May 9 (Bloomberg) -- House Republicans, seeking to insulate themselves from criticism that they would let the U.S. default on its debt, are set to consider a measure to exempt federal payments to creditors from a borrowing-limit cap.
The House is scheduled to vote today on the bill, which has almost no chance of advancing in the Democratic-led Senate and faces a veto threat from President Barack Obama if enacted.
Still, the plan signals the start of a protracted debate over the nation’s borrowing authority. The reason for the measure -- referred to as a debt-prioritization bill -- is simple: House Republicans won’t agree to a debt ceiling increase later this year without equal spending cuts. That could lead to a months-long standoff with Obama and Senate Democrats.
“Based on the way the debt ceiling and a lot of other financial issues have been handled over the course of the last four to five years, probably it’s inevitable we get to that point,” Representative Frank Lucas, an Oklahoma Republican, said in an interview.
That means, Lucas said, that Republicans see the legislation to prioritize debt payments as necessary if Congress can’t strike an agreement on the debt ceiling.
The House bill would ensure that U.S. government bondholders will continue to be paid and that Social Security benefits won’t be interrupted if a stand-off over the nation’s debt limit causes a cash crunch. The measure leaves it up to the Obama administration to decide which of the government’s other bills to pay using incoming tax revenue.
Democrats oppose the legislation, saying it’s political theater and would be irresponsible to decide to pay foreign creditors before Americans who need their government checks.
“I call it the ‘pay-China-first’ bill, because what it really means is we’ll pay China before we’ll pay veterans, before we’ll pay seniors, before we’ll pay contractors,” Maryland Representative Steny Hoyer, the No. 2 House Democrat, told reporters this week. “We’ll pay China first.”
Republicans maintain that they’re thinking ahead about handling the debt ceiling and the Senate would be wrong not even to consider the measure.
“The Senate would be opting for another showdown, another unnecessary round of uncertainty if they weren’t to take this bill up,” said Representative Kevin Brady, a Texas Republican. “It makes sense to do this, unless, you want to flirt with default, which we don’t. Why not take it off the table?”
Congress voted at the end of January to suspend the nation’s $16.4 trillion debt limit until May 19, temporarily removing the risk of a default. When the ceiling is restored May 19, it will be increased to reflect the government’s borrowing during the past few months.
The Treasury Department can ward off a default for several months beyond May by shifting money among government accounts. The latest estimates are the limit would be reached in September.
“Our goal here is to not default on our debt. Our goal here is to get ourselves on a sustainable path from a fiscal standpoint,” House Speaker John Boehner, an Ohio Republican, said in a Bloomberg Television interview May 7. “Doing a debt prioritization bill makes it clear to our bondholders that we’re going to meet our obligation.”
The bill, H.R. 807, would exempt from the limit federal payments on the principal and interest owed to bondholders. That would help ensure the government wouldn’t default on those payments even if incoming tax revenue on any given day wasn’t enough to cover the obligations.
To ensure that Social Security benefit checks aren’t interrupted, the measure would exempt interest payments to the Social Security trust fund. It also would require the Treasury to provide a weekly report to Congress accounting for all the exempted payments made.
The Obama administration opposes the Republican measure, saying it masks the real issue.
Missing any of the government’s bills, regardless of who is owed, would be “another form of default -- you’re just choosing what to default on,” Treasury Secretary Jacob J. Lew told the House Budget Committee last month.
Boehner said the bill takes a fair approach.
“Those who have loaned us money, like in any other proceeding, if you will, court proceeding, the bondholders usually get paid first. Same thing,” Boehner said in the Bloomberg Television interview.
While Obama has said he won’t agree to conditions placed on a debt limit increase, Republicans say they’re determined to extract federal spending cuts and changes to programs such as Medicare, Medicaid and Social Security. House Republicans will meet May 15 to discuss their strategy on the debt limit once Treasury makes its formal request.
Republican leaders are also weighing whether to spell out the steps and timing of a tax-code rewrite as a trigger for raising the borrowing limit. Their goal is to curb tax breaks and use the resulting revenue to lower rates.
They are considering a strategy to act early, with legislation that would authorize a debt-limit increase on their preferred terms to increase pressure on the White House.
Still, the refusal by House Republicans to consider tax increases, even in return for changes to Medicare and Social Security spending, may set up another fiscal showdown.
In 2011, lawmakers fought for months over raising the nation’s debt limit. Obama signed a debt increase measure into law on Aug. 2, 2011, the day the Treasury Department warned that U.S. borrowing authority would expire.
The bitter negotiations led to the Budget Control Act of 2011, which set discretionary spending caps for 10 years and created a process that resulted in the automatic spending cuts known as sequestration. The cuts started in March.
Credit markets weren’t rattled by the 2011 standoff, as yields on 10-year Treasury notes declined to 2.61 percent on Aug. 2 from 3.18 percent on July 1, 2011, and continued to fall to 1.88 percent at year-end.
Standard & Poor’s downgraded the U.S. credit rating for the first time on Aug. 5, 2011, citing the partisan wrangling over the debt limit. The stock market reacted, with the benchmark Standard & Poor’s 500 Index falling 16.8 percent between July 22, when talks on a broad agreement faltered, and Aug. 8, the first trading day after the rating downgrade.
Stocks in the U.S. have since rebounded, with the S&P 500 gaining almost 46 percent from Aug. 8, 2011, through yesterday. Yields on 10-year Treasuries were 1.77 percent as of yesterday in New York.
The debt limit has been raised periodically since its creation in 1917, with Congress increasing or revising it 79 times, including 49 times under Republican presidents, since 1960.
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