United States lawmakers are preparing for a fresh bout of brinkmanship after coming up with a stop-gap deal to avoid stepping over the so-called “fiscal cliff” and potentially plunging the country, and the rest of the world, back into recession.
After marathon talks in Washington, held as the rest of the nation was celebrating New Year’s Eve, Democrat and Republican senators agreed to hold back from nearly half a trillion dollars of tax rises and a further $110bn (£68bn) of spending cuts, due to come into force in the New Year.
The lethal combination would have drained the US economy of cash, sending it tumbling back into recession, economists had warned.
But despite the doomsday scenario, negotiations in the Senate went beyond the wire, with a deal passed only after the midnight deadline had passed.
Their bill now has to be passed by the House of Representatives today. But last night House Republican leader Eric Cantor said he did not support it – raising new doubts over whether it will be passed.
Even if it does, details mean that the crucial issue of spending cuts are still to be deferred, prompting fears that far from solving the matter, the two sides were merely kicking the solution to America’s yawning budget deficit into the long grass.
Barack Obama issued a wry statement yesterday, criticising the intransigence of politicians on Capitol Hill. “One thing we can count on with respect to this Congress is that if there’s even one second left before you have to do what you’re supposed to do, they will use that last second,” the president said.
With the deal having been passed by 89 votes to eight in the Senate, it will go to the House of Representatives with hopes that Mr Obama will be able to sign off legislation by the middle of the week.
The deal puts taxes up for those families earning more than $450,000 (£277,000) a year, a far higher sum than Mr Obama had campaigned for during his election campaign last autumn, but one which Democrat senators decided to back.
It is the first time in about two decades that conservatives have agreed to higher taxes.
Spending cuts totalling $24bn over two months aimed at the defence department and domestic programmes will be deferred, to allow the White House and Capitol Hill time to regroup before fresh negotiations on how best to slash the US deficit.
Republicans want to rein in the cost of the Medicare health care programme and other
government benefit schemes. But Mr Obama put down a marker that he would not
allow deficit reduction to come solely from cuts to government spending.
“If Republicans think that I will finish the job of deficit reduction through spending cuts alone – and you hear that sometimes coming from them – then they’ve got another think coming. That’s not how it’s going to work, at least as long as I’m president,” he said.
“And I’m going to be president for the next four years, I think,” he added.
Senator John McCain of Arizona said Mr Obama’s comments would “clearly antagonise members of the House”.
Senator Bob Corker of Tennessee said: ““I know the president has fun heckling Congress”, adding that “he probably lost some votes.
However, the Republican leader in the Senate, Mitch McConnell, urged calm, saying it was crucial to push through the tax changes agreed early yesterday morning. “Let’s pass the tax relief portion now,” said Mr McConnell, who will spend next Sunday evening and Monday negotiating with vice-president Joe Biden. “Let’s take what’s been agreed to and get moving. We’ll continue to work on finding smarter ways to cut spending.”
Senate majority leader Harry Reid, a Democrat, said: “If we do nothing, the threat of a recession is very real,”
He added: “Passing this agreement does not mean negotiations halt, far from it.”
In the House of Representatives, Republican Speaker John Boehner last night refrained from endorsing the Senate deal. He said the House would not vote on any Senate-passed measure “until House members – and the American people – have been able to review” it.
The talks on more spending cuts come with the US now only two months away from being unable to pay its debts, having hit its borrowing limit.
With stock markets closed yesterday, reaction to the deal was muted, but the prospect of a breakthrough had seen the US benchmark S&P 500 index recover almost all of last week’s losses in its final trading session of the year.
THE FISCAL CLIFF EXPLAINED
AMERICA’s central role as the driver of the global economy explains why it matters to the rest of the world whether or not it decides to plunge off the fiscal cliff.
If the United States presses ahead with the raft of tax increases and spending cuts due yesterday, $607bn (£373bn) would be removed from the economy, with the lower paid losing child and income credits, the unemployed losing their rights to some benefits, high earners losing out and big-spending government departments, including defence, having their budgets slashed.
It has been estimated that the average annual tax bill for each American would rise by $3,500 (£2,150), with the super-rich facing an average tax rise of $120,500 (£74,000) a year.
This would have had a massive impact on the global economy, depressing demand from US consumers and hammering confidence in investment, potentially sparking a further reduction in the crucial credit lifeline as firms pulled back from risky spending.
Analysts have warned that the impact of that sudden removal of spending power from the world’s most powerful economic nation would
dwarf the impact of the eurozone crisis. “The US fiscal cliff represents the single biggest near-term threat to a global economic recovery,” the Fitch ratings agency said recently.
“The dramatic fiscal tightening implied by the fiscal cliff could tip the US, and possibly the global economy, into recession. At the very least, it would be likely to halve the rate of global growth in 2013.”
The International Monetary Fund has warned that even the uncertainty raised by the fiscal cliff has hit global investment and job creation.
If the US falls off the cliff, it could knock possibly four percentage points of growth off the US and undermine the fragile confidence in the rest of the world, it said.
For the UK economy, that would likely mean a speedy return to recession and the end of any hope that 2013 might see the country lifting itself back towards steady growth.
However, if the deal gains confidence that the US has indeed stepped back from the cliff – and has found a way to deal with its deficit – then analysts believe it could help steer the global economy away from the rocks and back into calmer waters.
IT TURNS out that the fiscal cliff has a balcony.
Democrats and Republicans abseiled down to it in the early hours of yesterday, opting to defer the whole issue of spending cuts over which they could not agree.
Now begins a fresh round of tortuous negotiations on whether or not to haul themselves back up, or continue the fall downwards.
Congress leaders made clear that yesterday’s deal marks only a pause in the heated talks over how best to sort out America’s deficit problem.
A two-month extension has been granted to swingeing spending cuts now due to come into force. The lawmakers will draw breath before beginning again.
The Republicans are intending to seek spending cuts in
exchange for letting the Treasury borrow above the current debt limit of $16.4 trillion (£10tn).
For his part, Barack Obama made clear he will not countenance piling all the burden of deficit reduction on spending cuts to government programmes such as Medicare.
His statement yesterday – in which he bluntly noted that he will be president for another four years – suggested that he intends to spend some of the
political capital his election victory two months ago bought him.
Given the stakes, and the mutual self-destruction that awaits a failure to act, another last-minute fudge, similar to yesterday’s deal, seems likely.