President Obama today hailed congressional passage of a $143 billion economic package that will extend a Social Security payroll tax cut and unemployment benefits through the end of the year, while urging Republican and Democratic lawmakers to work with him to do more for the middle class before the November election.
The bipartisan package hammered out late last week by the White House and GOP and Democratic congressional leaders is widely viewed by budget and policy experts as the last major piece of business that will get done this year because of the bitter relations between the two parties as they head towards a crucial November election.
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The legislation averted the possibility of a tax increase on 160 million Americans amid the economic recovery and booming stock market – although it meant having to add $100 billion to this year’s deficit and could speed up the deadline for having to deal with the politically poisonous debt ceiling again. The typical family will see an extra $40 in every paycheck because of the extension of the 2-percentage point cut in the tax rate, while millions of unemployed people will continue to receive extended unemployment insurance benefits.
“The entire economy gets another boost just as the recovery is starting to gain some steam,” Obama said of the bipartisan compromise legislation during a White House gathering. “So in the end, everyone acted in the interest of the middle class and people who are striving to get into the middle class. That’s how it should be . . . Now my message to Congress is don’t stop here.”
Obama said lawmakers should act on measures to help homeowners pay their mortgages and assist small businesses. He also wants Congress to pass the so-called Buffett rule, which would make people earning more than $1 million a year pay at least 30 percent of their incomes in federal taxes.
While Obama repeatedly heaped praise on the package, he won’t actually sign it until later this week, when the bill is formally transmitted from Capitol Hill to the White House. And while Congress and the administration agreed to offset the cost of extending unemployment insurance and averting a sharp 27 percent cut in Medicare rates for physicians treating the elderly, the nearly $100 billion cost of the payroll tax cut extension will simply be added to this year’s deficit.
The decision by House Speaker John Boehner of Ohio and other House and Senate GOP leaders to go along with the payroll tax cut extension without requiring offsetting spending cuts marked a dramatic turnabout by Republicans, who in the end were unwilling to accept responsibility for a tax increase before the November election. But that decision to add $100 billion to this year’s estimated $1.3 trillion budget deficit could push the debt ceiling to its limit sooner than either party wants to deal with it again.
Despite the marked improvement in the economy in recent months and the Dow Jones industrial average crossing 13,000 Tuesday for the first time since May 2008, Treasury Secretary Timothy Geithner said that won’t necessarily prevent another bitter showdown over raising the federal debt ceiling late this year.
“I think even with agreement and prospect on the payroll tax, we still do not expect to hit the debt limit until quite late this year, significantly after the end of the fiscal year but before the end of the calendar year,” Geithner said in testimony before the Senate Finance Committee last Thursday.
Congress and the White House agreed to raise the debt limit to $16.4 trillion last summer, after an ugly, protracted political battle between Obama and the Republicans that nearly led to the first ever default on U.S. debt and that subsequently prompted Standard & Poor’s to downgrade the United States’ top AAA rating. The deal seemingly put off any additional consideration of the politically contentious debt ceiling until well after the election. But a lot will depend on how well the economy performs throughout the remainder of the year and how that affects the tax revenue flow to the Treasury. A sudden dip in revenues would force the Treasury to borrow more to finance government operations, which would push up the debt.
So far, the economy is off to a good start this year, with unemployment now down to 8.3 percent and the economy beginning to grow at a slightly faster clip. The Conference Board issued a report last Friday showing leading economic indicators moving up, providing further evidence that the recovery is gaining in strength. Some economists note, however, that we have seen similar good economic news early in the year in 2010 and 2011, only to see growth fall back sharply.
Joseph Minarik, a former White House and congressional budget expert, told The Fiscal Times today that Geithner may have been intentionally pessimistic in his congressional testimony for strategic and planning purposes, and that Congress and the White House probably will wait until early next year to grope with the debt ceiling problem again – along with a host of other issues including the expiring Bush era tax cuts and the payroll tax cut and unemployment insurance.
Rather than addressing these issues in a lame duck Congress following the election, Minarik said he expects to see “a bunting of these issues into early next year.” But Minarik said there is no doubt that the decision to add the $100 billion price tag of the payroll tax cut to the overall deficit will speed up the timetable for the Treasury to bump up against the current debt ceiling. “That is literally cash out of the drawer, and therefore it will have an effect on the public debt this year.”
