Debt ceiling is ultimately raised with the mutual consent of the President and Congressional leaders. They have decided to reduce the deficits by $2.5 trillion over the next decade. Obama by raising the debt ceiling narrowly averted an unprecedented default along with horrific economic consequences.
In order to raise the debt ceiling, the federal government emphatically implemented to cut federal spending by $1 trillion over a decade to be debt free. This helps to increase the debt ceiling by $900 billion; thereby, the nation will manage its expenses for less than a year.
The congressional committee has introduced a new plan that helps in deficit cut by additional $1.5 trillion. Entitlement and tax reform are incorporated in the White House's term sheet. If the committee is successful in implementing the new plan, then it can help to increase the debt ceiling by another $1.5 trillion.
There will be 1.2 trillion cut in additional spending, if the congressional committee is not successful in showing a sufficient savings. However, there will be no modification in Social Security and Medicare along with the low income program, according to the White House.
The president clarifies that the Congressional committee should have a balanced approach while implementing a plan. Obama encourages spending cut, but he is also in favor of tax hike as well. An extension of the Bush tax cuts on high income group is presently off the table, but the tax cut will expire by January 2013.
According to the White House, it will be beneficial if Mr. President uses his veto power to encourage additional $1 trillion deficit cut, instead of extending the high-income tax cuts.
Taxes play a key role in current deficits; therefore, the state experiencing drop in tax revenue can be equally severe as the increase in spending.
The revenue earned by the state from the taxes will reach at 14.4% of GDP currently. The consumer spending will be hit by 25.3% of GDP. The tax revenue of the state has dropped incessantly, as a result of high unemployment and a crumbling economy. Increase in federal spending by $1 trillion as more funds are being used for unemployment benefits and food stamps.
The agreement signed by Mr. President does not explicitly explain where the spending cuts will fall. But the design of the current federal spending cut suggests that a large spending cut is not a viable solution to the problem. More than 80% of federal spending is used for the purpose of defense, entitlements and unemployment benefits.
If the deficit reducing plan is not successful, then it can take a critical twist, leading to lower the credit report of America. Therefore, to avert the downgrade the federal government has to cut the deficit by $4 trillion over a decade. Unfortunately, the current agreement does not follow it, which might lead to a downgrade very soon.
The problem with "Debt ceiling is ultimately raised with the mutual consent of the President and Congressional leaders" is that the same leaders, regardless of party affiliation, like to spend the country further and further into debt.