Stalemate at Capitol Hill

The next time the IMF points a finger at Pakistans inept fiscal management, officials can say weve learnt it from the boss; the ambivalent state of the United States fiasco of spending cuts and tax raises, after all, pales Pakistans fiscal woes in comparison.
Earlier this week, the special deficit-cutting "super committee" of the US Congress failed to reach a consensus on how to reduce the US deficit by $1.2 trillion over the next ten years. While Democrats are calling for raising taxes, particularly on the richest of the Americans; Republicans are keen on seeing some spending cuts by the government.
Thankfully, a backup plan exists in case of an impasse on the deficit deal of the super committee: automatic spending cuts of the same amount-$1.2 trillion-will be triggered come January 2013.
Now that the prospects of a deadlock have turned into reality, the US needs to brace up for these automatic cuts, half of which will come from domestic spending cuts-education, agriculture, environmental programmes and Medicare; while the other half will entail reduction in defence spending.
Though there are talks of abandoning the automatic spending cuts among some members of Congress, doing so will not bode well for the credit rating of the US which was dropped only a few months back.
An analysis by USA today quoted Standard and Poors - the rating agency that downgraded the States in August this year - "In a report late Monday, S&P said downward pressure on the ratings could build if Congress tries to undo its commitment to $1.2 trillion in automatic cuts."
And when the management of a superpower appears to be in such disarray, the effect on investors sentiments is anybodys guess.
But the real turning point as far as the fate of the automatic cuts is concerned is the elections to be held in November 2012, even though Obama has shown his resolution to veto any attempt to reverse the cuts.
And with the elections round the corner and partisanship at its peak, one can smell populist motives in the entire fiasco as well. Automatic cuts are far from a popular policy instrument since social security tax cuts and unemployment benefits may be terminated, triggering the US economy to slow down in the coming year.
Whatever the course; through automatic cuts or through an arrangement spelled out by the super committee, the path to orderly and efficient fiscal management will not come easy. There will be bumps ahead, but the Americans will have to make some sacrifices to put the finances of Capitol Hill back in order.