Wed, November 23, 2011
Now that the Congressional Super-Committee has thrown in the towel, the automatic spending cuts mandated by the Budget Control Act of 2011 are set to kick in unless Congress gets its act together.
Under current law, there are quite a few loose ends in the tax laws. The Alternative Minimum Tax has not been fixed beyond 2011, and the status of estate and gift taxes after 2012 is still uncertain. The Bush-era tax cuts are set to expire without further Congressional action at the end of 2012; if that happens, it would produce $1 trillion in deficit reductions automatically.
What also happens is that the automatic spending cuts mandated by the Budget Control Act come into play. These include $600 billion in defense spending cuts, and reductions in the budgets of regulatory agencies that handle food safety, the financial industry, and the environment. Medicare payments to healthcare providers will also be reduced and across-the-board cuts will be applied to food stamps and other welfare programs.
Congress will be tempted to put “patches” on various budget cuts, but doing so would bring further doubts about its commitment to real deficit reduction and could trigger further credit rating downgrades of US debt.
It’s difficult to say what the final outcome will be, but in the near term we can expect further turmoil in the financial markets in response to uncertainties about long-term deficit reduction plans.