As the supercommittee’s November 23 deadline approaches, some commentators contend that failure to reach an agreement would have serious adverse ramifications for financial markets and the economy. These concerns are largely misplaced, according to a new analysis from economists at Goldman Sachs Research, Q&A on the Super Committee (November 9, 2011).
- A debt “downgrade seems unlikely,” Goldman writes. “If the super committee reaches its November 23 deadline without any agreement, the process concludes. While this would be far from ideal and could weigh on sentiment, the practical near-term repercussions seem limited. There would be no near term fiscal consequences, but automatic spending cuts would take effect from January 2013. At this point there is little reason to believe that either S&P or Moody’s would downgrade solely based on a failure to agree. Both rating agencies have indicated that while a stalemate in the super committee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic cuts if not through the super committee, so their fiscal outlook should remain unchanged.”
- The medium-term deficit outlook will change “only modestly, if at all,” Goldman continues. “The super committee process presents an important opportunity to reduce the longer term imbalance between the expected growth in entitlement programs and the revenues used to finance them and other government spending. However, a “grand bargain” to resolve this imbalance appears to be a low probability this year. Instead, the politically realistic outcomes range from no agreement to a deal reaching $1.2 trillion in deficit reduction over 10 years. While $1.2 trillion represents a meaningful amount of deficit reduction, it is important to keep in mind that the same amount of deficit reduction would occur even if the super committee deadlocked and automatic spending cuts took effect. So while a great deal of attention is being paid to the super committee, it is unlikely that deficit projections will change substantially following their agreement.”