Oct. 11 (Bloomberg) -- The congressional supercommittee responsible for finding $1.5 trillion in U.S. deficit reductions has the “ingredients” to begin making debt reforms, according to Dan Clifton of Strategas Research Partners.
“The stakes are very, very high,” Clifton, head of policy research at Strategas in Washington, said on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “If they don’t get something done, it just feeds what S&P said about the U.S. credit in August, that Washington doesn’t have the political will to get these big issues done. Does that lead to a Moody’s downgrade? Does that lead to a second notch downgrade from S&P?”
Standard & Poor’s stripped the U.S. of its top AAA credit ranking on Aug. 5 after weeks of disagreement between the Obama administration and Congress over raising the nation’s borrowing limit to avoid a government default. The downgrade followed an agreement to increase the $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said was needed to keep the AAA ranking.
Moody’s Investors Service affirmed its top U.S. ranking on Aug. 8 and has a negative view of the debt. Fitch Ratings kept its AAA credit rating on Aug. 16 and said the outlook is stable, citing the nation’s central role in the global financial system and the flexible, diverse economy.
The law to increase the debt ceiling also created a so- called supercommittee to find $1.5 trillion in reductions across the government to help reduce the deficit. If Congress fails to act on the committee’s recommendations by Dec. 23, the budget law calls for automatic cuts, including an additional $500 billion from defense spending over a decade, not including interest.
“I’m a little bit more optimistic that we could do fundamental tax reform that comes out of the supercommittee,” Clifton said. “We’ll start breaking some of this confidence problem that we have, but it won’t fix all the structural problems, particular with Europe and entitlement reforms.”
The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 55.7 in August, the lowest level since November 2008, from 63.7 in July. The gauge was projected at 55.8 after a preliminary reading of 54.9, according to the median forecast of economists surveyed by Bloomberg News.
Tax reform, a topic that’s being debated among Republican presidential candidates, may become a “self-fulfilling prophecy,” Clifton said.
A poll of Republicans and Republican-leaning independents by Bloomberg News and the Washington Post, the sponsors of tonight’s Republican candidates’ debate in Hanover, New Hampshire, found that Herman Cain, a former chief executive of Godfather’s Pizza, has pulled almost even with Mitt Romney, a former governor of Massachusetts, in appeal as an economic leader.
Cain’s 9-9-9 tax plan would replace the current tax system with 9 percent corporate and individual taxes and a 9 percent sales tax.
“Now that it is becoming part of everybody’s plan, and you have this supercommittee deliberating, I think it provides a nice background for the actual existing policy environment that we’re facing in Washington,” Clifton said. “There could be some good that comes out of it.”
--Editors: Dave Liedtka, Greg Storey
To contact the reporters on this story: John Detrixhe in New York at firstname.lastname@example.org; Tom Keene in New York at email@example.com
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