Deficit reduction committee is rendered null and void: What comes next?
November 30, 2011
In August 2011, when Congress passed legislation to raise the ceiling on U.S. federal debt, it did so with a major stipulation: A specially appointed “supercommittee” would have to write a plan for reducing the U.S. federal budget deficit by $1.2 trillion over the next 10 years.
In late November, however, the supercommittee announced that it had failed to reach an agreement on a deficit-reduction plan. As a result, an automatic cost-cutting program (aimed at reducing the deficit by the original target of $1.2 trillion) is scheduled to begin taking effect in 2013.
Questions left unanswered
Investors are now left to consider questions that include:
- How quickly will the automatic budget cuts kick in?
- What kind of related political fallout can markets expect in 2012?
- Which sectors could be most affected by significant spending cuts?
- Perceiving a lack of political will, could rating agencies downgrade U.S debt once again?
There’s little doubt that political maneuvering will play out in the months ahead. The automatic budget cuts will be hotly contested as opponents seek ways to stall any actual implementation. President Obama has publicly declared that he will veto any effort to delay or unravel the cuts, but his declaration won’t stop lawmakers and other officials from taking their best shots.
Despite President Obama’s power to veto, do the deficit-reduction measures have a realistic chance of seeing the light of day? One important variable to consider here is the timing of the slated cuts. As currently stipulated, implementation won't get started until 2013, which is after the November 2012 elections. This means that a new Congress will be in place, and it will have the authority to set the budget cuts aside if it chooses to do so.
The net effect: continued uncertainty
As politically loaded as it is, the deficit-reduction issue won’t be solved overnight; if there’s any progress, it will come slowly. In light of the upcoming elections in 2012, it’s reasonable to expect that budgetary matters will be part of the political fray for at least another year. It’s very likely that this political uncertainty will spill into financial markets, contributing to periods of price volatility as investors react to whatever piece of news they can make sense of.
The events surrounding the deficit-reduction committee have not been pleasant for investors, as securities markets have become acutely sensitive to policy-related turbulence. As we head into an election year, this heightened sensitivity is likely to linger.
Visit www.delawareinvestments.com often, over the coming months, for additional information on how our various investment teams may be reacting to these developments and to other investment-related crosscurrents inherent in today’s markets.
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