Grand US deficit-cutting effort ends with whimper

The Republican and Democratic leaders of a 12-member congressional “super committee” are set to declare defeat in a joint statement to be released after three months of talks failed to bridge deep divides over taxes and spending.

After a year of bruising budget battles, it is another sign that U.S. lawmakers are too entrenched to compromise on the tax increases and benefit cuts that budget experts say are needed to set the country’s finances on a stable path.

The panel’s failure will cement notions of a dysfunctional Washington among voters and investors already disenchanted with the brinkmanship that brought the country to the edge of a first-ever debt default in August.
Lawmakers likely will not return to the problem until 2013 at the earliest as they shift their attention to the 2012 presidential and congressional elections.

Budget skirmishes will continue over the coming months.

Democrats will try to extend short-term economic stimulus measures, such as enhanced unemployment benefits and a payroll tax cut, that they had hoped to roll in to any super committee deal. Analysts say the economy could slide back toward recession if they expire as planned at the end of the year.

Republicans will scramble to shield the military from $600bn in automatic spending cuts that are triggered, beginning in 2013, in the absence of a deal.

Asian stocks and US stock futures fell as news of the collapse weighed on markets. Market expectations for a deal were low, and investors have viewed the United States as a relative safe haven from the debt crisis in the euro zone.

But failure could remind investors of the risks posed by gridlock in Washington.

“As is the case with policymakers in Europe, US politicians need to be doing more than investors expect, not less,” said Michael Gapen, senior US economist with Barclays Capital.

President Barack Obama kept his distance from the talks, choosing instead to emphasise a job creation package that was blocked by Republicans in Congress. Aides believe Obama will be able to use the super committee’s failure to paint Republicans as obstructionist as he seeks re-election.

Congressional leaders set up the super committee during a bitter budget fight last summer that hammered consumer confidence and prompted a first-ever downgrade of the United States’ AAA credit rating by Standard & Poor’s.

Aiming for the big deal
Blessed with extraordinary powers, the committee was supposed to forge the sort of deficit-reducing deal that had eluded Obama and House Speaker John Boehner, the top Republican in Congress, over the summer.

The panel was tasked with finding at least $1.2trn in budget savings over 10 years, enough to demonstrate that Washington could tame a debt load that last week hit $15trn – equal to the size of the US economy.

The threat of the automatic cuts, falling equally on military and domestic programs, was supposed to ensure that a deal would be reached.

Committee members met for dinners and several even took bike rides together in an effort to build the trust that would enable them to make decisions that could anger powerful industries and interest groups before the 2012 elections.

They had a clear blueprint for agreement. Other budget-cutting panels, including one set up by Obama, had concluded that lawmakers need to wring out the loophole-laden tax code and rein in health benefits that are set to balloon over coming decades as the population ages.

In the end, Republicans were unwilling to sign off on tax increases while Democrats balked at a dramatic benefits overhaul.

Lawmakers were doubtless mindful of the political fallout from the deals that led to the budget surpluses of the late 1990s. A 1990 deal that raised taxes and cut spending prompted a conservative rebellion within the Republican Party that weakened then-President George H.W. Bush and contributed to his defeat two years later.

A similar 1993 deal, forged without Republican cooperation, led to a landmark defeat for congressional Democrats the following year that handed control of Congress to Republicans.