WASHINGTON (AP) — The political fight that took the nation to the verge of defaulting on its debts last year is back, overshadowed by "fiscal cliff" disputes but with consequences far graver than looming tax hikes and steep spending cuts.
The government is on track to hit its $16.4 trillion borrowing limit later this month. And while the Treasury can keep the government functioning through early next year, President Barack Obama is bluntly insisting that any deal on the fiscal cliff include an end to brinkmanship on the debt ceiling.
Obama is demanding tax rate hikes on the rich, using the prospect of a worse alternative and the momentum of his re-election as leverage. But the debt ceiling gives Republicans a powerful weapon to extract further deficit reduction too, contributing to the current stalemate.
Both sides have warned that plunging off the fiscal cliff — letting income taxes increase for all and kicking in deep cuts in defense and other programs — could rattle the fragile economic recovery.
But failure to raise the borrowing cap would leave the government unable to pay its debts. That would roil the stock market, result in a likely downgrade in the nation's credit rating, increase interest rates and threaten another financial crisis. Last year's fight prompted Standard & Poor's to reduce the AAA rating for government bonds.
That risk gives Republicans the weight to counter Obama in fiscal cliff talks and demand that the president agree to greater spending reductions or savings from programs such as Medicare, Medicaid and even Social Security.
House Speaker John Boehner, R-Ohio, says any increase in the debt limit must be matched by greater amounts of deficit reduction. Boehner, who has been leading the fiscal cliff talks for Republicans, spoke with Obama by telephone Wednesday, signaling the possible start of fresh talks to avoid the fiscal cliff. Specifics of their discussion were not released.
Speaking to corporate executives the same day, Obama set down a hard line.
"If Congress in any way suggests that they're going to tie negotiations to debt ceiling votes and take us to the brink of default once again as part of a budget negotiation — which, by the way, we had never done in our history until we did it last year — I will not play that game," the president said.
"Because we've got to break that habit before it starts," he said.
Treasury Secretary Timothy Geithner said on CNBC on Wednesday, "We are not prepared to have the American economy held hostage to periodic threats that Republicans will force the country to default on our obligations."
To that end, Obama is asking to make permanent a mechanism used to implement last year's $2.2 trillion debt limit hike. That mechanism, designed by Senate Minority Leader Mitch McConnell, R-Ky., requires the president to notify Congress of the need to lift the debt ceiling and request an increase in the borrowing cap. The request would not require congressional approval, but Congress could pass a resolution to disapprove the increase, and the president could veto any such move.
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