl Lantz, New York-based head of interest rate strategy Credit Suisse Securities USA LLC.
Stocks surged, sending the Standard & Poor’s 500 Index to its biggest gain in four months, and Treasuries rallied amid optimism lawmakers were moving closer to a deal.
The S&P 500 jumped 1.6 percent to 1,326.73 at 4 p.m. in New York. Ten-year Treasury note yields lost five basis points to 2.88 percent, and 30-year bond yields fell 12 basis points to 4.19 percent at 5:03 p.m. in New York, according to Bloomberg Bond Trader prices.
“The upside in Treasuries has been a function of this new, more robust proposal from the Gang of Six,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s a reasonable amount of perceived momentum behind that, the concept being that’s the type of proposal needed to keep the credit-rating agencies at bay.”
Still, some analysts said there was less to the outline than meets the eye, noting that while the group laid out goals for long-term savings, it doesn’t actually make the promised cuts.
“The market completely overreacted to this Senate plan,” said Tom Porcelli, chief economist at RBC Capital Markets. “There’s an idea that could easily go nowhere.”
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