The Not So 'Super Committee'
By Stephen Smith
December 9th, 2011
The
Joint Select Committee on the Deficit Reduction referred to as the Super
Committee was created by the Budget Control Act of 2011. Twelve members of Congress were selected to
sit on this committee, six from the House of Representatives and six from the
Senate. Each delegation was evenly
divided between Democrats and Republicans. The Super Committee’s mission was to
come up with $1.5 trillion in deficit reductions over a ten year time horizon
by
November 23, 2011. If it did not come up
with these reductions, then the Budget Control Act as passed by Congress in
August, provided that certain federal funds would not be spent but would be
sequestered.
The Congressional Super Committee failed to reach a deal by the November 23rddeadline. What’s next? Without a deal, the Act requires certain funds to be sequestered beginning January 1, 2013. The sequestered funds will reduce spending by $109 billion per year for nine years. The cuts that were agreed to by Congress are split between security spending (defense) and domestic spending, with roughly half coming from Medicare and the balance from domestic discretionary spending. These cuts are across the board except for Medicare cuts to providers and HMOs that manage part D plans are capped at 2%. The fiscal drag in 2012 from these cuts will amount to 1% of Gross Domestic Product if the payroll tax, unemployment benefits, and the AMT patch are not extended by Congress. The largest fiscal drag will occur in 2013 and is projected to total $535 billion.
Congress
is unlikely to change the sequester before the 2012 elections. President Obama
has vowed to veto any legislation that would weaken the sequester in any event.
Many Democrats believe the scheduled sunset of the Bush tax cuts coupled with
the sequester, which includes defense spending cuts, is more preferable than
proposals by Republican’s to reduce the
major entitlement programs such as Social Security, Medicare, and Medicaid.
Clearly both parties are positioning themselves for the 2012 elections instead
of taking a business-like approach to solving nation’s revenue versus spending
problem, leaving investors in a protracted period of uncertainty in both the
equity and bond markets.
