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Obama’s call for stimulus, tax hikes may complicate deficit talks

By Reuters
Thursday, June 30, 2011 8:29 EDT
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WASHINGTON (Reuters) – President Barack Obama called on Wednesday for new steps to spur job growth and tax hikes on the rich, hardening a stance that will likely complicate deficit reduction talks with Republicans.

Obama’s call came as the International Monetary Fund and the Treasury Department urged Washington to reach a budget deal that would pave the way for Congress to raise the United States’ $14.3 trillion borrowing limit by August 2.

Failure to increase the debt ceiling, which caps how much the United States can borrow, would likely trigger a default that could plunge the United States into a new recession and roil global financial markets, the Obama administration and economists warn.

Obama’s push for new construction loans and an extension of a payroll tax cut could further alienate Republicans already incensed by Democratic demands for new tax revenue.

Challenging lawmakers to make “substantial progress” by the end of this week or cancel plans for the July 4th holiday weekend, Obama upped pressure on Republicans by tying them to tax breaks for “millionaires and billionaires” while warning of default.

“If the United States government, for the first time, cannot pay its bills, if it defaults, then the consequences for the U.S. economy will be significant and unpredictable,” he told a White House news conference, reminding Republican Party backers on Wall Street of the stakes involved.

Standard and Poor’s rating agency told Reuters it would immediately cut the United States’ top-notch credit rating if it missed a $30 billion debt payment on August 4.

With the country still struggling to emerge from the deepest recession since the 1930s, Obama said Congress needs to take steps to bring down the 9.1 percent unemployment rate even as it weighs medium-term austerity measures.

“There are more steps that we can take right now that would help businesses create jobs here in America,” he said.

Those measures likely would add hundreds of billions of dollars to budget deficits at a time when the White House and lawmakers are trying to narrow them by more than $1 trillion.

Congressional Republicans, determined to cut spending, say additional stimulus have no place in the debt ceiling talks.

“The president’s remarks today ignore legislative and economic reality,” said Republican House of Representatives leader John Boehner. “The president is sorely mistaken if he believes a bill to raise the debt ceiling and raise taxes would pass the House. The votes simply aren’t there.”

The budget deficit for the fiscal year that ends September 30 is expected to hit $1.4 trillion, one of the highest as a share of the economy since World War Two.

Since deficit-reduction talks collapsed last week, Republicans and Democrats have made no progress on a deal to allow Congress to extend the government’s borrowing authority.

But Obama, invoking the example of his daughters Sasha and Malia, told Congress to do its job: “They don’t wait until the night before. They’re not pulling all-nighters. They’re — they’re 13 and 10. You know, Congress can do the same thing.”

Analysts said Obama had not broken new ground, but forcefully framed Democrats as backing ordinary Americans while Republicans look out for the wealthy.

This is “the strongest argument that Democrats have made in a while in the whole budget area. They’re talking about trade-offs, a balanced package,” said Andy Laperriere, an analyst with the ISI Group in Washington.

But, Obama “was asked to draw a line in the sand over requiring higher taxes to get a deal, and he declined,” Laperriere said.

Obama, echoing an argument his administration has made for weeks, sought to paint Republicans as siding with the rich and powerful over middle class Americans.

“If we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners … then that means we’ve got to cut some kids off from getting a college scholarship,” he said.

Time is running out for the White House and Republicans to reach a deficit reduction deal.

The International Monetary Fund said on Wednesday that failure to reach a deal soon could deliver a “severe shock” to a still-fragile recovery and global markets.

Financial markets have so far shown little concern, but credit-rating agencies have warned they could reassess their outlook on U.S. debt if a deal is not in the works by mid-July.

“If the U.S. government misses a payment, it goes to D,” said Standard and Poor’s managing director John Chambers, speaking of the country’s debt rating.

Geithner said investors would shun U.S. debt after the August deadline even if Treasury made debt payments its top priority — an approach backed by some conservative Republicans.

“There is no credible budget plan under which a debt limit increase can be avoided,” he warned.

Obama met top Senate Democrats later on Wednesday to discuss the deficit negotiations.

(Writing by Andy Sullivan and Alister Bull, additional reporting by David Morgan, Glenn Somerville, David Lawder, Patricia Zengerle, Richard Cowan and Emily Stephenson in Washington and Ellen Freilich in New York; Editing by Cynthia Osterman)

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