No budget deal: Now what?

A Deadline with no consequences - Until 2013

By Shihira Knight, VP Government Relations & Public Policy at Fidelity Investments

Many people expected an 11th hour deal, much as we saw with the debt limit last summer. I think the big difference was that the debt limit was viewed by most lawmakers as a real deadline with a major consequence: a potential U.S. government default. By contrast, November 23 was a legislatively fabricated deadline with no real consequences until 2013, when the spending cuts are supposed to take effect. One year is an eternity in politics.

So what happens now? Immediately, nothing. But starting in 2013, $1.2 trillion of spending cuts will begin to take effect, unless Congress rescinds them. The spending reductions will be spread out over 10 years. Half of those cuts will affect defense spending and the other half will affect domestic programs, including Medicare provider benefits. However, a host of programs are not affected by the cuts, including Social Security and Medicaid.

In the coming weeks and months, there are two questions to monitor. First, will these spending cuts actually happen, or will Congress intervene to reverse or modify them? Making any changes would require a new law, which may be challenging to enact in 2012, but it’s another story in 2013 or beyond, when a new Congress will be in place. Some lawmakers have already started talking about changing the mix of spending cuts.

The second question is, what happens to the temporary payroll tax relief and extended unemployment insurance benefits that are set to expire at the end of this year? It was assumed these items would be extended in the Super Committee bill. Now that there is no bill, their fate is less clear.