Grand U.S. debt-reduction effort fails

WASHINGTON Mon Nov 21, 2011 11:19am IST

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Night falls as the U.S. Capitol Building is seen in Washington January 28, 2008.

Credit: Reuters/Kevin Lamarque/Files

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WASHINGTON (Reuters) - Washington's most ambitious effort in years to come to grips with its mounting debt is set to end with a whimper on Monday as negotiators plan to announce they have failed to reach a deal.

The Republican and Democratic leaders of a 12-member congressional "super committee" planned to declare defeat after three months of talks failed to bridge deep divides over taxes and spending.

After a year of bruising budget battles, it is another sign that U.S. lawmakers are too entrenched in their ideological ruts 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.

The joint statement, to be released on Monday, will cement notions of a dysfunctional Washington among voters and investors already disenchanted with the brinkmanship that brought the country to the edge of a first-ever debt default in August.

Republican and Democratic lawmakers will be eager to swiftly shift the blame as they gear up for the 2012 presidential and congressional elections.

There was no immediate comment from Republican and Democratic leaders or the White House. The committee had faced a Wednesday deadline to strike a deal.

The committee's washout will spur another round of drama as Democrats try to extend short-term economic stimulus measures that they had hoped to roll in to any super committee deal, and Republicans scramble to shield the military from $600 billion in automatic spending cuts triggered in the absence of a deal, starting in 2013.

Asian stocks and U.S. stock futures fell as news of the failure weighed on markets. Market expectations for a deal were low, but failure could remind investors of the risks posed by gridlock in Washington.

"We do believe the failure of the super committee to reach an agreement does raise the risk that the payroll tax cut and unemployment benefits will not be extended into 2012," said Michael Gapen, senior U.S. economist with Barclays Capital.

Investors have viewed the United States as a relative safe haven from the debt crisis in the euro zone, and credit-rating agencies have said a super committee failure will not change their assessments of U.S. debt.

The White House had been bracing for days for the committee's failure and aides believe President Barack Obama can weather it without major political fallout and may even be able to score points against the Republicans as he seeks re-election next November.

Aides believe Obama will be able to seize the chance to further paint Republicans as obstructionist, a strategy they hope will be more potent because of polls showing most voters back his proposal to increase taxes on wealthier Americans.

Obama can now be expected to lament the wasted opportunity while urging lawmakers from both parties to try to work out a deal in coming months before the automatic budget cuts triggered by the committee's failure take effect at the start of 2013.

Congressional leaders set up the super committee during a bitter budget fight last summer that hammered consumer confidence and prompted a first-ever downgrade of the United States' AAA credit rating by Standard & Poor's.

AIMING FOR THE BIG DEAL

Blessed with extraordinary powers, the super committee was supposed to forge the sort of deficit-reducing deal that had eluded President Barack Obama and House Speaker John Boehner, the top Republican in Congress.

The panel was tasked with finding at least $1.2 trillion in budget savings over 10 years, enough to demonstrate that Washington could tame a debt load that last week hit $15 trillion -- equal to the size of the U.S. economy.

The threat of automatic, across-the-board cuts, falling equally on military and domestic programs, was supposed to ensure that a deal would be reached.

Committee members met for dinners and several even took bike rides together in an effort to build the trust that would enable them to make decisions that could anger powerful interest groups on the left and the right and industry groups ahead of the 2012 elections.

They had a clear blueprint for agreement. Other budget-cutting panels, including one set up by Obama, have concluded over the past 12 months that lawmakers need to wring out the loophole-laden tax code and rein in health benefits that are set to balloon over coming decades as the population ages.

In the end, Republicans were unwilling to give Democrats the tax increases they sought, and Democrats balked at the dramatic benefits overhaul that Republicans had offered. Democrats also believed they had an advantage as Republicans want to lock in low income tax rates for the wealthy before they expire at the end of 2012.

Lawmakers were doubtless mindful of the political fallout from other landmark agreements that led to the budget surpluses of the late 1990s. A 1990 deal that raised taxes and cut spending prompted a conservative rebellion within the Republican party that weakened then-President George H.W. Bush and contributed to his defeat two years later.

A similar 1993 deal, forged without Republican cooperation, led to a landmark defeat for congressional Democrats the following year that handed control of Congress to Republicans.

(Additional reporting by Richard Cowan, Matt Spetalnick, Patrick Temple-West and Margaret Chadbourn, editing by Ross Colvin and Doina Chiacu)

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