US President Barack Obama yesterday signed an emergency austerity Bill that averted a devastating debt default, but warned the contentious plan was “just the first step” on a long road to economic recovery.
“It’s an important first step to ensuring that, as a nation, we live within our means,” Mr Obama said in the White House Rose Garden after polarised lawmakers sent him the legislation. “This is, however, just the first step.”
The measure lifts cash-strapped Washington’s $14.3 trillion debt limit by up to $2.4 trillion while cutting at least $2.1 trillion in government spending over 10 years, a step forecast to drag down already sluggish US growth.
“Slowing down the big-government freight train from its current trajectory will give us the time we need to work toward a real solution,” said Republican Senate Minority Leader Mitch McConnell.
Mr Obama spoke after the US Senate voted 74-26 to pass the measure – which cleared the House of Representatives by an overwhelming 269-161 margin on Monday – with just hours to spare before a midnight (0400 Wednesday) deadline that could have triggered a first-ever US default on its debt payments.
Congressional approval paid immediate dividends as the Fitch ratings agency said the hard-fought 11th hour compromise would spare Washington from losing from its sterling Triple-A debt rating.
A downgrade would have likely led to a spike in US interest rates, making debt payments more pricey and hurting Americans holding flexible-rate loans – anyone carrying credit-card debt, or seeking an automobile loan.
But Fitch said it would keep a close eye on the country’s long-term finances and pressed for “a credible multi-year deficit reduction plan” if Washington is to stay in the elite club of healthy, low-risk debtor economies.
Mr Obama’s 2012 re-election bid will turn on voters’ perceptions of his handling of the US economy, which has laboured under historically high unemployment above nine per cent as it struggles to recover from the global meltdown of 2008.
The President promised that the deficit-cutting would not starve education and research nor happen “too abruptly while the economy is still fragile” and railed against the “manufactured crisis” over the debt limit.
Republicans have promised that the spending cuts will create jobs, but top Wall Street economists have warned the austerity measures will actually be a drag on already sluggish US growth even as government stimulus measures run out.
The overall shift from priming the US economy to government belt-tightening is expected to reduce US growth next year by about 1.5 percentage points, according to JPMorgan Chase economists.
The vote came as the US Commerce Department reported that US consumer spending, the economy’s key driver, fell 0.2 per cent in June relative to May, while personal income was basically stagnant, with just a 0.1 per cent increase.
Both figures fell short of analyst’s expectations and offered the latest discouraging omen about the US economy, which grew at a feeble 1.3 per cent in the second quarter of 2011, much worse than economists had expected.