No deal

The US debt ceiling will not be raised without budget cuts. That was the conclusion of a deal in August, when, at the last minute, the US managed to avert default on its debt payments. Since it was impossible to agree so abruptly on what should be cut, a bipartisan party committee seemed like the best solution. As a result President Barack Obama and a panel of congressmen from both sides of the political spectrum established the so-called super committee.

Made up of six Republicans and six Democrats, the super committee was given the task of making $1.2 trillion (887 billion euros) of budget cuts over the next 10 years. If they failed to reach agreement by this Wednesday evening, automatic cuts outlined in the bill would come into effect from 2013. Those cuts are likely to affect the Department of defense, which has largely been protected up until now. A number of social programs and public authorities will also be forced to slash spending.

No cross-party compromise

In the event, time for a possible compromise deal ran out on Monday, thus making it impossible to put the plan to a vote at least 48 hours after the committee's proposal. In a written statement, the committee confirmed that its work had ended without a deal. The statement said that the committee was "deeply disappointed that we have been unable to come to a bipartisan deficit reduction agreement … We remain hopeful that Congress can build on the committee's work … We end this process united in out belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve." US national debt currently stands at more than $15 trillion.

Even though both sides said they were willing to compromise, neither made moves to do so. The Republicans categorically rejected tax rises - many of them even signed a corresponding pledge. The Democrats, meanwhile, were demanding tax rises to compensate for cuts in social welfare that the Republicans wanted to introduce. Both sides were quick to blame the other. Jon Kyl, Republican Senator from Arizona, told CNN television, "We came here to reduce government spending, but what we're hearing from the other side is: 'we won't accept further cuts, if you don't raise taxes.'"

Tax breaks are deal breaker

The debate also centered on tax breaks introduced under former President George W. Bush. President Obama agreed in 2010 to extend this policy through to the end of 2012 - much to the irritation of his supporters. Democrat and former presidential candidate John Kerry accused the Republicans of holding the whole deal hostage in their bid to extend tax breaks for the richest Americans.

In a White House press conference following the committee's statement, the president blamed the failure on the Republicans. Despite the compromises that had been offered, he said, "there's still too many Republicans in Congress that have refused to listen to the voices of reason and compromise that are coming from outside Washington. They continue to insist on protecting $100 billion-worth of tax cuts for the wealthiest two percent of Americans at any cost," even if that meant deeper cuts in education, medical research and healthcare.

Obama's veto

Obama said he would veto any attempt to repeal the automatic cuts."There will be no easy off-ramps on this one. We need to keep the pressure up to compromise, not turn off the pressure," the president said.

But Jacob Kirkegaard from the Peterson Institute for International Economics doesn't believe that the automatic cuts will actually come into effect in 2013. Lawmakers "have already said that under no circumstances will the cuts in the defense budget be implemented, and if you can't save in the Pentagon, than I can name 10 other things that you can't do," Kirkegaard said. He is even skeptical as to whether the cuts amounting to $1 billion signed off by Obama will actually be implemented.

Political deadlock

Essentially, according to Kirkegaard, not much will happen for the moment. This development comes as no surprise to the markets. Kirkegaard only expects that the rating agencies would move to downgrade the country's creditworthiness if the planned cuts are not implemented. In the short term, Kirkegaard believes that the biggest problem is that "that would make it impossible to find any compromise relating to the budget before elections." That applies for example to the two percent of income tax breaks, which run out at the end of this year and would have to be extended.

Kirkegaard expects the Republicans to block the policies, even if that would deal a further blow to the country's economy. As in Europe, it would need a crisis before serious measures are taken, he said. In his statement President Obama explicitly referred to the fact that the situation was not as serious as in the summer, when the government was threatened with a shut-down and the rating agencies downgraded the country's credit rating after the political row about the debt ceiling.

Washington has plenty to think about as it prepares to shut down for the Thanksgiving Holiday. According to a survey conducted by CNN, 59 percent of Republican supporters are against tax rises, 57 percent of Democrats are against spending cuts. Independent voters want a compromise: almost 70 percent support tax rises for the rich, as well as spending cuts. But at the moment here in the US capital, they don't appear to have found an effective lobby.

Author: Christina Bergmann, Washington DC / ji
Editor: Rob Mudge