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One crisis averted, but humbled America is braced for the backlash

Uncertainty remains as to where controversial cuts will come from

David Usborne in Washington

Published 03/08/2011 | 08:29

Barely escaping the calamity of a debt default, a humbled America yesterday reluctantly set itself on a new austerity course amid still poisonous clouds of uncertainty about where the cuts in spending would come and whether it had done enough to avert a damaging downgrade in its credit rating.

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Moments after a deal on raising the debt ceiling and launching a programme of cuts in the deficit overcame a final hurdle on Capitol Hill, President Barack Obama stepped into the Rose Garden to acknowledge that the recent weeks of brinkmanship in Washington had already damaged a weak economic recovery.



"It was something that we could have avoided entirely," he said, agreeing that "dysfunctional government" was unacceptable to voters. "It should not take the risk of default, the risk of economic catastrophe" to get politicians to do their jobs, he said. In the same breath, however, he set the stage for further clashes with a vow to ensure that a second round of cuts envisaged by the deal includes increases in some tax rates.



President Obama forsook the usual public ceremony to sign the new law, which contained elements sufficient to offend just about everyone in Washington but did have the merit of preventing a default by the world's biggest economy which may have set off a new global recession. Liberals wail it will hurt the poor and protect the rich; Republicans are staring at the prospect of the first serious cuts in US defence spending.



The complex package provides a mechanism for the $14.3 trillion debt ceiling to be raised in several stages through the end of next year and thus beyond the 2012 presidential contest. Even so, it almost guarantees that the country will see yet more partisan fighting over fiscal policy flare and more gridlock.



In particular, it calls for the creation of a bicameral, bipartisan super-committee to agree on cuts of as much as $1.5 trillion over ten years that will come on top of the roughly $900bn already called for in its provisions. The work of the committee – its members, six from each party, will be appointed within two weeks – is certain to be highly charged with an end-of-November deadline for making recommendations.



While they decisively lost this round, Democrats and Mr Obama will again insist that the road to reducing the deficit must include some increases in taxation to boost revenue. It is a goal that Republicans, heavily influence by the anti-tax Tea Party flank, will once again resist ferociously.



Saying that reforming the tax code must be on the table for the committee, Mr Obama said America "can't balance the budget on the backs of the very people who have borne the brunt of this recession. Everyone is going to have to chip in... I will be fighting for that in the next phase of this process."



If there was relief on the steamy streets of Washington last night there was surely no euphoria. Also casting a shadow was worry about how ratings agencies would react. Standard & Poor's had previously said it would like to see a programme with much more substantial spending cuts than the combined $2.4 trillion in this package before it could retreat from a possible credit rating downgrade. The Fitch agency did, however, issue a statement indicating it would maintain the triple A rating for now, but warned that the top rating would be lost if debt levels continued to rise.



The Treasury Secretary, Tim Geithner, admitted the main ratings agencies were going to "take a careful look" at whether Washington politicians have the wherewithal seriously to tame America's deficit but insisted that the US was "in a much better position to make those tough choices because the down payment's pretty strong and this special committee, this mechanism for the reforms is a much more powerful device than we've had in the past".



Already yesterday, Republicans were signalling that their appointees to the super-committee would be pledged to resisting any revenue increase solution. Party leaders are "not going to select anyone who is going to vote for taxes," warned Senator John Cornyn.



That said, Republicans must alternatively face the similarly unpalatable reality that – without agreement in the super-committee – a swingeing second round of cuts will be triggered automatically, half of which will be targeted at defence spending, a sacred cow for many in the party. That would come on top of the $350bn in security spending already identified in the first round of reductions.



A snap CNN poll about the new package found that approval for how Congress handled the issue at a rock-bottom 14 per cent. A Pew poll reported interviewees offering words such as "ridiculous", "disgusting" and "stupid". President Obama and Speaker John Boehner have also been damaged. Only 18 per cent had a positive view of Mr Obama's handling of the mess. For Mr Boehner the figure was just 11 per cent.

Independent News Service

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