Thursday, November 03, 2011

The not-so-super committee

Business Times - 04 Nov 2011

The not-so-super committee

Voters and investors are waiting nervously for Nov 23 to see if the Joint Deficit Reduction Committee succeeds in its task


ON NOV 23, the members of Congress who are members of the Joint Deficit Reduction Committee - AKA the 'super committee' - charged with cutting the US federal budget deficit will have to come up with a plan. They have to reach a minimum target of US$1.2 trillion in reductions.

The six Democrats and six Republicans who were selected by their parties to serve on this bipartisan Congressional panel and who have been meeting since September will have to reach an agreement on reducing the deficit by between US$1.2 trillion and US$1.5 trillion - with most of the spending cuts coming from cumulative alterations in the budgetary baseline over 10 years. Or to put it in simple terms, the lawmakers will have to propose cuts that would amount to about 3 per cent reduction in the amount of money that the US government would be spending in the next decade.

If the Democrats and Republicans fail to reach such an agreement, Congress will have no choice but to support automatic and across-the-board budget cuts in spending.

 Optimists are hoping that a bipartisan agreement will be reached, as part of a historic solution to America's debt crisis. At the minimum, investors could feel more confident about the willingness and the ability of the politicians to end the political gridlock in Washington and to begin a process of putting the nation's fiscal house in order.

 Moreover, a deficit-reduction deal between the Republicans and the Democrats that will come on the eve of the Christmas shopping season may provide a psychological lift for American consumers (who need to spend more) and businesses (that need to create more (jobs), producing the kind of virtuous circle that could finally start accelerating the American economic recovery.

 But realists maintain lower expectations about the final product of the super committee and its impact on the economy. After all, it is important to recall that the establishment of the super committee resulted from the major gap between the two parties over fiscal policy, reflecting in turn, the wide ideological divisions between them.

Indeed, a deal on limited spending cuts and the forming of the deficit reduction panel was part of an effort to reach an agreement on raising the debt ceiling and avoiding a shutdown of the federal government in the summer.

Both Republicans and Democrats were concerned that the public would blame them for another political showdown over the budget.

Hence the unique legislative mechanism they agreed upon: if the members of the super committee fail in their mission, there will be across-the-board cuts that would affect spending on national security and domestic programmes.

Neither the Republicans nor the Democrats will be able to play 'chicken' and use the threat of a government shutdown in order to extract budgetary concessions from the other side.

 That under any conceivable outcome of the negotiations the US government will not shut down before the end of the year is good news. But that is about it.

If anything, the political and ideological rift between the two parties has been widening since the debt ceiling debate, and there are no signs that the two sides are willing to reverse their positions.

The Republicans continue to insist that any long-term plan would require huge cuts in spending on the government-backed social-economic programmes but that they would not support increasing the tax burden in order to provide the government with new sources of revenue.

 In fact, all the leading Republican presidential candidates have committed themselves to oppose any form of tax increase; and the continuing pressure from the anti-government Tea Party Movement ensures that the Republicans are not going to change their position on the issue.

At the same time, the Democrats would agree to back major cuts on government spending but only if the deficit reduction plan is based on increasing government revenues through higher tax rates on wealthy Americans.

 President Barack Obama - who has come under a lot of criticism from members of the progressive wing of his party for making so many concessions to the Republicans during the negotiations over the raising of the debt ceiling - has been moving to the left in recent weeks. He now stresses his support for raising the tax rate on those Americans making more than US$1 million a year - a view that is shared by a majority of Americans, according to opinion polls.

Moreover, the emergence of the Occupy Wall Street movement has helped create a more ideologically divided political environment in which reaching a compromise on a deficit reduction programme becomes more difficult for the Republicans and the Democrats.

Yet it is not inconceivable that the Republicans and the Democrats on the super committee would surprise all of Washington - including themselves - by reaching some sort of a deal before Thanksgiving. Both sides are worried that the automatic, across-the-board cuts that could occur without a deal would impact on their respective spending programmes.

Republicans, in particular, are aware that such cuts could shrink the defence budget in a very dramatic way, while Democrats want to avoid major cuts in spending on medical and retirement insurance programmes. And both sides are coming under pressure from lobbyists and interests to ensure that such cuts are averted.

  There is also a chance that members of the super committee could arrive at an agreement on an overhaul of the tax system, including the elimination of tax loopholes for businesses and consumers, as part of a plan to reduce the deficit. But strong opposition from business lobbyists and the general public is likely to derail dramatic changes in the tax code before next year's presidential and congressional elections.

Both Republicans and Democrats are hoping the elections will help tip the balance of power in Washington in their direction and allow them to get their own deficit plan enacted in 2013.

Voters - as well as investors - are watching nervously.

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