Congress and the White House have reached an agreement to raise the federal debt ceiling and have approved a package of spending cuts this week, but not until after weeks of debate that added to growing uncertainty in the markets and a lack of confidence from investors.
A recent survey by TNS Global Market Research found that 87% of individuals with more than $500,000 in investable assets believe the federal deficit is a major concern. A full 43% feel the economy will jeopardize their retirement.
Without congressional authorization to borrow more money, the government would not have enough to pay its bills, and faced credit rating downgrades from the major rating agencies.
The agreement, reached before the August 2, 2011 deadline for lifting the current $14.3 trillion debt ceiling, would initially raise the debt level by $900 billion and include more than $900 billion in spending cuts.
According to the White House, the agreement:
- Authorizes the President to increase the debt limit by at least $2.1 trillion so that further increases will not be required until 2013.
- Immediately enacts discretionary spending cuts of nearly $1 trillion over 10 years.
- Establishes a bipartisan congressional committee to identify an additional $1.5 trillion in deficit reduction by looking at tax reform and changes to entitlement programs. The committee has to submit recommendations by November 23, 2011, and Congress has until December 23, 2011, to vote on them. If the Committee fails to meet the deadline, an enforcement recommendation would trigger spending reductions beginning in 2013, split evenly between domestic and defense spending. Such enforcement action would protect Social Security, Medicare, and low-income programs from any cuts.
The two-part process of identifying spending cuts may set the stage for further congressional debate, which may include some of the proposals previously introduced by earlier commissions, such as last year’s Simpson-Bowles report.
And whatever measures do not make it into the final package may be back on the table when future budgets are being considered.
What investors do know is that current tax rates are at historic lows and, according to the federal tax law passed at the end of 2010, these rates are set to expire at the end of 2012.
Given today’s uncertainty, it may be an opportune time to contact clients and conduct a portfolio check to make sure they are taking advantage of the current tax environment. Our white paper, Capitalizing on tax clarity, remains relevant.
It is still likely that tax increases will happen after 2012. As it stands now, health-care reform legislation has already introduced a new tax on investments that begins in 2013.
When investors feel uncertain, they may start eyeing cash alternatives. This is another reason to reach out to your clients during times of turmoil, remind them about their investment goals, and encourage them to stay on track.