Calculating the odds of a U.S. deficit deal
WASHINGTON/NEW YORK (Reuters) - A dispute over disaster relief that brought the government to the brink of a shutdown has fueled pessimism that Republicans and Democrats can find hundreds of billions in budget savings by November 23.
That is the deadline for a bipartisan congressional "super committee" to reach a deal on reducing the deficit by at least $1.2 trillion.
If a majority of the 12-member panel fails to embrace a plan, $1.2 trillion in automatic spending cuts will be triggered, beginning in 2013.
Here are possible scenarios for how the committee could hit the bulls eye, get close to it or miss the target altogether:
This scenario is fuzzy and messy and it's what Congress does best. It's also a one that regularly comes up among budget and tax experts outside the government. They give it strong odds.
Here is how it would work: The super committee, unable to reach agreement on the $1.2 trillion in savings, agrees to some savings -- say $500 billion to $800 billion over 10 years. Farm subsidies and federal workers' pensions could get trimmed along with other spending cuts and tiny revenue hikes.
The automatic spending cuts starting in 2013 could help achieve the rest of the $1.2 trillion goal.
There could be a twist: In a move to give credit rating agencies and investors confidence that Washington is determined to fix the long-term fiscal mess, the super committee instructs congressional committees to find more savings next year. That likely would mean an attempt at broad tax reform.
It is unclear though how the super committee could force the congressional committees to actually do the work.
Signs that lawmakers would continue looking for additional savings after the super committee's work is done could buy some time with the ratings agencies, avoiding additional downgrades of the U.S. credit rating in the short term.
In August, Standard & Poor's sent shockwaves through the financial world when it cut the U.S. government's AAA rating by a notch following a rancorous debate between Republicans and the White House over raising the borrowing limit.
In a report issued on Monday, Moody's noted that "differences between the political parties" point to likely deadlock on significant deficit reduction.
The November 23 deadline for the super committee to finish its work is written into law, not stone, and Congress can change the law. "That's clearly a possibility. They buy time; push it into next year," said Kenneth Kies, managing director of the Federal Policy Group and a former Republican tax counsel for the House Ways and Means Committee.
Other budget and tax specialists in the private sector see this as a possibility too. But they also note pitfalls, such as further erosion of the public's already shaky confidence in Congress and the potential for upsetting financial markets.
For the rating agencies, such a delay would be seen as bad news. Both S&P and Moody's, which currently have a negative outlook on U.S. ratings, have said agreement on a deficit reduction plan will become even more difficult in 2012 as presidential elections increase political divisions.
The odds of this outcome are low, but possibly growing.
The problem with November 23 is this: It's a tough timeline for achieving big things. Practically, it requires major decisions by early November so that congressional budget analysts have time to assess the deal's effectiveness before it is put into final language for the super committee to vote on by November 23.
A majority of committee members fail to agree on anything, a scenario that is given even odds by many budget observers.
Here's why: Republican leaders have said no to tax hikes, while President Barack Obama and his fellow Democrats have said they won't allow major cuts to government retirement and healthcare programs without tax increases. Heightened partisan rhetoric just weeks away from the earliest contests in the 2012 election could harden ideological divides.
The pessimists also argue that months of negotiations between Congress and the White House earlier this year failed and so there is no reason the super committee can close the divide. They also point to the bickering that unfolded this week over a routine spending measure to fund aid for disaster victims and keep the government running past Friday.
The result: $1.2 trillion in spending cuts are automatically triggered to begin on January 1, 2013.
But 2013 is a long time away. In the meantime, voters will go to the polls on November 6, 2012, to pick a president and members of Congress. Depending on who wins, there could be a move to suspend or change the automatic spending cuts.
Such a scenario is a recipe for further ratings downgrades. It would confirm S&P's view that Washington is unable to reach a meaningful deficit-reduction deal, paving the way for additional downgrades in the next couple of years.
Moody's could still wait until after the 2012 elections to decide on a downgrade, however -- unless slow economic growth forces it to cut U.S. ratings before that.
THE FULL DEAL
The super committee finds a way to thread the needle and get enough votes to back a mix of spending cuts and some revenue increases that total $1.2 trillion over a decade.
The revenue increases probably would be sold as closing tax loopholes. Ending a special break for ethanol blenders that is set to expire at the end of the year anyway is a possible example.
While not total failure, this would be a disappointment to ratings agencies looking for a more ambitious product. Their rating decisions would probably depend on the chances of further deficit-reduction measures in the future and on the performance of the economy.
A ROBUST DEAL
Nobody sees it now, but sometimes the unexpected happens. Under this scenario, the super committee surprises everybody, and crafts a $3 trillion deficit-reduction deal that includes Republican spending cuts and Democratic tax increases.
The panel writes into legislation comprehensive tax reform and structural reforms to the Medicare and Medicaid healthcare programs for the elderly, poor and disabled.
By December 23, the full Congress approves the plan. President Barack Obama signs it into law and heads into the election year as a tight-fisted budget hawk. Republicans, including Tea Party fiscal conservatives, boast that they have changed the culture of Washington from spendthrift to miser.
This is the recipe ratings agencies are looking for. Over the long run it could persuade Standard & Poor's to restore Washington's AAA credit rating.
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