U.S. deficit panel failure looms over last gasp talks

WASHINGTON Mon Nov 21, 2011 7:57pm GMT

Senator Jon Kyl departs a ''super committee'' meeting in the Capitol in Washington November 18, 2011. REUTERS/Kevin Lamarque

Senator Jon Kyl departs a ''super committee'' meeting in the Capitol in Washington November 18, 2011.

Credit: Reuters/Kevin Lamarque

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WASHINGTON (Reuters) - After months of talks, the high-profile congressional effort to rein in the ballooning U.S. debt is expected to end in failure on Monday with negotiators announcing they could not bridge deep divides over taxes and spending cuts.

The Republican and Democratic leaders of a 12-member congressional "super committee" are set to declare defeat in a joint statement later on Monday. They failed to find enough common ground on a package of at least $1.2 trillion (766.5 billion pounds) in deficit reduction over 10 years.

As the clock ticked down to a Monday deadline to publish the results of any deal, a small group of panel members gathered for a last-ditch effort to compromise. When the meeting broke up, lawmakers - some serious, others amused by the media hordes - said they were having last-minute talks and a statement would be released later.

Congressional aides who have worked closely with the panel said they had little hope of any progress - echoed by the super committee members themselves.

"I wouldn't be optimistic. I don't want to create any false hope here," Republican Senator Jon Kyl told Fox News. He said the panel would release a statement by the end of the day.

Failure to reach a deal on deficit reduction would trigger $1.2 trillion in cuts over the next decade, beginning in 2013.

The deadlock focuses on Republican opposition to tax increases, particularly on the wealthiest Americans, and Democratic refusal to cut into federal retirement and healthcare benefits without such tax increases.

After a year of bruising budget battles, super committee failure would be another sign that U.S. lawmakers are too entrenched in their positions to compromise on the tax increases and benefit cuts that budget experts say are needed to set the country's finances on a stable path.

DYSFUNCTIONAL WASHINGTON

It would also cement notions of a dysfunctional Washington among voters and investors already disenchanted with the brinkmanship that brought America to the edge of a first-ever debt default and subsequent credit downgrade in August.

As failure loomed in Washington, Wall Street stocks skidded, extending losses from across Europe as fears over out-of-control government debt on both sides of the Atlantic hit financial markets. Commodity prices also fell.

The S&P 500 index fell 2.3 percent. The Dow Jones industrial average and tech-heavy Nasdaq Composite Index each lost more than 2 percent.

The super committee, with six Republicans and six Democrats, had until Wednesday midnight to vote on a deal. But the deadline to have a legislation written and presented to the entire panel was Monday.

Lawmakers likely will not return to the problem until 2013 at the earliest as they shift their attention to the November 2012 presidential and congressional elections.

Budget skirmishes will continue over the coming months.

Democrats will next try to extend short-term economic stimulus measures, such as enhanced unemployment benefits and a payroll tax cut which they had initially hoped to roll those into any super committee deal. Analysts say the economy could slide back towards recession if these expire as planned at the end of the year.

For their part, Republicans will seek to shield defence spending from $600 billion the automatic spending cuts that would be triggered, beginning in 2013, in the absence of a deal.

As the triggers are written, beneficiaries of Medicare federal health insurance would be spared major cuts.

MARKET WORRIES

Market expectations for a deal were low, and investors have viewed the United States as a relative safe haven from the debt crisis in the euro zone. But failure could remind investors of the risks posed by gridlock in Washington.

"These days it's pretty hard to have confidence in the political side of things," said Rick Bensignor, chief market strategist at Merlin Securities in New York."

Democratic committee member Senator John Kerry said the big hurdle the two sides could not get past was whether to extend tax cuts to all Americans. Democrats want to extend them to all but the wealthiest citizens.

He blamed Grover Norquist, the head of the powerful anti-tax lobbying group Americans for Tax Reform, for blocking progress since most Republican lawmakers have signed Norquist's pledge agreeing not to raise taxes.

"Grover Norquist has been the 13th member of this committee without being here," Kerry said on CNN.

"I can't tell you how many times we hear about 'the pledge,'" he said. "Well all of us took a pledge to uphold the Constitution. ... I think that requires us to try to reach an agreement - so we have to compromise."

FODDER FOR 2012

President Barack Obama kept his distance from the talks, choosing instead to emphasise a job creation package that was blocked by Republicans in Congress. Aides believe Obama will be able to use the super committee's failure to paint Republicans as obstructionists during his 2012 re-election campaign.

As the super committee appeared set to announce its failure, White House spokesman Jay Carney said Obama had not been "disengaged" as some have accused.

"Congress assigned itself a task," Carney said in the daily White House briefing. "They have to hold themselves accountable. They have to do the things that American families do every day, which is live within their means and take responsibility for their own actions."

(Additional reporting by Alister Bull, Lucia Mutikani, David Morgan, Andy Sullivan, Kim Dixon, Susan Cornwell; writing by Deborah Charles; editing by Mary Milliken and Jackie Frank)

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