Republican Senate Minority Leader Mitch McConnell announced the “backup plan” on the debt limit he has been mentioning the last few days.
Under the plan, the President could obtain a total of $2.5 trillion in debt limit increases by specifying spending cuts in an equal amount. It doesn’t require Congress to consider the spending cuts or to actually cut spending, but it would create a situation in which Democrats would be voting for more debt three times before the November 2012 election.
Speaker Boehner hasn’t commented on this plan yet. We don’t think the Republican-controlled House will approve this as a backup plan because it increases the debt limit without cutting spending. However, the pressure on Republicans is mounting fast. We think the debt limit impasse is building toward a roughly July 26 formal warning by the president of an imminent shutdown of government payment systems for popular services. Our guess is that Republicans cut a some kind of deal prior to that (see yesterday’s piece on a possible mini-deal). If not, a gradual shutdown of government payments would start August 2.
Beyond the uncertainty, we don’t think there will be a big market impact from the political drama. However, shutting down government payment systems is a legal quagmire, so there is a chance of something going wrong as the deadline approaches.
Here’s our understanding of Sen. McConnell’s backup plan.
The House and Senate would pass legislation now giving the President the authority to request increases in the debt limit in lump sums and constraining how Congress would handle the requests. (Under the current system, the President can request increases in the debt limit but Congress is not required to respond).
In making his request under this new law, the President would be required to specify spending cuts he would like to make. The amount of the spending cuts would need to be equal to or greater than the requested debt limit increases.
The debt limit increase would go into effect automatically unless both the House and Senate passed “resolutions of disapproval.” Such resolutions would probably pass since many members wouldn’t like the debt increase or the list of spending cuts or both.
The President could then veto the resolution of disapproval which would then go back to the House and Senate to see if the veto could be overridden by two-thirds majorities in each House. If not overridden (McConnell assumed it wouldn’t be because Democrats would have enough votes to sustain the veto), then the debt limit would be increased by the amount requested.