Leader: US deal lacks a growth plan to lead it out of the mire

IF THE millions of words that have been expended on the US fiscal crisis, perhaps the two most significant, and stinging, have come from Xinhua, the news agency that faithfully reflects the views of the Chinese government.

It termed the foot-dragging brinkmanship which led the American government to within hours of being unable to pay what it owes as "dangerously irresponsible" conduct.

This may seem as no more than a statement of the obvious, but in diplomatic circles it is a wounding rebuke, for it echoes words US governments have used in the past to describe the handling of financial crises in South America, Asia, and Europe. The fact the US is on the receiving end of such criticism, particularly from a government on which it has depended as a major source of its $14.3 trillion credit mountain, is in effect a verdict that it no longer has any claim to be the world's economic leader.

Americans, however, can be forgiven for worrying less about what foreigners think than about the domestic implications of the deal that enabled squabbling Republicans and Democrats to set aside some of their differences. The big flaw is that while they may have agreed a fiscal strategy, there is no growth strategy. Achieving economic growth is an essential part of any route out of a recession. Growth enables people's incomes and government tax revenues to grow, which is one half of a strategy to close the gap between government spending and revenues. But the US economy is close to stagnation - its paltry 0.4 per cent growth in the first six months of this year was not much more than the growth that can be attributed to its rising population.

On the other side of the deficit reduction equation - cutting spending and raising taxes - the tax-raising element is missing, thanks to the ideological obtuseness of the Tea Party right-wing of the Republican party. It means all the re-balancing strain is being taken by spending cuts. Given that what growth the US has achieved since the financial crisis is largely due to the billions of dollars the federal government has pumped into the economy, the implication is pretty clear. What fragile growth now exists is liable to be choked off by the spending cuts Congress is implementing.

In the medium term, it is self-evident that US government spending must be reined back. But as many economists have pointed out, the time to do that is when the economy is growing strongly, so any public unemployment that may be caused by cut-backs can be compensated by job creation in the private sector. By failing to recognise such basic economics, tax-cutting right-wingers in Congress risk worsening the mess their country is in.

Half a deal is certainly better than no deal, as the crisis which would have erupted if the US had defaulted on its debts would have been truly awful. But all Americans, including many Republicans, will come to regret the missing half of this deal.