Kicking it down the road

Last Updated: Tue, Jan 01, 2013 19:30 hrs

For two hours after midnight on January 1, 2013, the United States headed off the dreaded “fiscal cliff”. Then the US Senate voted to pass a package that averts the worst of the disaster for now. If cleared by the House of Representatives on Wednesday, the immediate prospect of harsh spending cuts that would almost certainly lead to a fresh recession will be avoided. That isn’t automatic, as the Senate is controlled by the Democratic Party of President Barack Obama, and the House by his opponents, the Republicans — who have not covered themselves in glory as negotiating partners of late. Republican Speaker of the House John Boehner has promised a quick vote, but has notably shied away from endorsing the Senate’s package, saying it will be tested against one of his preferred alternative formulae in the House. For the moment, however, a recession that would have hurt the fragile global recovery, and further pushed Indian exports negative, is likely to be avoided.

The outlines of the deal arrived at in the Senate reveal how very incomplete the agreement is between the two parties. The big agreement is that tax increases, for now, will be kept to those earning very high incomes — individuals earning more than $400,000 a year, or families earning more than $450,000. This is a tiny fraction of the United States — and, for them, all that happens is that the tax cuts that George W Bush arranged for them will be allowed to expire, and their top marginal tax rate will be raised 4.6 percentage points to the Bill Clinton-era tax rates of 39.6 per cent. Some other minor changes have been passed, but overall the taxes for the vast majority of Americans will remain unchanged. These tax changes are expected to raise $12 billion in new revenue, mainly from the richest Americans who have seen incomes increase considerably even during the recessionary circumstances since the 2008 financial crisis. Meanwhile, the “sequestration” deadline has been pushed back by two months. Under sequestration, big spending cuts in defence and domestic programmes will kick in. Agreement on these spending cuts remains elusive, and so it is hard to see how what the US Congress is devising can be a permanent solution at all.

However, the Senate deal will relieve observers in that it shows that, faced with a tough deadline, the US system can still get at least the minimum required done. Even that belief had begun to fray of late, as partisanship and obstruction in Washington reached an unprecedented high. It remains to be seen if similar energy will be visible in America’s lower House, as well as when it comes to work on raising the US government’s debt ceiling — which it is bumping up against already. The medium term is as uncertain as ever.

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