Now US looks to a fight over cuts
Published 02/01/2013 | 01:50
A last-minute deal to avoid the US "fiscal cliff" has sent world stocks climbing but did not solve the massive budget deficit, meaning other battles on deep spending cuts are looming.
The Dow Jones industrial average jumped 1.8% as US markets opened. A smiling President Barack Obama said he would sign the law "that raises taxes on the wealthiest 2% of Americans while preventing tax hikes that could have sent the economy back into recession." Then he left for Hawaii to resume his holiday.
The deal that squeezed through a sharply divided Congress just hours before most financial markets reopened from the New Year's holiday keeps income taxes from rising on the middle class and the poor, but it puts off major decisions on more than 100 billion dollars in defence and domestic spending cuts.
Congress also will have to act as early as February on raising the 16.4 trillion dollar federal borrowing limit, which will allow the country to pay its bills. "If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic - far worse than the impact of a fiscal cliff," Mr Obama said.
That means more potential drama ahead for those who have marvelled at the inability of US leaders to address chronic deficit spending. Mr Obama warned that he will "not have another debate with this Congress" on the debt ceiling. The makeup of Congress changes on Thursday, when dozens of new members are seated.
If the fiscal deal had not been reached by then, the new Congress would have had to start over, and Americans would have faced automatic spending cuts and tax increases of more than 500 billion dollars in 2013 alone.
The deal passed a final hurdle when the House of Representatives passed it, despite loud protests from conservative Republicans who hate the idea of raising taxes. They wanted to see more spending cuts in the agreement. The deal put off the issue of spending cuts.
Moments after the vote, Mr Obama strode into the White House briefing room and claimed a victory, although it was vice president Joe Biden, a decades-long veteran of the Senate, who was called to the negotiating table to work with Senate Republican Leader Mitch McConnell to get the deal through the Senate in the early hours of the new year. Some liberal Democrats criticised Mr Obama for not sticking to a harder line in negotiations, considering that he no longer faces re-election.
The bill tackles the most sensitive issue, higher taxes. It would boost the top 35% income tax rate to 39.6% for households on more than 450,000 dollars a year, while continuing decade-old income tax cuts for everyone else.
The measure would raise taxes but is not balanced enough to shrink the federal deficit.