July 25, 2011 / 1:55 AM / 6 years ago

SCENARIOS-Options for raising the U.S. debt limit

(Refiled to fix date)

By Richard Cowan and Tim Reid

WASHINGTON, July 24 (Reuters) - Democrats and Republicans in Congress, unable to compromise on how to cut budget deficits and raise U.S. borrowing authority, are now working on their own, competing bills.

With nine days’ left until the United States runs out of money to pay all its bills after Aug. 2, the two parties were rushing to get their respective bills moving through Congress this week. [ID:nN1E76M0B0]

Here are some scenarios for raising the debt limit by the early August deadline to avoid a potentially crippling government default:

* AN ALL SPENDING CUTS, NO REVENUES PLAN

This is the path being pursued by Senate Majority Leader Harry Reid, a Democrat.

Since tax increases that Democrats had been seeking were the major sticking point in negotiations with Republicans, Reid is simply removing the problem from the formula altogether.

Instead, he’s writing a bill that would achieve about $2.7 trillion in spending cuts over a decade while raising the $14.3 trillion U.S. debt limit by an identical amount.

If this streamlined plan were to pass Congress, there would be no need to revisit the divisive debt limit fight until 2013, after the presidential and congressional elections. Democrats would be glad to see no benefit cuts to popular Medicare, Medicaid and Social Security programs.

Financial markets would be happy that government borrowing authority is ensured through 2012.

* THE DISADVANTAGES

Some of the savings could be squishy, such as counting money not spent in the future on wars as the United States withdraws from Iraq and Afghanistan.

Also, overall deficit reduction is short of the $3 trillion to $4 trillion many had hoped for, including financial markets.

And there likely would not be anything in the plan to force future reforms of the cumbersome U.S. tax code and major benefit programs for the poor and elderly that will increasingly weigh on the federal budget.

The result could be that conservatives won’t go along.

And it’s unclear how U.S. credit ratings agencies would view the legislation.

* A SHORT-TERM DEBT LIMIT INCREASE

House of Representatives Speaker John Boehner, the top U.S. Republican, is going ahead with a two-stage program to achieve some spending cuts and a stopgap debt limit increase with plans to do another installment of both next year. He’d start with about a $1 trillion debt limit hike by Aug. 2, with a similar or greater amount of spending cuts.

Then, over the next six or seven months, Congress and Obama would fight over large additional savings -- maybe from expensive benefit programs and by reforming the tax code -- in order to get a second installment of the debt limit increase.

Boehner also might attached language requiring passage in Congress of a balanced budget amendment to the U.S. Constitution.

Tea Party conservatives who are important to Boehner’s political future have been pushing for such an ambitious plan and especially like the fact that it includes no tax hikes.

THE DISADVANTAGES

It is complicated, and sets up another difficult fight over the debt limit next year that could rattle financial markets. It could cause credit ratings agencies to downgrade the U.S. prized Triple-A rating.

* BLEND THE TWO IDEAS?

If the Senate were to pass the Reid plan and the House were to pass the Boehner plan, could the two be married?

Possibly. There could be a debt limit increase that carries through 2012 with no tax hikes, coupled with mechanisms to try to achieve more savings than Reid’s $2.7 trillion.

But leaders would have to work hard to find a “sweet spot” with just enough adjustments to get the necessary majorities for passage in Congress. And they’d be under an almost impossibly tight deadline.

MCCONNELL “FALLBACK” PLAN

A backup “fail-safe” plan first proposed by Mitch McConnell, the top Senate Republican, could be dusted off if it appeared the two sides could not reach a compromise on their competing bills.

Through a complex back-and-forth between the White House and Congress, it would allow Obama to raise the debt limit by $2.4 trillion in three installments through November 2012, when Obama and most lawmakers are up for re-election.

Under the McConnell plan, Republicans would not have to vote to raise the debt limit.

Obama has said that “at a minimum” the debt limit has to be raised and that he will take responsibility for that if the McConnell plan passes Congress.

House Republicans hate the plan, saying it would be a missed opportunity to get the big spending cuts they demand.

TALKS RESUME

It’s getting late to launch yet another round of negotiations, but at some point, leaders from both parties are going to have to work out either a brand new deal or one that accepts elements of their respective bills.

OBAMA INVOKES THE CONSTITUTION

This seems to be the most unlikely scenario.

Some have argued that Obama could ignore Congress if it fails to raise the debt limit and order continued borrowing by relying on the 14th Amendment of the U.S. Constitution.

The fourth section of the 14th Amendment states that the United States’ public debt “shall not be questioned.”

Obama has said White House lawyers had explored the option and they are “not persuaded” that it is a winning argument. But he did not rule it out. (Editing by Vicki Allen)

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