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Members of the media seek comment from Democratic Senator John Kerry after a special debt-reduction committee of the U.S. Congress failed to reach agreement on Nov. 21, 2011. (Andrew Harrer/Andrew Harrer/Bloomberg)
Members of the media seek comment from Democratic Senator John Kerry after a special debt-reduction committee of the U.S. Congress failed to reach agreement on Nov. 21, 2011. (Andrew Harrer/Andrew Harrer/Bloomberg)

U.S. politics

Republicans, Democrats ditch deficit talks to keep election pitches intact Add to ...

A bipartisan congressional panel’s failure to come up with a hoped-for deficit reduction deal has added to global investor uncertainty and left Republicans and Democrats alike vowing to take their case directly to the American electorate in 2012.

The so-called super-committee appointed to find at least $1.2-trillion (U.S.) in savings could not come to a compromise on a combination of spending reductions and tax increases to meet their target by Monday’s de facto deadline.

Each party reacted to the 12-member panel’s formal avowal of failure by blaming the outcome on its rival’s intransigence. Republicans wanted an across-the-board reduction in income tax rates in exchange for the elimination of some deductions. Democrats opposed cuts to social programs without higher taxes on the rich.

However, the odds were stacked against a compromise from the outset and each side may have preferred failure over a deal that could upset its political base in advance of an election.

“Both parties got some terrific arguments out of it,” explained Larry Sabato, director of the University of Virginia Center for Politics. “President Obama will say this is yet more evidence of the do-nothing Congress generated by the GOP. Republicans are going to say ‘We told you Democrats weren’t serious about cutting spending.’”

Still, the panel’s failure unnerved investors, primarily since it leaves the fate of more than $100-billion in payroll tax cuts up in the air. Those cuts, set to expire on Dec. 31, have provided a modest boost to the U.S. economy this year and the Obama administration has sought to extend and expand them. The super-committee’s failure leaves the issue unsettled.

The panel of six senators and six congressmen was created as part of last summer’s hard-won debt-ceiling agreement between the White House and Republicans in Congress. In exchange for raising the limit on U.S. borrowing by $2.1-trillion – or enough to carry the Obama administration beyond the 2012 vote – the GOP-led House of Representatives demanded an equal amount in deficit reduction over 10 years.

The parties agreed on the first $900-billion in outright spending cuts – an easier task than it sounds since the bulk of the cuts are not scheduled to take effect until later in the decade, giving Congress plenty of opportunity to revise the plan down the road.

The remaining $1.2-trillion in deficit reduction was left for the super-committee of six Republicans and six Democrats to pin down. They were supposed to have an incentive to compromise, since automatic defence and domestic spending cuts totalling that amount would start to take effect in 2013 without a deal.

A year of wiggle room is an eternity on Capitol Hill and Republicans and moderate Democrats are already talking about passing legislation that would repeal the more than $600-billion in defence cuts that even the White House considers too deep.

“They’ve built in an extra year for Congress to worm out of it,” Prof. Sabato added. “And Congress is very good at worming out of things they don’t want to do.”

Defence cuts are anathema in Washington, primarily among hawks in the GOP.

“There are now the makings of a really interesting conversation between the anti-tax people and the pro-defence people in the Republican Party,” Brookings Institution senior fellow William Galston offered. “But that presumes the Democrats would hang tough [on defence cuts] Many of them are leery of being tagged as anti-defence and almost all have local defence-related interests in their districts and states.”

Mr. Obama insisted Monday he would veto any legislation that repeals the automatic cuts unless they are replaced by a broader deficit reduction deal that involves both tax increases and spending reductions.

“There will be no easy off ramps on this one,” the President said in the White House briefing room after the super-committee formally announced its failure to reach a deal.

Still, all signs suggest each party is counting on the 2012 election to settle the issue. Democrats cite polls showing that two-thirds of Americans favour increasing taxes on the wealthy, while Republicans hold up surveys indicating voters think federal spending is out of control and do not trust Mr. Obama to take an axe to it.

So far, financial markets have been more concerned about Europe’s debt woes than the deficit standoff in Washington, relieving the pressure on Congress to reach a comprehensive deal to address long-term fiscal challenges as the U.S. population ages.

But Mr. Galston argued that market sentiment can sour quickly and investor patience with U.S. political gridlock could eventually run out.

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