THE bipartisan US congressional super committee – established in August by President Obama following the debt ceiling debate and mandated to find a minimum of $1,200bn in budget savings over the next 10 years to put the US government on a firmer financial footing – failed last week to reach an agreement.

The failure results in automatic triggers to cuts in defence and domestic spending from 2013 (about $600bn each).

The failure by the super committee to provide an alternative (and greater) savings plan is based on two factors. Firstly, the Republicans have refused to compromise on their position of permitting tax rises. Given that tighter fiscal policy has two policy options – lower spending or higher taxes – the Republican position appears unworkable. Secondly, there is still a large debate over the role of government in the US. Republicans want minimal government involvement in the economy whereas Democrats argue for more participation, such as through "entitlement programmes" e.g. healthcare that are proving very costly.

According to some estimates, US debt to annual income is forecast to rise from the current 66% to 96% by 2021 unless savings are made. One option for savings is to adopt the European model of tough austerity measures today which, although lowering near-term growth, provides for a better long-term growth outlook.

Barclays Capital believes that US policymakers should be targeting a total of $6trn in budget savings to secure the US’ AAA credit rating, $4 trillion more than the total of $2 trillion currently under discussion.

As a result, the lack of agreement is very disappointing at this early stage of finding cuts, particularly since it is a very small sum of the predicted $38.3 trillion in total US government spending over the next 10 years.

In addition, only discretionary spending is currently being reviewed. Social security and medicare (health insurance for the elderly) payments are considered non-discretionary and are forecast to represent $17 trillion of cumulative government spending over the next 10 years – with annual growth rates of nearly 6%. Without entitlement reform, the fiscal profile cannot be stabilised, with the entitlements’ share of GDP rising from 10% to 15% by 2035.

What does the lack of willingness by US policymakers to address its rising government debt levels mean for investors? In the main, bond investors (buyers of US debt) should be the most impacted, although the effects could be minimal in the near term.

Firstly, the credit rating agencies have already stated that they are unlikely to downgrade the US rating in the short term following Standard & Poors’ reduction in rating from AAA to AA+ in August. Next, the universe of risk-free assets is declining. For example, recent losses from the universe include Italy and arguably France.

Even though the credit worthiness of the US is certain to deteriorate markedly over the next few years, US bond yields (the cost of borrowing) may not necessarily rise as a result of a reduction in credit quality as investors seek safe havens for their monies. The US’ safe haven status should be retained because the US dollar is the reserve currency of the world and the US banking system is smaller as a proportion of its GDP relative to other leading nations (and therefore less risky).

In truth, politicians are only likely to implement tough austerity measures to regain control of public finances when they are pushed into a corner and US bond market investors appear unwilling to force the issue, at least in the short term.