The implosion of the US congressional supercommittee is likely to delay any major deficit-reduction agreement until after the next presidential election and may pose an immediate threat to the struggling US economy.
The committee’s failure to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.
The panel’s inability to agree on US$1.2 trillion in budget cuts, which drove stocks down on -Monday and Treasuries higher, also stoked doubts about US lawmakers’ ability to overcome partisan gridlock and safeguard the nation’s fiscal health.
“They could not agree even on the smaller challenge of US$1.2 trillion,” former White House budget director Alice Rivlin, among a coalition of officials who pushed the panel to “go big” and find US$4 trillion in savings, said in an e-mail. “I do not see a way to get to the big deal before the election, if then. It is really discouraging!”
Still, Standard & Poor’s reaffirmed it would keep the US credit rating at “AA+” after stripping the government of its top “AAA” grade on Aug. 5. Moody’s Investors Service reaffirmed its “AAA” rating with a negative outlook.
Fitch Ratings noted in a statement that it said in August that a supercommittee failure would probably result in a “negative rating action,” likely a revision of its outlook to negative, and that a review would be concluded by the end of this month.
S&P said its rating would stand because the committee’s failure triggers US$1.2 trillion in automatic spending cuts, which were put in place in the event no compromise could be reached. Easing those automatic spending limits may cause “downward pressure on the -ratings,” S&P said in a statement.
That so-called trigger may be in jeopardy, with both Democrats and Republicans leery of steep cutbacks at the Pentagon that US Secretary of Defense Leon Panetta has called “draconian.” Congress has succeeded in the past in undoing debt-reduction enforcement mechanisms.
“They have to really be careful not to mess with that,” said Robert Bixby, head of the nonpartisan Concord Coalition, which presses for debt reduction. “To dismantle it would be totally unacceptable.”
Investors have largely shrugged off S&P’s August downgrade of US debt to “AA+” from “AAA.” After the move by the ratings company, the government’s borrowing costs fell to record lows as Treasuries rallied.
An end to the reduction in -payroll taxes would subtract 0.5 percent from GDP next year, while failing to extend unemployment benefits would cause a separate 0.3 percent decline, according to JPMorgan Chase & Co chief US economist Michael Feroli.
At the same time, any extension of the tax holiday would add to the nation’s debt now that there is no broader deficit-trimming agreement.
“It’s certainly going to look awkward to do a number of these things that expand the deficit over the next year,” Bixby said.
Earlier this year, the Congressional Budget Office estimated that US debt would reach 187 percent of GDP by 2035.
Even after the trigger takes effect, the debt would grow to between 134 percent and 164 percent of GDP by 2035, according to the New York-based Peter G. Peterson Foundation, which works to focus public attention on the US’s fiscal deficit.
“History suggests that a debt-to-GDP ratio of more than 60-90 percent can impair economic growth and produce crises,” Peterson said in a statement.
After addressing these more immediate agenda items, congressional lawmakers are likely to turn to altering the trigger’s equal blend of domestic and defense cuts.
So far, senators Lindsey Graham and John McCain have proposed a 10 percent reduction in pay for members of Congress and a 5 percent cut elsewhere in the budget. The two members of the Senate Armed Services Committee haven’t spelled out other targets.
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