(Updates with Kerry in fourth paragraph, markets starting in eighth paragraph.)
Nov. 21 (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.
U.S. Senator Jon Kyl of Arizona, a Republican on the 12- member panel, said on CNBC today that the supercommittee’s Republican and Democratic co-chairmen, Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington, would make a formal announcement “toward the end of the day.” They are expected to say that the panel can’t reach agreement on determining deficit reductions of at least $1.2 trillion.
Today is the deadline for the Congressional Budget Office to receive information for analyzing how a proposal would affect the U.S. budget deficit, in advance of the supercommittee’s Nov. 23 target date for reaching a deal. Senate Republican leader Mitch McConnell of Kentucky has declared over the past few months that failure is “not an option” for the panel, which was 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.
Senator John Kerry, a Massachusetts Democrat and member of the supercommittee, told Bloomberg Television today that “the single thing” standing in the way of an agreement was Republican “intransigence” about extending tax cuts for top earners, enacted under President George W. Bush, that are scheduled to expire at the end of 2012. He said that because those tax cuts would benefit the wealthy, “the vast majority of Americans do not think we should do” that.
Yesterday, members of both parties took to the airwaves on the Sunday talk shows 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.
Appearing on NBC’s “Meet the Press,” Kyl 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,” he said.
On the same program, Kerry 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 the congressional impasse. Treasuries advanced, pushing yields toward a six-week low, as speculation about the panel’s failure to reach an agreement spurred demand for the safest assets.
The 10-year yield fell six basis points to 1.96 percent at 9:13 a.m. New York time, according to Bloomberg Bond Trader prices. The benchmark Stoxx Europe 600 Index lost 1.9 percent, extending last week’s sell off, and the MSCI Asia Pacific Index dropped 1.5 percent.
Futures on the S&P 500 expiring in December dropped 1.4 percent to 1,197.30 at 8:38 a.m. in New York. The equity benchmark lost 3.8 percent last week, the biggest retreat since Sept. 23, as Spanish, French and Italian bond yields rose and Fitch Ratings said the euro-area’s debt crisis poses a threat to American banks.
Automatic Spending Cuts
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 appeared on the same program.
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 House 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.
“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 was three 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 C-SPAN’s “Newsmakers.”
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.
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.
Supporting the Trigger
Boehner, an Ohio Republican, and House Minority Leader Nancy Pelosi, a California Democrat, 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 rating companies 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.
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 decide whether to extend an expiring payroll tax cut, which could further roil the economy.
--With assistance from Laura Litvan and Roger Runningen in Washington, Joanna Ossinger in New York, Emma Charlton in London and Wes Goodman in Singapore. Editors: Jodi Schneider, Robin Meszoly
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