Both Parties Set to Use Failure of Debt Deal for 2012 Campaign

The failure of a U.S. congressional panel to reach a deficit-reduction deal was an option leaders of both parties anticipated and spent months laying political groundwork to manage.

The demise of the supercommittee kicks the issue into the 2012 election campaign, framing a fight over taxation, fairness in shouldering the burdens of deficit reduction and who is to blame for Washington gridlock.

“Unless there is some intervening event like a market collapse or a spike in interest rates, both parties have their narratives going into the election,” said Tom Davis, a former Virginia congressman who headed the Republican Party’s national congressional campaign from 1998 to 2002. The president is positioned to run against “a do-nothing Congress” and “the Republican narrative is we refuse to raise taxes.”

President Barack Obama, who has spent months criticizing Congress for inaction, showed signs of an early advantage in fixing responsibility for the panel’s failure. A Quinnipiac University national poll conducted Nov. 14-20 found more registered voters ready to blame congressional Republicans than Obama, by 44 percent to 38 percent.

Obama said in remarks at the White House shortly after the committee announced it couldn’t reach agreement yesterday that Republican lawmakers “refused to listen to the voices of reason and compromise.”

Republican Criticism

While Democrats were willing to exchange cuts in Medicare health benefits for the elderly for tax increases on the wealthy, he said Republicans “simply will not budge.”

Republican presidential candidates and congressional leaders didn’t wait for the committee’s announcement to point the finger at Obama.

“What’s most disappointing about that is that our president has had no involvement in the process,” said Republican presidential candidate Mitt Romney, campaigning in Nashua, New Hampshire. “Instead he’s been out doing other things: campaigning and blaming and traveling.”

In a memo to House Republicans, Speaker John Boehner of Ohio said the committee “was unable to reach agreement because President Obama and Washington Democrats insisted on dramatic tax hikes on American job creators, which would make our economy worse.”

Market Reaction

The bond market didn’t signal concern about U.S. government debt, with yields on the benchmark 10-year Treasury note dropping yesterday to 1.96 percent, almost a six-week low.

Stocks prices declined amid concerns the impasse would complicate efforts to maintain fiscal stimulus next year and could trigger an automatic $1.2 trillion sequestration of federal spending beginning in 2013. Such cuts would lop as much as 2 percentage points off growth in the first quarter of 2013, according to JPMorgan Chase & Co. The Standard & Poor’s 500 Index dropped 1.9 percent to 1,192.98 at the market close yesterday.

Obama’s job approval rating dropped along with that of congressional Republicans in August after his efforts to forge a deficit reduction deal with Boehner failed and the nation came to the brink of default before the two parties reached an agreement to raise the legal debt limit. That accord also established the supercommittee.

“He found last summer and last spring when he engages with Boehner it doesn’t work and he winds up getting blamed,” said Douglas Schoen, a Democratic pollster.

Obama’s Campaign

Since then, Obama has offered a $3 trillion deficit- reduction plan while promoting tax breaks and spending to cut the nation’s 9 percent unemployment rate and criticizing Republicans for blocking it. He has underscored his criticism of Congress by announcing a series of executive actions aimed at spurring hiring, arguing that the nation’s jobless cannot wait for lawmakers to act.

Obama stayed out of the supercommittee negotiations. He was out of the country on a trip to the Asia-Pacific region during the panel’s final week.

Davis said the competing narratives of the two parties will work best with their core supporters, with Republicans most energized by resistance to taxes and Democrats by criticism of Congress along the lines of President Harry Truman’s successful 1948 re-election. Still, the economy will loom larger, particularly for independents, he said.

“The average Joe out there is going to be voting based on the condition of the economy,” Davis said. “If the economy is doing badly, it’s going to be hard to blame Republicans.”

Payroll Tax Cut

White House officials said Obama will spend the remainder of the year pressing Congress on keeping and enlarging a cut in payroll taxes and continuation of extended unemployment benefits for up to 99 weeks.

Without an extension of the payroll tax reduction, the rate would return to 6.2 from 4.2 percent and Americans would face a cut in take-home pay from their first $106,800 in gross earnings. That would crimp consumer spending, which accounts for about 70 percent of the economy. Obama wants the rate cut to 3.1 percent through 2012, and he travels to Manchester, New Hampshire, today to promote the plan.

Grover Norquist, president of Washington-based advocacy group Americans for Tax Reform and author of a pledge against tax increases many congressional Republicans have signed, said resistance to more taxes is a winning campaign message for Republicans, even if blocks a deficit deal before the election.

“This guy wants to spend us into oblivion,” Norquist said, referring to Obama. “Had there been a tax increase of whatever amount, it would have damaged the Republican brand of being the party of moderation in taxes.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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