Obama swallows Tea Party's demands as debt deal is reached

Barack Obama responds to the emergency debt-ceiling deal approved in the House of Representatives in Washington last night, which was widely seen as a major defeat for the US President (Reuters)

By David Usborne in Washington

President Barack Obama, who once lectured Europe on why spending and investment is the best cure for a recession, was yesterday contemplating the consequences of a deal that will suck more than $2tr (£1.2tr) out the US economy over the next 10 years.

Enormous concessions from the White House, to satisfy demands driven largely by the radical Tea Party flank of the Republican Party, provided the key to unlock the door to a deal, pending congressional approval. It would enact deep spending cuts in return for a new authorisation to raise the US debt ceiling and draw America back from the brink of defaulting on its debt.

To the disgust of many in his own party, Mr Obama caved completely on his demands that the deal have "balance" between spending cuts and some increases in tax revenues. Of the latter, there so far are none.

What emerged is a new austerity programme for America that at almost every level goes against all the natural instincts of the Democrats and their leader. Tough new caps designed to trim spending by $2.3tr before 2021 will severely impair Mr Obama's ability to get the economy back on its feet or start a credible jobs programme as the centrepiece of his re-election effort.

There was distaste for the concocted contract from many quarters last night and there was some risk it would hit roadblocks on Capitol Hill, where both chambers must vote in favour of it before it can be signed by Mr Obama. Passage by a wide majority in the Senate seemed assured. But a vote in the House, which could come overnight or today, presented more peril.

Vice-President Joe Biden, pictured, went instantly to Capitol Hill to lobby for the package. If there were a rebellion in the House – perhaps aligning Tea Party members who think the cuts too small with liberal Democrats who think them too severe – the crisis would be upon America all over again, and the market reaction grave.

If, as most observers think likely, the package is signed into law today, the default threat wilol be lifted. It might be enough to persuade ratings agencies to leave America's triple-A credit status intact.