Deficit panel failure looms over last-gasp talks

After months of talks, the high-profile congressional effort to rein in the ballooning U.S. debt is expected to end in failure on Monday with negotiators announcing they could not bridge deep divides over taxes and spending cuts to reach a deal.

The Republican and Democratic leaders of a 12-member congressional "super committee" are set to declare defeat in a joint statement later on Monday. They failed to find enough common ground on a package of at least $1.2 trillion in deficit reduction over 10 years.

As the clock ticked down to a Monday deadline to publish the results of any deal, a small group of panel members gathered for a last-ditch effort to compromise. But several congressional aides who have worked closely with the panel said they had little hope of any progress.

The super committee members agreed.

"I wouldn't be optimistic. I don't want to create any false hope here," Republican Senator Jon Kyl told Fox News. He said the panel would release a statement by the end of the day.

Failure to reach a deal on deficit reduction would trigger $1.2 trillion in cuts over the next decade, beginning in 2013.

The deadlock focuses on Republican opposition to tax increases, particularly on the wealthiest Americans, and Democratic refusal to cut into federal retirement and healthcare benefits without such tax increases.

After a year of bruising budget battles, super committee failure would be another sign that U.S. lawmakers are too entrenched in their positions 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.

Dysfunctional Washington

It would also cement notions of a dysfunctional Washington among voters and investors already disenchanted with the brinkmanship that brought America to the edge of a first-ever debt default and subsequent credit downgrade in August.

As failure loomed in Washington, Wall Street stocks skidded, extending losses from across Europe as fears over out-of-control government debt on both sides of the Atlantic hit financial markets. Commodity prices also fell.

The S&P 500 index fell 2.5 percent. The Dow Jones industrial average and tech-heavy Nasdaq Composite Index each lost nearly 3 percent.

The super committee, with six Republicans and six Democrats, had until Wednesday midnight to vote on a deal. The deadline to have a legislation written and presented to entire panel was Monday.

Lawmakers likely will not return to the problem until 2013 at the earliest as they shift their attention to the November 2012 presidential and congressional elections.

Budget skirmishes will continue over the coming months.

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

For their part, Republicans will scramble to shield defense spending from $600 billion in automatic spending cuts that would be triggered, beginning in 2013, in the absence of a deal.

For now, the triggers would protect beneficiaries of Medicare federal health insurance coverage from major cuts.

Market Worries

Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, said a larger market drop might send a strong statement to Washington.

"It's telling the politicians that if you want to play your games, play your games, but investors are just going to be very unhappy with you," he said.

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.

Democratic committee member Senator John Kerry said the big hurdle the two sides could not get past was whether to extend tax cuts to all Americans. Democrats want to extend them to all but the wealthiest citizens.

He blamed Grover Norquist, the head of the powerful anti-tax lobbying group Americans for Tax Reform, for blocking progress since most Republican lawmakers have signed Norquist's pledge agreeing not to raise taxes.

"Grover Norquist has been the 13th member of this committee without being here," Kerry said on CNN.

"I can't tell you how many times we hear about 'the pledge,'" he said. "Well all of us took a pledge to uphold the Constitution. ... I think that requires us to try to reach an agreement - so we have to compromise."

Fodder For 2012

President Barack Obama kept his distance from the talks, choosing instead to emphasize 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 obstructionists during his 2012 re-election campaign.

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' top-notch AAA credit rating by Standard & Poor's.

Blessed with extraordinary powers, the panel was tasked with finding at least $1.2 trillion in budget savings over 10 years, enough to demonstrate that Washington could tame a debt load that last week hit $15 trillion - equal to the size of the U.S. economy.

In the end, Republicans were unwilling to sign off on tax increases while Democrats balked at a dramatic overhaul of government health benefits that are set to balloon over the coming decades as the population ages.

But both sides were already positioning themselves to blame the other side while campaigning in the 2012 election.

[Source: By Thomas Ferraro and Richard Cowan, Reuters, Washington, 21Nov11]

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