A ‘super-committee’ of US politicians announced this week that it had failed to formulate a plan to reduce America’s budget deficit. It had been asked to cut the deficit by at least $1.2trn over the next ten years. Republicans refused to countenance higher tax rates and Democrats were reluctant to cut spending further. When the committee was established in summer, it was agreed that a failure to do a deal would automatically trigger $1.2trn of cuts in defence and domestic spending as of January 2013.
What the commentators said
“Washington is a long way from turning sensible – let alone super,” said the FT. Many had hoped that the draconian automatic cuts would concentrate minds, but it hardly helped that they were due to begin only after November’s election. Now the odds favour “even worse gridlock as both parties dig their heels in” for the election, even though the US “badly needs to agree on a framework for medium-term fiscal discipline.”
A $1.2trn deal wouldn’t be “nearly enough”, as Economist.com pointed out. Gross federal debt is around $15trn, more than GDP. Predicted deficits over the next decade will add up to $12trn to this figure. Analysts reckon that cuts of around $4trn should stabilise the overall debt pile. Cuts, however, are only half the picture, said David Reilly on wsj.com.
Getting debt down is also a question of growth, and here official estimates look too optimistic. For instance, the Congressional Budget Office has pencilled in GDP growth of 4.4% in 2014 and 5% the following year. But such a strong expansion is unlikely in the aftermath of a burst credit bubble when the economy is gradually working off debt, said Reilly. The last time growth exceeded 4% for two successive years was during the tech bubble.
The long-term picture looks bleak unless politicians get their act together. But for now, at least, a credit downgrade is unlikely, noted The Times. President Obama has promised to veto legislation to water down the automatic cuts, so at least some progress should be made. The bad news, however, is that the failure of the super-committee makes the renewal of both payroll tax cuts and extended unemployment benefits – agreed last year – less likely. As of January, fiscal drag could represent as much as 1.5% of GDP, said Fxpro.com. – “a significant headwind” for the fragile economy.