1:20pm

Mon November 21, 2011
Politics

With No 'Super' Deal, What's Next In Deficit Debate?

Originally published on Mon November 21, 2011 4:30 pm

For the not-so-super debt reduction supercommittee, failure is clearly an option.

As the blame-gaming bipartisan congressional committee stumbled toward collapse Monday, washing out on even the most basic show of common purpose, the "what happens next" scenarios began to take shape.

Markets reacted with initial alarm at the prospect of yet another sign of the deep dysfunction in Washington. The Dow Jones industrial average closed down nearly 250 points Monday, as investors — who just months ago saw Republicans in Congress push the nation to the brink of default during a debt debate — again reacted.

With elected officials in Congress preparing to wave the surrender flag and hustle home for the Thanksgiving holiday, here's a look at four potential consequences of the latest Washington disappointment:

1. Let The Automatic Cuts Begin

The supercommittee was born when a deeply divided Congress failed to agree on a plan to reduce the nation's ballooning deficit earlier this year.

Co-chaired by Democratic Sen. Patty Murray of Washington and GOP Rep. Jeb Hensarling of Texas, the panel was charged by law with coming up with a bipartisan bill that would cut the federal deficit by $1.5 trillion over the next decade.

The committee's failure to meet a pre-Thanksgiving deadline will trigger $1.2 trillion in automatic spending cuts beginning in 2013 and through 2021, with half coming from domestic programs and half from the defense budget.

Programs exempt from automatic cuts include Social Security, Medicaid and food stamps; cuts to Medicare are capped at 2 percent.

The $1.2 trillion represents about 10 percent of the nation's collective deficit of more than $10 trillion through 2021, according to Craig Jennings, director of federal fiscal policy at OMB Watch.

He notes that with interest savings factored in, the actual triggered cuts will be closer to $980 billion.

In terms of a hard number, "it doesn't get you very far," Jennings says, but still will touch many programs.

2. Or Change The Rules

But with the automatic cuts not slated to go into effect for more than a year, legislators have already begun to fashion bills to protect certain programs. Republican Sen. John McCain of Arizona, for example, is working on one that would limit military spending cuts. Defense Secretary Leon Panetta, in a letter last week to McCain, the ranking GOP member of the Armed Services Committee, characterized the prospect of rapid, triggered cuts as "devastating."

Congress could pass a law allowing it to back out of the automatic cuts. Or it could push all the cuts to the domestic side of the ledger, or back out of the triggered defense cuts altogether.

But President Obama has told supercommittee members that he will not accept changes that water down the triggered cuts, so the prospects for these laws remain murky at best.

3. Trade Defense Cuts For Tax Cuts

With the supercommittee winding down, many see the deficit-cutting debate as reverting to what it's always been about: the Bush-era tax cuts.

The Congressional Budget Office calculates that if the Bush tax cuts, extended last year through 2012 in a budget agreement forged by Obama, are again extended, the deficit would increase by $3.3 trillion through 2012.

That number increases to $4.6 trillion if inflation indexing and other factors are taken into account.

With the tax-cut extension set to expire at the same time the automatic cuts are scheduled to begin, Congress watchers speculate that negotiations now will involve horse-trading over defense spending and rollbacks on Bush tax cuts for the wealthy.

But the timing suggests that a plausible scenario could be one in which Bush-era tax cuts for the middle class are extended, in exchange for a deal on defense cuts.

4. Take The Issue On The Road

The debate will continue into January, when Obama introduces his 2013 budget and the Republican nominating process kicks into high gear.

So far, Republicans are adopting different strategies. Former GOP House Speaker Newt Gingrich, surging in recent polls, characterized the committee's mission collapse as "good for America." Former Massachusetts Gov. Mitt Romney assailed Obama for the supercommittee's collapse.

The one thing that the supercommittee's tired expiration appears to guarantee is a long election-year debate over the Bush tax cuts, and a clear party divide over who pays to reduce the nation's deficit — and how.

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