Economists are warning of dire consequences if US politicians fail to make progress this weekend in tense talks aimed at reducing America’s massive deficit ahead of a Wednesday deadline.
The bi-partisan congressional super-committee is charged with drawing up plans for a $1.2tn reduction in the nation’s deficit by the middle of next week. Failure to do so will trigger an automatic “sequester” that will make cuts of that size to defence and social welfare programmes starting in 2013. But the two sides seem far from finding a solution after clashing over tax revenues.
While Wednesday is the official deadline for the supercommittee to report back, it has until Monday to tell the Congressional Budget Office about the impact any plan they send to Congress will have on the budget.
“Time is running out. What I can say is we are leaving no stone unturned, negotiations continue and we are looking to find a way. We recognise what’s at stake and we’re hoping to reach an agreement,” Democrat committee member Chris Van Hollen told CNN Friday.
Failure to reach an agreement on what is essentially a small reduction on the deficit – just 0.7% of gross domestic product in 2013 – could trigger another rating’s agency downgrade, warned economists including Paul Ashworth, chief North American economist at Capital Economics.
“With all this pressure to reach an agreement, it really doesn’t look good if they can’t find a solution,” said Ashworth.
He said that the US had much more serious problems that would need tackling first.
“The US is already spending 7% of GDP on Medicare and Medicaid [the government-run health schemes] and that will be up to 10-11% in the next two decades. Debt is on an unsustainable path, and if they can’t reach an agreement on this, it doesn’t look good for the future.”
Ratings agency Standard & Poor’s cited the “extremely difficult” political conditions in Washington when it made the controversial decision to downgrade its rating on US debt in August. The firm also put the US “on watch’ implying further cuts could come.
Morgan Stanley analyst Christine Tan predicted earlier this month that there was now a one-in-three possibility of another downgrade.