Supercommittee Failure Sets Stage for Election Year Debate

As part of a last-minute agreement ending August’s debt ceiling standoff, legislation was signed into law calling for the creation of a deficit reduction “supercommittee.” The Joint Select Committee on Deficit Reduction, comprised of 12 members (6 Democrats and 6 Republicans) from both the House and Senate, was charged with finding ways to reduce the federal deficit by at least $1.2 trillion, and directed to report its findings by November 23, 2011. Of course, the outcome was well publicized–the committee announced that it was unable to reach a deal, and subsequently disbanded. Seen by many as the last best hope to reach a compromise, the committee’s failure casts the debt ceiling as one of several major issues that will ultimately be addressed by the coming election.


Automatic cuts


Built into the legislation that gave birth to the supercommittee was a default provision–with the committee’s failure to reach agreement, $1.2 trillion in broad-based spending cuts are automatically triggered over a nine-year period beginning in January 2013 (the term for this is “automatic sequestration”). The automatic cuts are split evenly between defense spending and non-defense spending. Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs would be subject to the automatic cuts.

The threat of the automatic cuts was conceived as a way to encourage the supercommittee to each a compromise. With the failure of the supercommittee to reach agreement, however, these imminent cuts are now the source of concern. Parties on both sides find the cuts too broad, and efforts to short-circuit the automatic cuts, at least those affecting defense spending, have already begun–though the President has suggested that he would veto any such legislation.


New debt ceiling crisis possible in 2013


The legislation that established the supercommittee also put in place what amounted to a piece of political theater that allowed for temporary, short-term incremental increases to the debt ceiling limit. Effectively, the President was able to get additional borrowing authority, while allowing Congress to go on record opposing it by voting for disapproval–but without really being able to prevent the debt ceiling increase from taking effect. The last debt-ceiling increase made under this legislation was calculated to carry us through the current election cycle. It might not be long after the election is decided, however, that the debt ceiling limit will again need to be addressed.


Same basic divide remains


The supercommittee failed in its mission because the parties involved have fundamentally different visions of how to address our country’s debt problem. It’s a gross oversimplification, but the debate largely boils down to what degree deficit reduction efforts should focus on increasing revenue (and how to accomplish that), or on reducing government spending, including addressing the long-term costs associated with entitlement programs such as Social Security, Medicare, and Medicaid.

Of course, these approaches aren’t mutually exclusive; for example, the bipartisan Bowles-Simpson commission (the National Commission on Fiscal Responsibility and Reform) issued a December 2010 report that recommended a combination of both approaches. The fact that we’re in an election year complicates matters, however, and may make compromise less likely, if not impossible. That’s because each element of a potential compromise will have significant political ramifications. In the end, the course taken may depend entirely on the post-election political landscape.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012