The reaction to the supercommittee’s epic failure this week to address the spiraling debt has been surprisingly muted on Wall Street and Main Street, in part because astute observers there have concluded that Congress may accomplish more by doing nothing when it comes to the deficit.
If partisan gridlock prevails in the next year or so, as seems likely in a presidential election year, about $7 trillion in tax cuts and spending programs will expire under current law — enough to eradicate the deficit problem by 2014 — well ahead of the most ambitious plans offered in Congress.
While the expiration of major measures such as President George W. Bush’s tax cuts, higher Medicare payments for doctors, cuts in Social Security payroll taxes and the alternative minimum tax would jolt the economy, given the increasing dangers of the accumulating debt, some analysts say that may be preferable to the gimmicks and small compromises that the supercommittee was considering to keep those budget-busting programs in place.
The Congressional Budget Office recently estimated that the budget gap would be nearly eliminated within a few years if programs sunset as scheduled, with tax revenues rising to about 21 percent of economic output from today’s 16 percent level, and spending falling to about 22 percent of output from today’s 25 percent level.
“If they still remain in gridlock and are unable to pass legislation for 10 years, we’re actually in pretty good shape really,” said Josh Gordon, policy director of the Concord Coalition, a deficit watchdog group, despite widespread disappointment and dismay over yet another missed opportunity to address the deficit in Congress.
The biggest chunk of the expiring provisions is Mr. Bush’s $4 trillion in tax cuts, which President Obama last year agreed to extend temporarily through 2012. While Mr. Obama wants to maintain the tax cuts for the middle class, he has vowed to veto any bill that extends about $1 trillion in tax cuts for top earners, saying the wealthy should contribute like everyone else to debt reduction.
Also starting in 2013, $1 trillion in automatic cuts in defense and domestic discretionary programs will be triggered as a result of the supercommittee’s failure, and Mr. Obama has promised to veto attempts by some in Congress to try to roll back those mandated cuts.
Other hefty-priced measures are due to expire at the end of this year, including legislation shielding doctors from a 30 percent cut in payments under Medicare — the biggest entitlement program targeted for deficit cuts by Republicans in Congress.
About $160 billion in “stimulus” measures enacted last year also will end in December, including a 2 percent cut in payroll taxes and extended unemployment benefits. Measures to shield middle-class taxpayers from the Alternative Minimum Tax also will end at that point.
Although it may be “unrealistic” to expect Congress to allow many of these popular programs to expire, Mr. Gordon said, gridlock over how to extend them remains deep and legislators will be under tremendous pressure to find ways to offset their enormous cost. The offsetting budget cuts inevitably prove contentious and can prevent an agreement.
If Congress tries to extend the budget-busters without offsetting their costs, Wall Street analysts say they almost certainly would be punished with further downgrades of the nation’s credit rating and considerable market turmoil. Standard & Poor’s Corp. downgraded the U.S. by a notch from AAA this summer, roiling the markets and setting off a record drop in consumer confidence.
By contrast, when news broke Monday of the supercommittee’s failure, the market reaction was muted, with the Dow Jones industrial average initially plunging more than 300 points but then recovering to end down 240.
Moody’s Investors Service, which has not as yet lowered the Treasury’s AAA rating, said Wednesday that maintaining the spending caps, automatic discretionary cuts and other disciplines put in place during this summer’s debt-ceiling debate will be critical to maintaining its top rating for the U.S.
Moody’s added that letting the Bush tax cuts expire would for the most part resolve the near-term deficit problem and eliminate further pressure on the nation’s once-perfect credit rating.
“Tax revenues will rise significantly if there is no change in the law,” Moody’s Vice President Steven A. Hess said. “The upward trend in the ratio of federal debt to [economic output] could well be reversed in the middle of the decade” without the Bush tax cuts, although over the longer term, unsustainable growth in entitlement programs still must be addressed.