Absent a super committee, now who'll lean on Congress to cut US deficit?

Global markets or deadlines for extending tax breaks may yet force Congress to try again for a 'grand bargain' to shrink the US deficit. But big action before the 2012 election is unlikely. 

Conceived in crisis, Congress's deficit-reduction "super committee" fizzled, without cutting a dime.

With the exception of a brief break in GOP ranks over opposition to tax hikes, the two parties remain deeply entrenched in old positions – and apparently see no reason to change, until after the 2012 elections.

But the enormity of America's fiscal crisis and two toxic political deadlines – the expiration of the Bush tax cuts and the onset of draconian automatic spending cuts – could give Congress the leverage for another shot at a grand bargain over taxes and spending.

In a sense, every tax and spending decision from now through the 2012 election is a setup for that rare moment of political opportunity. But aside from the political calendar is the constant threat that financial markets may move faster, forcing Congress to react under the gun of a deeper crisis.

How we got here

Raising the national debt limit has always been a tough sell, especially for the party holding the White House. But this time, a new GOP House majority drew a line in the sand: No debt-limit increase without spending cuts of equal magnitude – and no tax hikes.

The standoff, which took the nation to the brink of default on Aug. 2, threatened "fiscal Armageddon," the White House said. Wall Street trembled. In the end, Congress and the White House agreed to raise the debt limit, including the creation of a joint congressional panel to come up with at least $1.2 trillion in additional deficit reduction – or, failing that, automatic spending cuts of the same magnitude in 2013.

Even after the debt-limit deal, Standard & Poor's lowered the US credit rating, on the grounds that Washington hadn't demonstrated the capacity to set the nation on a sustainable fiscal course.

"There may not be an issue of such gravity and magnitude, at least on the domestic side, that any Congress has faced in modern times," said Senate deputy leader Richard Durbin (D) of Illinois, at a rally on Nov. 16.

Why no reaction? Look at Europe.

Yet the failure of the 12-member super committee to agree to a plan to cut the deficit by $1.2 trillion – not even 3 percent of the $43.9 trillion that the United States is expected to spend over the next decade – barely stirred a reaction.

No fiscal Armageddon. No catastrophe. No flight from US Treasury bonds. Only a new round of partisan finger-pointing – and some recriminations within GOP ranks over lawmakers who even considered raising taxes as part of a deal.

The US national debt has now roared past $15 trillion, up from the $14.3 trillion breached on Aug. 2. The government still borrows nearly 40 cents for every dollar it spends. Soaring health-care costs still threaten to drown Washington in red ink.

One explanation for the muted reaction is that the US debt woes have been vastly eclipsed by the prospect of a debt meltdown in Europe, struggling to avert fiscal collapse in Greece and Italy, among other nations. Moreover, Wall Street reacts to expectations, and Wall Street expected the 12-member panel to fail.

"Ironically, Europe's troubles give us a little more time," says Robert Greenstein, president of the Center on Budget and Policy Priorities in Washington.

"Problems with the euro make the dollar and US Treasurys look better relatively than they did before," he adds. "Whatever issues and concerns people have, it's still the best place to put your money."

That reprise from world markets may not last – a point acknowledged by lawmakers on both sides of the aisle. But for now, fiscal crises elsewhere bought Congress and the White House some time to assess what went wrong and take another run at the problem.

With the failure of the super committee, responsibility for deficit reduction now falls back to the full Congress. But Republicans and Democrats remain as divided over a way forward as they were heading into the panel's deliberations.

Two views of the problem and solution

Republicans say the nation's fiscal crisis is rooted in a federal spending binge, period. The solution, they say, is to spend less and cut taxes.

Democrats blame the crisis on the impacts of the Bush-era tax cuts, especially tax breaks for the wealthy, and two wars paid for on credit.

Moreover, the wreckage of the super committee deliberations produced blame narratives that fit well with campaign strategies for 2012. Democrats are already producing ads that say Republicans were willing to sacrifice the fiscal health of the nation to subsidize the lifestyles of the rich. Republicans say Democrats refused any concessions on Social Security, Medicare, and Medicaid, thereby ensuring that these programs will go broke.

"Doing nothing will lead to the outcome both sides fear – massive tax increases and the shredding of the social safety net," says Sen. Tom Coburn (R) of Oklahoma. "If we don't make these decisions ourselves, the international financial community will dictate the solutions to us, which is exactly what we are seeing in Europe today."

Absent market sanctions, however, there's little incentive for Congress to break through politically useful party lines until after the 2012 elections. But two big deadlines – the expiration of the Bush tax cuts after Dec. 31, 2012, and the automatic spending cuts set to take hold in Jan. 3, 2013 – may create the impetus for action.

If Congress does nothing, a series of tax cuts enacted in 2001 and 2003 will expire, and tax rates will revert to 2000 levels. Along with the $1.2 trillion in automatic spending cuts mandated by the failure of the super committee, congressional inaction would mean some $4 trillion in deficit reduction. A popular Social Security payroll tax cut and aid for long-term unemployed workers – part of a deal to extend the Bush tax cuts after Republicans won back the House in 2010 – are also set to expire at year's end.

But, for different reasons, these outcomes are unacceptable to both sides. Here is why:

Bush tax cuts. Republi­cans want to permanently extend the Bush tax cuts, a move that would increase the federal debt by almost $3 trillion over the next 10 years, according to the Congressional Research Service.

President Obama and most Democrats say the tax cuts should be extended for all but the highest-income taxpayers, which would increase federal debt overall by $2 trillion. Letting the cuts expire for high-income taxpayers is expected to increase tax revenues by $931 billion over 10 years.

Automatic spending cuts. Republicans are already signaling an intent to challenge the automatic spending cuts for the Pentagon. Sens. John McCain (R) of Arizona and Lindsey Graham (R) of South Carolina announced in a joint statement that they aim to "pursue all options" to ensure that the mandated $600 billion in automatic spending cuts for the Pentagon do not occur.

Mr. Obama says he will veto any effort by lawmakers to repeal the cuts. "We need to keep the pressure up to compromise, not turn off the pressure," he said in a press conference on Nov. 23.

Payroll tax cuts. Although Republicans have supported extension of the cuts in the past, GOP leaders have held back an endorsement for a new extension, expected to come to the floor as soon as Dec. 2. The payroll tax break was negotiated as part of a deal to extend the Bush tax cuts in December 2010, after Democrats took a drubbing in midterm elections. Extending that tax break could add $250 billion to federal deficits.

Democrats propose extending and further lowering the payroll tax paid by workers to 3.1 percent and also cutting employers' share of the payroll tax from 6.2 percent to 3.1 percent. Mirroring their standoff in the super committee deliberations, Republicans say the payroll tax cuts must be offset by spending cuts.

While each of these items has its own pros and cons, they are now tied to the prospect of another run at a grand bargain after the 2012 elections.

"What everyone wants is a bipartisan deficit-reduction package, and we still have 13 months to reach it," says Mr. Greenstein of the Center on Budget and Policy Priorities.

To resolve the issues in isolation is to give up a critical pressure point, he says.

"If you take defense off automatic cuts, there's no reason for Republicans to come to the table," he says. "If you take the Bush tax cuts off the table, you completely forgo the single best political lever to try to work out an agreement with the Republicans on tax reform."