House Votes to Give Creditors Priority if Debt Ceiling Is Breached

The legislation, which passed 221 to 207, would allow limited borrowing to make payments to federal bondholders, then Social Security recipients, even if the Treasury is prohibited from borrowing to finance the rest of the government. No Democrats voted for it. Eight Republicans were opposed.

Republicans said the measure effectively took the threat of a government default off the table if the debt ceiling was breached. But opponents, who included Democrats and some Republicans, said the bill was unworkable and would do nothing to stave off a messy default and economic chaos once the Treasury exhausted its payment options early this fall. The bill is unlikely to get a hearing in the Senate, and President Obama has promised a veto.

Senator Harry Reid of Nevada, the majority leader, called it “so shallow” that it would fail an eighth-grade model government class.

Instead, House Republicans used it to signal that for the third time since taking control in 2011, they would try to extract major concessions on fiscal policy from the president before they were willing to raise the government’s borrowing authority.

“We’re not in any different position than we were two years ago. We continue to spend more money than we bring in,” Speaker John A. Boehner of Ohio told reporters Thursday. “You can’t continue to do this.”

The bill, called the “Pay China First Act” by Democratic opponents, signaled an end to a truce in Washington’s budget wars that ensued after Republicans and Democrats agreed in January to allow taxes to rise mainly on affluent households, then let $85 billion in across-the-board spending cuts take effect in March. Amid those steps, Congress had temporarily set aside the government’s borrowing limit, but the statutory $16.4 trillion debt ceiling comes back into force May 19, at which time the government’s debt will actually already exceed that number.

Because of higher-than-expected tax receipts and large payments from the federally controlled housing agencies Fannie Mae and Freddie Mac, Treasury officials believe they can shuffle money within accounts to avoid any more borrowing until the fall.

That schedule sets up what lawmakers in both parties see as another conflagration approaching on Sept. 30, when the government would run out of money to operate and the Treasury would near exhaustion of its borrowing options.

House and Senate appropriations committees have begun work on 12 annual spending bills, but House Republicans will set total spending in those bills at $967 billion, expecting the automatic spending cuts known as sequestration to continue. Senate Democrats are expected to use the spending cap established in the first debt ceiling fight of 2011, $1.058 trillion. House Republican aides concede that a majority of the House might not be able to accept the cuts to domestic programs that would be needed to stay within the limit.

The brewing standoff could be resolved with a comprehensive deficit reduction agreement, but so far, House and Senate Republican leaders have refused to even convene a formal negotiating conference to resolve the vast differences between the budget blueprints passed by the Senate and the House.

“We should be talking about the budget in general and how we can get to conference and what we need to do to compromise,” said Senator Patty Murray, Democrat of Washington and the chairwoman of the Senate Budget Committee. “They’re over there debating how we’re going to create the next crisis that this country is going to have to face down.”

With little real negotiations going on, Democrats accused House Republicans of preparing for disaster. Representative Dan Maffei, Democrat of New York, said the House “prioritization” bill “maps out not if but when the United States defaults for the first time in the nation’s history.”

Some Republicans were no more charitable.

Even if the Treasury could pull off the difficult task of managing incoming taxes and outgoing payments on a daily basis, about 25 percent of the government would have to shut down for lack of money. And Tony Fratto, a Treasury and White House spokesman in the Bush administration, said it could not be done.

Daily tax receipts are “lumpy,” he said. They do not arrive in any steady or predictable way. At the same time, government payments are “spiky” and fluctuate in ways that do not mesh with income tax receipts. The bill also hands Democrats the talking point that Republicans are willing to make foreign creditors like China the first priority for tax receipts over veterans and the military.

Mr. Fratto called the bill “technically impossible and politically disastrous.”

But Republicans said they were merely being prudent and signaling to world financial markets that they would not let the United States government miss debt payments when they come due.

“This legislation credibly and permanently removes the threat of default on a U.S. debt payment and ensures that Social Security benefit payments are paid in full and on time,” said Representative Dave Camp of Michigan, the chairman of the House Ways and Means Committee.

Article source: http://www.nytimes.com/2013/05/10/us/politics/house-votes-to-give-creditors-priority-if-debt-ceiling-is-breached.html?partner=rss&emc=rss