Super Committee to the Rescue
Congress and the President agreed to a bipartisan Super Committee (the “Joint Select Committee on Deficit Reduction”) to work out the details of a deficit reduction of $1.5 trillion over ten years, averaging $150 billion a year. Put in context, the budget increase of 2011 over 2010 is $363 billion; the deficit this fiscal year is $1.3 trillion. Effectively, the cut would just be a reduction in the rate of debt growth. Significantly, the outcome of the Committee’s work will be symbolic of the ability of Congress to come up with a solution to the runaway US debt. Just as eurozone is leaderless and struggles to demonstrate ability to make decisions and implement solutions, Congress could be suffering from the same systemic disorder.
Splitting the Baby
Twelve members were selected for the Committee (three senators and three congressmen from each party). Although their meetings have not been public, we know that Democrats will want additional revenues while Republicans will refuse tax increases and demand spending cuts.
Disenabling the Children
The currently available $5 million estate, gift and generation-skipping transfer-tax exemption is purportedly on the chopping block, although most observers say nothing will come of it. Instead of expiring on December 31, 2012 the rumor was that the exemption will be returning to a 55% federal tax rate for transfers above $1 million per person when the Committee makes its recommendations as of November 23. Anyone who wants to make gifts at the current level (up to $5 million per person or $10 million per married couple) and has not already done so should consider making their gifts now.
The Administration previously proposed a reduction in the tax exemption of municipal bonds retroactively, which could result in a significant drop in value in outstanding municipal bonds. Before anyone sells their bonds, consider the current rumor that if there is a reduction of tax exemption it would be prospective. This could result in a significant rally in existing municipal bonds in which case buying bonds is the thing to do.
The Fix is In
If the Committee fails to agree on at least $1.2 trillion in reductions by November 23 (really, they need to decide by the end of this week so the Congressional Budget Office can run the numbers), or Congress fails to confirm the Committee’s reductions, then automatic spending cuts spread evenly over ten years starting in 2013 will be triggered to make up the difference. Half of the automatic cuts would be in defense spending. There is talk that the Committee will only make recommendations and either leave the details up to Congress or else push the matter to after the election. Already, members of Congress on both sides of the aisle are scurrying to avoid any defense cuts by proposing workarounds before 2013. President Obama has said he would veto any such moves. Unless this time it’s different, the Committee will push cuts towards the end of the ten-year period, which gives them time to be undone while reducing near-term fallout. Perhaps some Committee cuts will be those that are likely to be cut anyway but are in the budget now, such as the budget for the wars in Afghanistan and Iraq. Negotiations in the Committee are moving at a fast pace yet observers are holding out little hope for a successful outcome. If real austerity is not an outcome, a Treasury debt credit downgrade by Moody’s and a further cut by S&P may result. Whatever happens, it will be a temporary fix. The expiring tax cuts from the Bush-era and the statutory debt limit are looming.