The House of Representatives passed an agreement Monday, called the Budget Control Act of 2011, that would raised the debt ceiling until 2013 and cut the federal deficit by about $2.1 trillion over a 10-year period.
The two-stage agreement, which was criticized by both tea party lawmakers and progressive Democrats, passed by a vote of 269 to 161.
Rep. Gabriel Giffords (D-AZ), who was shot in the head by a gunman in January, also cast a vote of "yes" amid applause from her colleagues.
The Senate hopes to hold a debt ceiling vote on Tuesday.
The agreement was struck in 11th hour talks Sunday by President Barack Obama and congressional leaders from both parties as the August 2 deadline to raise the country's $14.3 trillion debt ceiling loomed.
According to the Treasury Department, the legislation needs to reach Obama's desk by Tuesday at the latest to ensure the U.S. doesn't default and to avoid rising interest rates.
The first stages includes a $917 billion cut to the federal budget, with approximately $420 billion coming out of the defense budget, and a $900 billion increase to the debt ceiling.
The second stage involves a 12 member bipartisan special joint committee of Congress, which would be responsible for drafting additional budget legislation by November 23 to reduce the budget deficit by about $1.2 trillion. If the legislation drafted by the committee is passed by December 23, Obama would be allowed to raise the debt ceiling by another $1.5 trillion.
The agreement also calls for Congress to vote a balanced budget amendment to the Constitution that was demanded by tea party lawmakers, but does not require the budget amendment to be passed in order to raise the debt ceiling.
Bruce Bartlett, a former economic adviser to President Reagan, described the budget amendment as "quite possibly the stupidest Constitutional amendment that I think I have ever seen," adding that it "looks like it was drafted by a couple of interns on the back of a napkin."
Democratic critics of the agreement to avert a disastrous U.S. debt default while cutting some $2.1 trillion in government spending over ten years have noted that retrenching government outlays is likely to hurt U.S. growth.
“This deal does not even attempt to strike a balance between more cuts for the working people of America and a fairer contribution from millionaires and corporations,” Progressive Caucus leader Rep. Raul Grijalva (D-AZ) said in a statement Sunday night. “I will not be a part of it.”
But for fiscal 2012, beginning in October, only $21 billion will be cut from expected spending of up to $3.7 trillion, and only $41 billion the following year.
"The so-called 'immediate' spending cuts of $917 billion do of course not begin this year. And they barely have an impact in 2012 or 2013 either," said Harm Bandholz on UniCredit Bank.
"In a $15 trillion economy, the impact... is negligible," said John Ryding of RDQ Economics.
Fears were that an effort by hardline Republicans to radically pare the country's budget shortfall and accumulated debt could force the near-stalled U.S. economy back into recession.
Instead, though, what significant reductions there was will only come later in the 10-year outlook -- hitting $100 billion a year in 2017 and rising from there.
"The real meaning (of the deal) is only that we don't have a debt ceiling fiasco in the next few weeks," said Ryding.
"The two things that needed to be done... to have a broad-based tax reform (and) to reform the entitlement programs, they weren't touched as part of this deal," he said.
But any tightening of spending, economists warned, spelled trouble for the economy, which virtually stagnated in the first half of the year, growing at roughly a one percent annualized pace.
With government spending a key economic driver, possible cuts could have forced more layoffs in both the public and private sectors, pressing the 9.2 percent unemployment rate higher.
"Although the impact of these cuts of the next couple of years is likely to be small, there's a more direct relationship between spending and jobs than there is between taxes and jobs," said Henry Blodget, who Business Insider, a website of economic and market analysis.
"The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further," wrote Paul Krugman, New York Times columnist and Nobel economics laureate.
At the same time, the deal, many worried, did not go far enough for the country to avoid a historic cut in the country's AAA debt rating of more than nine decades.
Standard & Poor's had warned in April, and repeated the warning two weeks ago, that Washington needed a "credible" long-term strategy to reduce the deficit to avoid the downgrade, which could push up US borrowing costs, further hurting the economy.
S&P last week said that a $4 trillion reduction plan over 10 years would be credible. At the most optimistic interpretation, the plan the two sides have tentatively agreed achieves about $3 trillion in savings.
"It will save the U.S. government from defaulting on its obligations to pensioners and others. But it does not address the long-term fiscal challenges facing the nation," Sebastian Mallaby of the Council on Foreign Relations said of the deal.