A plan supported by U.S. Congressman Mac Thornberry (R-Clarendon) to address the debt crisis passed the House this evening. The "Cut, Cap and Balance Act of 2011" (H.R. 2560) would immediately cut billions of dollars in 2012 spending and cap future spending as a percentage of the economy. The bill also requires that the debt ceiling would only be raised after a Balanced Budget Amendment is adopted by the House and Senate and sent to the states for ratification.
House and Senate leaders have been meeting with President Obama for weeks to try and reach an agreement to increase the debt ceiling ahead of August, 2nd, the day that the ability to borrow by the federal government is set to expire. The limit was reached in May, but using what it calls "extraordinary measures," the Administration can continue to pay the government's bills until early August.
"There has been a lot of talk about how to deal with the debt crisis, and today the House actually did something about it. The Cut, Cap, and Balance bill is a real plan that offers a framework for the debt limit talks and for the country," said Rep. Thornberry.
Two of the country's credit rating agencies have expressed serious concern over the situation and have issued warnings of possible downgrades to the nation's credit rating. Last week, credit firm Moody's even indicated if budget cuts associated with a debt limit increase are not credible and lead to a balance in the ratio of debt to GDP, then the United States government will likely face a downgrade.
"Raising the debt limit without a credible plan to make serious changes to spending and the budget could cost America jobs, strain the economy even further, and make our debt problem grow even worse. This bill is not the only answer to financial problems, but it is a real answer that will begin to get our financial house in order," Thornberry said.
A decrease in the government's credit rating would raise interest rates. The government's debt problem would grow worse because the country's interest payments would increase. All other interest rates are based on the government's ratings, so lowering the credit rating of the government affects all other interest rates as well. Higher interest rates for mortgages, car loans, student loans, and business loans would all affect the economy.
A similar measure to the one that passed the House has been introduced in the Senate. S.1340, The Cut, Cap, and Balance Act, currently has 37 co-sponsors, including the Senate Minority Leader Mitch McConnell, as well as Texas's two Senators Kay Bailey Hutchison and John Cornyn. As of July 19, President Obama has not offered a specific plan.
The Cut, Cap, and Balance Act (H.R. 2560):
*Saves $111 billion in 2012 and around $5.8 trillion over ten years;
*Provides enforceable caps on spending that will bring the size of government back below 20% of our Gross Domestic Product (GDP) to its average level over the last 30 years. Breaking the caps triggers automatic spending cuts.
*The legislation grants President Obama's request for an increase in the debt limit, but only after Congress passes a Balanced Budget Amendment and sends it to the states for ratification.