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Lawmakers Set to Say No Deficit Deal as Focus Turns to 2012

Republican Senate Minority Leader Mitch McConnell
Mitch McConnell, Republican Senate minority leader, has declared over the past few months that failure is “not an option” for the panel, created in August. Photographer: Andrew Harrer/Bloomberg

Lawmakers on a special debt-reduction committee are poised to announce they failed to reach agreement and dissolve congressional gridlock, kicking tax and spending issues into the 2012 election year.

Treasuries rallied while riskier assets declined as the congressional supercommittee’s deadlock spurred demand for safer assets.

Senator Jon Kyl of Arizona, a Republican on the 12-member panel, said on CNBC the Republican and Democratic committee co-chairmen, Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington, would make a formal announcement “toward the end of the day.” They are expected to say the panel can’t agree on deficit reduction of at least $1.2 trillion, triggering across-the-board cuts of the same amount starting in 2013.

“The next election certainly will have a big bearing on the question of what’s the scope and size of the federal government, and do we want to try to tax our way out of this or grow our way out,” Kyl said. There will be efforts to “ameliorate” effects of the cuts over the next year, he said.

Today is the panel’s deadline to receive a Congressional Budget Office analysis of the effects of any proposal on the deficit. The law requires that the estimates be available for 48 hours before the panel votes, and the supercommittee has a Nov. 23 target date for reaching a deal.

‘Very Difficult’

Senator Max Baucus, a Montana Democrat and panel member, said it’s important that the automatic spending cuts stay in place. He said the committee’s work “was very difficult from the start because of the divide.”

Hours before an anticipated announcement, Maryland Democrat Chris Van Hollen, a supercommittee member, said talks are continuing.

“Obviously the clock is winding down,” he said. The last-minute discussions are “in the realm of just last-minute ideas being considered.”

Election Year

Senator John Kerry of Massachusetts, a Democrat on the panel, said lawmakers have a year before the automatic spending cuts are set to occur. “We have an election between now and then and a lot can take place,” he said in an interview on Bloomberg Television.

Kerry and Kyl met with other members of the committee as late as this morning.

Treasury notes rose after the U.S. sale of $35 billion in two-year notes, the first of three auctions totaling $99 billion this week, drew above-average demand.

The yield on the current two-year note fell one basis point, or 0.01 percentage point, to 0.27 percent, at 1:04 p.m. in New York, according to BGCantor Market Data. The yield on the benchmark 10-year note fell five basis points to 1.96 percent.

Stocks tumbled, extending last week’s declines. The Standard & Poor’s 500 Index lost 2.1 percent, to 1,190.42 at 1:29 p.m. in New York. The Dow Jones Industrial Average plunged 294.53, or 2.5 percent, to 11,501.63.

Rancorous Debate

Senate Republican leader Mitch McConnell of Kentucky has declared over the past few months that failure is “not an option” for the panel, which was created in August after rancorous debate over raising the nation’s borrowing limit that plunged congressional approval ratings to lows of between 9 percent and 14 percent.

Kerry told Bloomberg TV “the single thing” standing in the way of an agreement was Republican “intransigence” over extending tax cuts for top earners, enacted under President George W. Bush, that are scheduled to expire at the end of 2012.

Democrats faulted Republicans for refusing to budge on an anti-tax pledge and Republicans accused Democrats of rejecting an offer to raise revenue along with spending cuts.

In a memo to House Republicans, Speaker John Boehner 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.”

President Barack Obama ignored questions from reporters about the panel at a signing ceremony for a law granting tax credits to companies that hire unemployed military veterans.

White House spokesman Jay Carney, in response to reporters’ questions, said lawmakers “need to do their job” to reduce the deficit and “fulfill the responsibilities that they set for themselves.”

Tax Dispute

Appearing yesterday on NBC’s “Meet the Press,” Kyl said Democrats turned down a final offer that included $250 billion in new revenue by eliminating some tax breaks even as it lowered income tax rates. “There’s a group of folks that will not cut a dollar unless we also raise taxes,” he said.

On the same program, Kerry called Kyl’s statement “patently not true” and said Democrats agreed to $917 billion in spending cuts with no new revenue as part of the August agreement to raise the debt ceiling.

The lack of a deal also would deprive Obama of a vehicle to extend a payroll tax cut and insurance benefits for unemployed Americans, which expire at the end of the year.

Defense Cuts

The impasse pushes into an election year the difficult work of reaching a bipartisan deal to head off the automatic cuts that Defense Secretary Leon Panetta has called “devastating” for the Pentagon.

The supercommittee was designed to be the solution to more than a year’s worth of failed bipartisan efforts to strike a “grand bargain” to drive down the debt. Obama’s fiscal commission last December didn’t agree on a $4 trillion package, pushing the work off to a group led by Vice President Joe Biden and bipartisan members of Congress.

The president and Boehner ultimately took over those negotiations, before delegating the task to the supercommittee.

With an eye to congressional approval ratings that began to sink to as low as 13 percent in a mid-August Gallup poll, Republicans insisted that the committee would deliver.

“This joint select committee was set up to succeed,” McConnell said to reporters Nov. 1.

Shouldering Blame

Republicans may shoulder more blame for the panel’s failure. According to a Nov. 11-13 CNN poll, 42 percent of respondents said they would hold Republicans responsible for failure, with 32 percent saying they’d blame Democrats. The margin of error was 3 percentage points.

The debate in Washington now focuses on the automatic cuts slated to start in 2013.

Congress has a history of undoing previous attempts to require debt reduction, and lawmakers on both sides of the aisle, including Senator John McCain, an Arizona Republican, and Representative Maxine Waters, a California Democrat, are already trying to use legislative levers to stop the automatic cuts from taking effect.

Supporting the Trigger

Boehner, an Ohio Republican, and House Minority Leader Nancy Pelosi, a California Democrat, have said they support the trigger. “The markets should know that the deficit reduction will occur,” Pelosi said on Nov. 3. Boehner has said he “personally” feels a moral obligation to uphold the cuts.

U.S. credit-rating companies have made it clear that, while a failure of the supercommittee might not lead to a credit downgrade, undoing the automatic cuts probably would. Moody’s said the lack of a supercommittee agreement wouldn’t on its own cause the U.S. to lose its top credit ranking because the August debt-ceiling deal includes $1.2 trillion in automatic cuts.

Last month, John Chambers, a managing director of Standard & Poor’s, said the U.S. could face additional downgrades if Congress attempts to thwart the across-the-board cuts.

Instead of dismantling the trigger, Congress is more likely to look for ways to reconfigure the blend of defense and domestic cuts.

If the current trigger remains, the consequences of failure will fall disproportionately on discretionary programs, with the Congressional Budget Office estimating that 71 percent would come from these programs such as education, the environment, transportation, housing assistance and veterans’ health care. The cuts would come in addition to the first round of cuts as part of the Budget Control Act.

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