Q+A: Spending cuts could be reversed

WASHINGTON Mon Nov 7, 2011 12:59pm EST

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WASHINGTON (Reuters) - The deadline for the U.S. congressional "super committee" to produce a deficit-cutting plan is fast approaching with no sign of a deal in sight, raising concerns about what will happen if the panel fails.

The legislation that established the panel of six Democrats and six Republicans put in place an enforcement mechanism that will trigger automatic cuts if the committee fails to reach agreement on $1.2 trillion in deficit cuts over 10 years.

Triggers would also would kick in if the super committee plan is rejected by Congress, if President Barack Obama vetoes it, or if the panel presents only a partial deal. It would take more than a year before the first cuts take effect and they could ultimately be reversed by Congress.

Below are some questions and answers on what happens if no deal is reached.

WHAT HAPPENS IF THE COMMITTEE FAILS TO AGREE?

Across-the-board cuts equal to $1.2 trillion over 10 years would start in January 2013. Furthermore, Bush-era tax cuts are set to expire at the end of 2012 and tax rates would snap back to pre-2001 levels if Congress fails to act.

Washington has been running annual deficits of more than $1 trillion for a number of years. Most financial analysts say that cannot continue indefinitely without creating a debt crisis similar than the one that is now hitting Europe and hurting global economic growth.

If the panel comes up with only a partial deal, the remainder would come through automatic cuts.

The cuts would be split equally between defense and non-defense programs. In reality, only about $984 billion in cuts over 10 years would be ordered because the legislation allows for lower interest payments on the U.S. debt after taking into account deficit reduction.

The Center for Budget and Policy Priorities calculates that $54.7 billion in cuts would be ordered annually in both defense and non-defense spending from 2013 through 2021. For defense, that would be on top of $350 billion in cuts over 10 years already enacted into law.

U.S. defense spending, including war costs, has been around $700 billion a year.

It is possible Congress may not allow the cuts to take effect. Congress has the power to vote to rescind some or all of the spending cuts.

Republican Senator Jon Kyl, a super committee member, has vowed to lead the charge against more military savings. Republican Senators John McCain and Lindsey Graham already are working on legislation to stop any military spending cuts triggered. Those spending cuts could become a powerful issue in 2012 presidential and congressional election campaigns.

DO LAWMAKERS HAVE ANY SAY ON THE TRIGGERS?

Yes, to some degree. Spending caps would be set for broad categories of government programs and senior lawmakers will have authority to allocate money to programs within those caps. By January 2013, Congress will have agreed on spending levels for the fiscal year and any across-the-board cuts triggered for 2013 would be against those appropriated amounts.

Obama would be free to exempt some or all military personnel funding from the automatic cuts. If he does, funding cuts for other defense programs would go up.

If the automatic cuts are triggered, Congress could still take all of 2012 -- an election year -- to rescind or change any of those spending cuts.

While the deficit-cutting action taken by the current Congress could be undone by lawmakers following the November 2012 elections it also could be scrapped by the new Congress that will be seated in January 2013.

WHAT HAPPENS TO MEDICARE AND OTHER PROGRAMS?

The Social Security retirement program is exempt from the automatic spending cuts. The Medicaid healthcare program also is protected as are veterans' benefits, food stamps and a handful of other programs to help the poor and disabled.

While Medicare benefits would be spared from the automatic cuts, payments to hospitals and other healthcare providers would be reduced. But those cuts would be limited to 2 percent a year. Still, the idea of provider cuts on top of those included in Obama's healthcare overhaul has upset doctors and hospital groups.

Farm price supports, food safety, education, foreign aid, public safety and law enforcement budgets would all be hit with across-the-board spending cuts, as would low-income housing and energy assistance and other government functions.

The top Democrat on the House Appropriations Committee, Representative Norm Dicks, warned that automatic cuts would force reductions at the Commodity Futures Trading Commission and the Security Exchange Commission that would make it hard for those agencies to enforce rules and investigate fraud.

ARE THERE OTHER CONSEQUENCES OF FAILURE?

Failure to overcome partisan differences and come to grips with U.S. deficits could fuel public disgust with lawmakers and feed anti-incumbent feelings in 2012 elections.

It also will not diminish the need to tackle well-known, long-term budget imbalances that are unsustainable. Spending on healthcare and retirement programs will rise sharply and consume an ever greater share of the federal budget as the 77-million-strong baby boom generation, born between 1946 and 1964, retires and draws on government benefits.

Lawmakers have to face that demographic reality by cutting spending on those programs or raising taxes. Most financial experts agree that borrowing ever more money from China and other investors is not a sustainable option.

Some credit rating agencies have warned of a potential downgrade of the top-notch AAA U.S. debt rating if Congress fails to rein in U.S. deficits and the costs of health and retirement benefits.

Standard & Poor's lowered its U.S. rating by a notch in August because political brinkmanship in the fight to raise the U.S. debt limit raised questions about Washington's ability to deal with long-term deficits.

Moody's Investors Service and Fitch Ratings maintained their top rating for U.S. debt but warned that additional deficit reduction would be needed order to keep it.

A credit rating downgrade could lead to higher interest rates across the U.S. economy. But some analysts note that U.S. interest rates actually fell after the S&P downgrade. (Reporting by Donna Smith; Editing by Jackie Frank)

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