December deadline won't mark end of debt fight

Reuters News

10/16/2011 3:33:49 PM - Reuters News

By Richard Cowan and Tim Reid

WASHINGTON (Reuters) - December looms as the deadline for tackling a fiscal mess punctuated by a $14.8 trillion national debt. But it's December 2012, not 2011, that is really worth keeping an eye on.

December 23, 2011, is the legal deadline for Congress to approve at least $1.2 trillion in savings over 10 years to avoid an equal amount of across-the-board spending cuts, as part of a deal reached during debt talks in August.

But a series of even more important events will dovetail following the November 2012 presidential election to create what some are calling a "perfect storm" for the nation's economic affairs.

"A whole lot of things happen in late 2012 and early 2013," said James Horney, a fiscal policy expert with the liberal Center on Budget and Policy Priorities.

Looming at the top of the list is the scheduled expiration of sweeping Bush-era tax cuts that in 2001 and 2003 lowered taxes across the board. President Barack Obama has called for extending these cuts for families earning less than $250,000 while letting those for the wealthiest lapse.

Also by the end of 2012, Congress will have to decide on fixing a glitch in the Alternative Minimum Tax so that middle-class Americans are not forced to pay a tax that originally was aimed only at the wealthiest.

Taken together, the future of these two tax policies could make for a multi-trillion-dollar swing for the Treasury, either in the way of higher revenues or more rapidly escalating debt.

"The real end game is December 2012," said Richard Gold, a lobbyist at Holland and Knight. "If the Republicans want to keep some or all of the (Bush) tax cuts, they need to cut a deal on deficits. The Bush tax cuts are the real trigger, and that gives Democrats the leverage here."

But that's not all.

By the end of 2012, Congress and Obama likely will need to increase the government's borrowing authority. A battle over the U.S. credit limit nearly led to a government default on its debt in August. Republicans used the debt limit increase as leverage to win $917 billion in spending cuts over 10 years.

The November 6, 2012, elections, when the United States will elect a president, all members of the House of Representatives and one-third of the Senate, are a big wild card, with the outcome likely to influence the outgoing Congress. It will sit until the new Congress is sworn in the following January.

"At that point," said Horney, the United States might "be in a better situation (than this year) to get some kind of an agreement" on fiscal matters.

DON'T IGNORE THE SUPER COMMITTEE

The deficit-reduction "super committee" of Congress is now struggling to find just the right balance of spending cuts and tax increases to achieve $1.2 trillion in savings.

Super committee member Chris Van Hollen, a House Democrat, Friday warned it was "still unclear" whether it will succeed. There are broad implications because of the November 23 deadline for presenting a plan to the full Congress.

House of Representatives Majority Leader Eric Cantor said in an interview on the "Fox News Sunday" program that he was confident there would be a deal by the November 23 deadline.

Success will show global financial markets that Washington is getting serious about reining in annual budget deficits that have been well over $1 trillion for three consecutive years.

Failure could spark another downgrade in the government's credit rating and rock global financial markets. In August, amid all the debt limit bickering, Standard and Poor's knocked Treasury's coveted AAA rating down one notch.

If the super committee cannot agree to at least $1.2 trillion in savings, that amount of spending cuts would automatically go into effect in January, 2013.

Gold noted that if there are automatic spending cuts, they "don't take effect until 2013, so Congress has the time to come up with a different solution. I think that's what everyone thinks is going to happen."

Super committee Republican member Senator Jon Kyl has said he would work to rescind automatic defense-related spending cuts if they are triggered. Half of any automatic cuts triggered would target defense programs.

Senator John Kerry, a Democratic member of the super committee, was asked by Reuters whether he feared Congress, following the 2012 elections, could scrap any 2013 spending cuts before they kick in or rewrite a deficit-reduction plan agreed to by the panel.

"Right now, I'm just concerned about doing our job; getting it done -- one step at a time," Kerry responded.

(Editing by Deborah Charles and Paul Simao)