Fallout from deficit-reduction panel failure

The failure of a congressional deficit-cutting "super committee" means the tough work of putting the United States' finances on a stable path will likely have to wait until 2013 at the earliest.

Barring some unforeseen development, the Republican and Democratic co-chairs of the committee are due to issue a joint statement on Monday conceding defeat in their three-month search for a debt deal, aides told Reuters on Sunday.

With the intensifying 2012 election campaign stoking already bitter partisanship in Washington, the U.S. Congress will be hard-pressed to reform expensive government benefit programs and an archaic tax code that are seen as the keys to improving the country's fiscal health.

Given the complexity of passing such legislation through Congress, it could even be 2014 before real progress is made.

That timetable could test the patience of global financial markets that so far have been willing to continue investing heavily in the United States as Europe grapples with a spiraling debt crisis.

The super committee has squandered a rare opportunity to take major action against the United States' fiscal problems because it had extraordinary powers to quickly move legislation through a gridlocked Congress.

The likely fallout from the committee's inability to agree on at least $1.2 trillion in deficit-reduction over 10 years also includes:

* Added difficulties extending payroll tax cuts, unemployment benefits and other expiring tax breaks, which are seen as important economic stimulants. The hope had been to include them in any super committee deal that would have been spirited through Congress by December 23 under rules prohibiting amendments and procedural roadblocks.

Now they will have to find another way through the legislative maze. Analysts says failure to extend the payroll tax cuts and enhanced jobless benefits could shave more than a percentage point off U.S. economic growth.

* Increased investor uncertainty. Investors already have little confidence Republicans and Democrats can bridge a yawning ideological divide over tax policy and who should shoulder the burden for reducing deficits. The U.S. Congress has had trouble passing even routine legislation this year, leading to repeated disruptions of government services.

* The committee's failure is unlikely to trigger another downgrade of the U.S. credit rating. Rating agencies have said they will look at a range of factors in making any decision but that the committee's washout will not be decisive.

* Republicans are already making noises about altering the $1.2 trillion in automatic spending cuts, or sequesters, that are due to kick in 2013 as a result of the super committee's failure. They want to soften the planned $600 billion defense cuts. If Congress starts tinkering with the sequesters, however, financial markets could become unnerved by the unraveling of savings seen as already "in the bank." Again, the 2012 elections could determine the fate of these cuts.

* Democrats and Republicans will try to use the super committee's dead end for political gain. Democrats will say the outcome is further evidence Republicans just want to protect the rich from sharing the burden of deficit reduction. Republicans will argue that, once again, Democrats fail to grasp the gravity of escalating costs of healthcare benefits.

* The White House had been bracing for days for the committee's failure and believes President Barack Obama can weather it without major political fallout and may even be able to score points against Republicans as he seeks re-election.

Aides believe Obama will be able to seize the chance to further paint Republicans as obstructionist, a strategy they hope will be more potent because of polls showing most voters back his proposal to increase taxes on wealthier Americans.

* Bush-era tax cuts are back in the firing line. They face extinction at the end of 2012 after super committee Republicans tried and failed to win permanent extension. That might please some Democrats, who see trillions of dollars in additional revenues in 2013 to reduce budget deficits.

Obama is likely to engage Republicans to at least extend the across-the-board tax cuts for the middle class. The presidential and congressional election results in November could decide if the wealthy see their taxes rise.

* One thing is certain: The super committee will disband having not agreed on one penny of deficit-reduction. Instead, it will have actually contributed to the government's $1 trillion-a-year budget deficits, having spent government funds paying for staff and other expenses.

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

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