Tom Ramstack – AHN News Legal Correspondent
Washington, DC, United States (AHN) – The Senate is scheduled to give final approval to a new debt ceiling Tuesday to save the U.S. economy from its first default in history within hours of running out of money.
The House approved the measure Monday evening.
Bickering between Republicans and Democrats continued down to the last hours before the vote.
The agreement that allows the U.S. government to borrow another $2.4 trillion also comes with tough new restraints on spending.
Spending levels would drop to the lowest levels since the Eisenhower Administration in the 1950s.
International markets reacted positively to the deal in Congress Monday. U.S. stocks rose by 1 percent when the New York Stock Exchange opened while the U.S. dollar increased in value compared to some foreign currencies.
The stock market gains were lost later in the day after a new report showed the U.S. manufacturing industry is performing poorly.
President Barack Obama admitted before the vote that he did not like the debt deal but felt there was no better option to avoid what he called “a default that would have had a devastating effect on our economy.”
Some of the first to feel the effect of the government running out of money would have been Social Security recipients and military personnel, both of whom would not have received their checks on time.
“Is this the deal I would have preferred? No,” Obama said during a press conference Monday.
“I believe that we could have made the tough choices required on entitlement reform and tax reform right now, rather than through a special congressional committee process,” he said. “This process has been messy. It’s taken far too long.”
The deal would raise the debt limit while reducing spending in two stages.
The first stage would cut $917 billion from the budget over 10 years. The second stage would require a special congressional committee to convene this year to find another $1.5 trillion in cuts by revamping the tax system and reducing social benefits.
The tax changes are most likely to eliminate tax breaks for high income individuals and corporations. Social benefit programs that could shrink under the plan include Medicare.
The higher debt limit would come on top of the nation’s current $14.3 trillion deficit. Much of the money is owed to China.
Obama administration officials said the additional $2.4 trillion in borrowing should give the U.S. government enough money to pay its bills until 2013.
“In the end, compromise won out,” White House Press Secretary Jay Carney said.
Former presidential candidate Sen. John McCain said the conservative sentiment created by the Tea Party helped sway the deal in favor of reduced spending instead of higher taxes.
“I agree the Tea Party movement has had an effect in that I don’t think without the Tea Party we would have had an agreement,” the Arizona Republican said in a television interview Monday on Fox News.
He said “the president had to back down” and give up “his primary position that we had to have tax hikes.”
Among critics of the debt ceiling deal is Republican presidential front-runner Mitt Romney.
He says the deal will result in higher taxes and a smaller military. Hundreds of billions of dollars in reduced government spending would come from the Defense Department budget.
“As president, my plan would have produced a budget that was cut, capped and balanced – not one that opens the door to higher taxes and puts defense cuts on the table,” Romney said in a statement. “President Obama’s leadership failure has pushed the economy to the brink at the eleventh hour and 59th minute.”
Other concerns are being raised by economists about the last-minute deal.
It might not be enough to prevent the U.S. economy’s credit rating from being downgraded from its current AAA level, which is the highest rating, economists say.
A downgrade would be likely to result in higher local taxes and more job cuts, according to economists.
“It definitely would have a dampening effect on the economy,” said Ellen Zentner, senior U.S. economist at Nomura Securities in New York.
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