Comittee Talks on US Deficit...About to Fail

  The committee has been locked in talks for months

Talks in Washington aimed at cutting the US government's borrowing are on the verge of failure. A congressional "super-committee" was tasked in the summer with finding $1.2tn in savings to avoid automatic deep spending cuts. But the talks between Democrats and Republicans are widely reported to have collapsed, with formal confirmation expected later on Monday.

Meanwhile, the US national debt has just risen above $15tn. The deficit-reduction committee was set up in August, the result of a last-minute deal between the two sides in Congress to raise the debt ceiling and avert a potential default on US debt payments. Its members were instructed to find at least $1.2tn in savings by 23 November. Democratic Senator John Kerry held out hope for a last-minute agreement, saying on Monday that a deal remained on the table, but that failure would mean the forthcoming presidential election would be dominated by the deficit debate.

If the committee fails, it is likely to have a major impact on financial markets, both at home and overseas. But any political failure is also likely to have a much broader effect on overall business and consumer confidence. If Americans are worried that Washington cannot work things out, they may rein in spending and damage the already weak US recovery.  In the bond markets, America's cost of borrowing could start to creep up. While many doubt that the US would ever turn into Greece, the debt problems in Europe are a nasty reminder of what can happen when governments borrow too much, fail to curb spending and people lose faith in their ability to repay loans.

Without an agreement, the committee faces the prospect of being held responsible for automatic cuts totalling some $1tn to defence and domestic spending, due to come into effect in 2013. Much of the burden - almost $500bn - is expected to fall on defence and national security budgets, despite the Pentagon already facing a $450bn reduction in its budget.

US Defence Secretary Leon Panetta has spoken out against the prospect of further defence cuts, saying they would "hollow" out US military capabilities. White House spokesman Jay Carney said on Monday that the defence cuts planned for 2013 are "deeper than we think is wise", but said the Obama administration does not think Congress should undo the automatic cuts.  "Instead of pointing fingers and playing the blame game, Congress should act," he said.

 

Disagreements have centred on whether tax increases should form part of the budget reduction measures, with Democrats in favour of such rises but Republicans opposed. Republicans are also seeking cuts in benefits and healthcare schemes including Medicare and Medicaid, programmes dear to Democrats.

Following weeks of negotiations, a last-minute proposal that included some new taxes raised hopes, but could not muster enough support. Republicans proposed a package of $644bn in savings, including $543bn in spending cuts, $3bn of new revenue generated by closing a tax loophole for businesses to buy private jets, and $98bn saved from lower interest payments. Democrats rejected the offer, saying it focused too heavily on spending cuts.

Earlier, Democrats produced a plan worth $3tn that included $1.3tn in revenue from tax rises, around $400bn in Medicare savings, and between $200bn to $300bn in new economic stimulus. But it did not attract support among Republicans, who oppose tax increases.

The Republican and Democratic heads of the 12-member committee were expected to issue a statement later on Monday, probably after the US markets have closed, saying they have been unable to reach a deal.

Automatic spending cuts in 2013

• Half of the cuts - estimated at $454bn - would hit defence spending
• Non-security programmes would be trimmed by $294bn
• About $170bn of cuts would be made to mandatory spending
• $31bn in savings by reducing Medicare premiums
• Savings of $169bn from reduced interest payments on national debt

Source: US Congressional Budget Office