Deal to stabilise US finances for '20 years' still possible

US DEBT CRISIS:US PRESIDENT Barack Obama has said a grand bargain that would "stabilise Americans' finances for a decade, for 15 or 20 years" was still possible "if we are willing to seize the moment".

Mr Obama yesterday outlined three possible solutions to the looming threat of a partial American default if the US does not raise the $14.3 trillion debt ceiling by August 2nd. Federal Reserve Chairman Ben Bernanke warned earlier in the week that failure to raise the ceiling would provoke a huge financial calamity.

Mr Obama wants a big package comprising $4 trillion in combined budget reductions and tax hikes. He said a less ambitious plan including cuts only would, nonetheless, go some way towards putting America’s fiscal house in order.

But a minimalist plan proposed by the Republican senator Mitch McConnell now appears to be the most likely outcome. Mr Obama said the McConnell plan, which would authorise him to raise the debt ceiling by $2.5 trillion in installments between now and the 2012 presidential election, was “the fallback position . . . the least attractive option . . . because if we take that approach, this issue is going to continue to plague us for months and years to come”.

Nonetheless, he said: “If Washington operates as usual and can’t get anything done, let’s at least avert Armageddon.”

Mr Obama challenged Republican leaders to show him a plan for deficit and debt reductions within 24 to 36 hours. Negotiations with congressional leaders may resume over the weekend.

On Thursday, Standard Poor’s rating agency warned that because of the stalemate in Washington over the debt ceiling, “there is at last a one-in-two likelihood that we could lower the long-term rating on the US within the next 90 days”.

If the US loses its AAA credit rating, the country could end up with a situation where interest rates rise for everybody throughout the country, Mr Obama said. “Effectively a tax increase on everybody.”

The president added that he was willing to take down domestic spending to the lowest percentage of the “overall economy since Dwight Eisenhower”. He would slash defence spending even more than the $400 billion already cut, and was “willing to look at” raising the retirement age and imposing means testing for social security and medicare – measures anathema to many in his own party.

As Mr Obama noted, his “Republicans friends” are “not willing to do revenues”, that is to say, raise taxes. He argued that “millionaires and billionaires can afford to do a little bit more . . . we can close corporate loopholes” so oil companies and owners of corporate jets do not receive unnecessary tax breaks.

The Republicans have said that any end tax breaks is equivalent to a hike and must be offset by tax reductions elsewhere.

The president that “80 per cent of the American people support a balanced approach that includes (increased tax) revenues and includes (spending) cuts”.

“The problem is members of Congress are dug in ideologically . . . they boxed themselves in with previous statements.”

Earlier in the day, House Republicans announced they will hold a vote next week on a package that would cut $2.4 trillion from the budget, cap government spending as a percentage of gross domestic product and impose a constitutional amendment requiring a balanced budget.

Mr Obama rejected the proposal out of hand, saying that $2.4 trillion in cuts without any increase in revenue would harm “ordinary folks”. Regarding the balanced budget amendment, Mr Obama said: “We don’t need a constitutional amendment to do our jobs. The constitution already tells us to do our jobs and to make sure that the government is living within its means and making responsible choices.”