Stephen Foley: US politicians won't be talking turkey about the budget on Thanksgiving


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The Independent Online

US Outlook: The "super-committee" charged with coming up with $1.2 trillion (£760bn) of federal government debt reduction over the next 10 years has a deadline for producing its proposals of this coming Thursday, the Thanksgiving holiday. The odds are it will serve up a turkey.

This won't be a surprise to anyone who follows the inner workings (or not-workings) of Congress, and it certainly won't come as a surprise to markets.

Unlike the showdown over raising the debt ceiling in August, when the federal government came close to shutting down and even to defaulting on its bonds, nothing that happens – or doesn't happen – on Thursday should interrupt anyone's festivities. This is a deadline created by Congress, and therefore not a deadline at all.

Technically, if no proposal is produced, the failure will trigger automatic cuts across the board in government spending, including in the bloated US defence budget, but since these won't actually be implemented until 2013, there is plenty of time to change them. Similarly, the extension or otherwise of the Bush-era tax cuts, which have always been the root cause of the federal government's fiscal mess, and which is now the central issue dividing members of the committee, doesn't have to be decided until the end of next year. You'll notice that all these dates are after the Congressional and presidential elections in November 2012.

We might get another fudged deal, with some cuts agreed now and the establishment of a "super-super-committee" to revise the tax code later, under threat of automatically-triggered tax rises if it fails. Or we might get nothing.

Standard & Poor's stripped the US of its triple A credit rating in August for two reasons: the frightening willingness of politicians to use the threat of default as a bargaining chip in budget negotiations, and the demonstrable inability of taxed-enough-already Republicans and healthcare benefit-defending Democrats to cut a deal. Until the two sides can find the right balance of concessions, or one side wins a Congressional landslide, the trajectory of US debt will continue to be upwards as far as the eye can see, and the trajectory of the US credit rating will continue to be downwards.

But what we learned from the S&P downgrade, though, is that markets don't mind, at least for the moment. The agency says another cut in the rating is possible, but that it probably won't come unless the economic growth outlook markedly worsens, if Congress rows back on the automatically triggered cuts, or if investors suddenly turn against US Treasury bonds and start to demand higher interest rates.

The last one of those is linked to the other two, of course. If markets lose faith, US finances could spiral down with alarming speed. But the notion that the US could "be the next Greece" is absurd, because of the safety valve of dollar depreciation and the hard fact that there is no alternative to Treasury bonds as the currency of international financial trading.

The tragedy of these low expectations for the deficit reduction super-committee is that, by not finding new long-term tax increases and entitlement cuts, it has failed to open up the opportunity for short-term economic stimulus measures.

The biggest single threat to the US government's finances is another leg down in economic growth, and the biggest worry on that score right now is what is happening in the eurozone. When American politicians are tucking into their Thanksgiving turkeys on Thursday, it is to be hoped that European policymakers are hard at work.