Friday, November 11, 2011

US fiscal "super committee"

While attention is firmly focussed on the ongoing debt crisis machinations in Europe, there is another critical fiscal deadline looming, this time in America.

On November 23rd the US fiscal “super committee” is scheduled to forward its recommendations to the US House of Representatives and Senate on how to cut $1.2 trillion from the US budget deficit over the next 10 years. This committee was established out of the Budget Control Act, the same legislation that raised the debt ceiling in August.

There doesn’t appear to be much progress being made. With six of the twelve committee members Democrat and the other six Republican the debate has, not surprisingly, been somewhat partisan. The Republicans are reluctant to raise taxes and the Democrats are protective of domestic social programs. To be fair, the Democrats have moved further on spending than the Republicans have on taxes.

Failure of the committee to reach agreement would be negative for market sentiment. $1.2 trillion is a mere drop in the bucket in terms of what needs to be achieved over the next few years in budget consolidation, but failure now would not bode well for the bigger job ahead.

However, should the committee not reach agreement, automatic spending cuts or “sequestration” of $1.2 trillion would kick in from January 2013. While that’s not the best outcome, it would be better than no deficit reduction at all. Should it get to that point, half of the spending cuts will come from defence while the other half will be spread across other domestic programs.

So failure of the committee to reach agreement would still result in budget cuts of the same magnitude they are currently looking to agree on. This would soothe market (and rating agency) concerns to some extent, but the politicians would be doing nothing to help their public image that was severely tarnished during the debt ceiling debate. Perhaps given the backlash in August there is some hope they will still reach an agreement?