By Heidi Przybyla and Kathleen Hunter - Nov 21, 2011 3:56 PM GMT+0700
Nov. 21 (Bloomberg) -- Matthew Dowd, Bloomberg political analyst and former chief campaign strategist for George W. Bush, talks about the consequences of failure by the deficit reduction supercommittee to reach agreement on deficit savings. Dowd speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
A debt-reduction committee with special powers that was supposed to dissolve congressional gridlock in Washington is instead on the brink of failure, setting the stage for $1.2 trillion in automatic spending cuts.
The 12-member bipartisan supercommittee likely will announce today that it can’t reach agreement on deficit savings, according to a Democratic aide. The aide, who wasn’t authorized to discuss internal matters publicly and requested not to be identified, said in an e-mail that it was highly unlikely that the committee’s talks could be salvaged.
Today is the deadline for the Congressional Budget Office to receive information for scoring a proposal in advance of the supercommittee’s Nov. 23 target date for reaching a deal. Republican Senate Minority Leader Mitch McConnell has declared over the past few months that failure is “not an option” for the panel, created in August after rancorous debate over raising the nation’s borrowing limit that plunged congressional approval ratings to lows of between 9 percent and 14 percent.
Both parties took to the airwaves yesterday to blame the other for the lack of an agreement, though they stopped short of saying the talks had failed. Democrats faulted Republicans for refusing to budge on an anti-tax pledge and Republicans accused Democrats of rejecting their latest offer to raise revenue along with spending cuts.
Finger-Pointing
U.S. Senator Jon Kyl of Arizona, the chamber’s No. 2 Republican who sits on the panel, said Democrats turned down a final offer that included $250 billion in new revenue by eliminating some tax breaks even as it lowered income tax rates. “There’s a group of folks that will not cut a dollar unless we also raise taxes,” Kyl said on NBC’s “Meet the Press.”
Senator John Kerry, a Massachusetts Democrat who serves on the committee, called Kyl’s statement “patently not true” and said Democrats agreed to $917 billion in spending cuts with no new revenue as part of the August agreement to raise the debt ceiling. The latest Republican plan, said Kerry, “still results in the biggest tax cut since the Great Depression.”
European stocks dropped for a third day today and U.S. futures retreated in anticipation of a Congressional impasse. Treasuries advanced. The benchmark Stoxx Europe 600 Index lost 2.1 percent as of 8:49 a.m. in London, extending last week’s selloff, and the MSCI Asia Pacific Index dropped 1.3 percent.
Futures on the Standard & Poor’s 500 Index expiring in December declined 1.4 percent. The benchmark gauge for American equities lost 3.8 percent last week, the biggest loss in two months, as Spanish, French and Italian bond yields rose and Fitch Ratings said Europe’s debt crisis poses a threat to American banks.
Optimism Fades
Supercommittee members held out only a sliver of optimism that a deal is still possible. “Nobody wants to give up hope,” Representative Jeb Hensarling said on Fox News Sunday. “Reality is -- to some extent -- starting to overtake hope.”
If the committee doesn’t come up with an agreement, $1.2 trillion in across-the-board spending cuts to domestic and defense programs are set to take effect starting in January 2013. The lack of a deal would deprive President Barack Obama of a vehicle extending a payroll tax cut and insurance benefits for unemployed Americans, which expire at the end of the year.
It would also push into an election year the difficult work of reaching a bipartisan deal to head off the automatic cuts that Defense Secretary Leon Panetta has called “devastating” for the Pentagon. Many lawmakers cast doubt on whether anything will happen before the 2012 election if the committee doesn’t come up with a deal.
Waiting Until 2013
“We’re going to have to wait for the next election,” said Senator Christopher Coons, a Delaware Democrat who appeared on ABC’s “This Week” program. “I never thought the supercommittee was a good idea,” said Florida Senator Marco Rubio, a Republican who also appeared on the show.
The supercommittee was designed to be the solution to more than a year’s worth of failed bipartisan efforts to strike a “grand bargain” to drive down the debt. Obama’s fiscal commission last December didn’t agree on a $4 trillion package, pushing the work off to a group led by Vice President Joe Biden and bipartisan members of Congress.
The president and Speaker John Boehner ultimately took over those negotiations, before delegating the task of constructing a larger package to the supercommittee. With an eye to congressional approval ratings that began to sink to as low as 13 percent in a mid-August Gallup poll, Republicans insisted that the committee would deliver.
Shouldering Blame
“This joint select committee was set up to succeed,” McConnell said to reporters Nov. 1. On Nov. 14, Senator Lamar Alexander, a Tennessee Republican, reiterated that “failure is absolutely not an option.” He said “the American people expect us to get to work and do our job.”
Republicans may shoulder more blame for the panel’s failure. According to a Nov. 11-13 CNN poll, 42 percent of respondents said they would hold Republicans responsible if the supercommittee doesn’t reach agreement, with 32 percent saying they’d blame Democrats. The margin of error is 3 percentage points.
“It was Washington’s answer to kicking the can down the road,” said Senator Tom Coburn, an Oklahoma Republican who was a member of a bipartisan group of six senators working on a similar package this year. “That’s what America’s upset about,” he said in a taped interview on CSPAN’s Newsmakers.
Shrugging Off Downgrade
“There is a real threat that not only will be there a downgrade, but that the market, on Monday, will look again at Washington and say, ‘You guys can’t get the job done,’” Kerry said on “Meet the Press.”
Mark Zandi, chief economist of Moody’s Analytics, said he doesn’t think there would be much of a market reaction. “I don’t think many expected much to come out of the process,” he said on ABC’s “This Week.”
Investors have largely shrugged off Standard & Poor’s Aug. 5 downgrade of U.S. debt from AAA to AA+. After the downgrade, the government’s borrowing costs fell to record lows as Treasuries rallied. The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note fell three basis points to 1.98 percent at 1:40 p.m. in Tokyo.
Absent a last-minute breakthrough, the debate in Washington will now focus on the so-called trigger and the automatic cuts slated to start in 2013.
Undoing Cuts
Congress has a history of undoing previous attempts to require debt reduction, and lawmakers on both sides of the aisle, including Senator John McCain, an Arizona Republican, and Representative Maxine Waters, a California Democrat, are already trying to use legislative levers to stop the automatic cuts from taking effect.
House Minority Leader Nancy Pelosi, a Democrat, and Republican Speaker John Boehner have said they support the trigger. “The markets should know that the deficit reduction will occur,” Pelosi said on Nov. 3. Boehner has said he “personally” feels a moral obligation to uphold the cuts.
U.S. credit ratings agencies have made it clear that, while a failure of the supercommittee might not lead to a credit downgrade, undoing the automatic cuts probably would. Moody’s said the lack of a supercommittee agreement wouldn’t on its own cause the U.S. to lose its top credit ranking because the August debt-ceiling deal includes $1.2 trillion in automatic cuts.
Last month, John Chambers, a managing director of Standard & Poor’s, said the U.S. could face additional downgrades if Congress attempts to thwart the across-the-board cuts.
Defense Cuts
Instead of dismantling the trigger, Congress is more likely to look for ways to reconfigure the blend of defense and domestic cuts. ‘They’re done in a way that would be very harmful to our nation’s defense,’’ Toomey said yesterday. “It’s very important that we change the configuration but that we not abandon the spending cuts.”
If the current trigger remains, the consequences of failure will fall disproportionately on discretionary programs, with the Congressional Budget Office estimating that 71 percent would come from these programs such as education, the environment, transportation, housing assistance and veterans’ health care. The cuts would come in addition to the first round of cuts as part of the Budget Control Act.
If the panel fails, White House Budget Director Jack Lew has said he thinks there would be action on the deficit at the end of 2012, after the presidential election, because there would be a “perfect storm” of circumstances forcing Congress’s hand, including the expiration of the Bush-era tax cuts.
Meanwhile, with the U.S. jobless rate at 9 percent, Congress and the president must now scramble to decide whether to extend an expiring payroll tax cut, which could further roil the economy.
To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net;
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net
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