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Fiscal worries don’t end with avoiding cliff

The US Congress approval of a deal sparing the middle class from tax rise but letting the wealthy pay the higher pre-Bush rates—a personal victory for President Obama to redeem a campaign promise - along with a two-month deferment of spending cuts, lifted the threat of a ‘fiscal cliff’ at the start of the New Year. However, it does little to give any immediate boost to the still fragile US economy, let alone lowering the levels of unemployment.

Global markets heaved a sigh of relief that the deal would help to avert a recession the US economy might otherwise have run into by mid-2013 from a combination of tax rises (with the expiry of Bush-era tax cuts for all incomes on 1 January) and huge spending cuts enforced by the Congress. That would have taken over 500 billion dollars off the economy. At best for the present, further austerity has been avoided in the world’s largest economy. There are no gains for the global economy until USA overcomes the immediate fiscal challenges and growth stagnation. Meanwhile, the International Monetary Fund has welcomed the US Congressional action ‘to avoid sudden tax increases and spending cuts, including through an extension of unemployment benefits during 2013’. In the absence of Congressional action the economic recovery would have been derailed, IMF said. ‘However, more remains to be done to put US public finances back on a sustainable path without harming the still fragile recovery’. Here IMF has taken the position that revenues and spending cuts should go together, the type of balanced package that the President has been urging.

IMF has suggested that ‘a comprehensive plan that ensures both higher revenues and containment of entitlement spending over the medium term should be approved as soon as possible. In addition, it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills’.

It is where Republicans, who had to yield to tax rise for the richer classes (their guarded turf) in order to escape being blamed for the ‘cliff’ consequences, have reserved their fights for the coming months, especially over the urgently-needed increase in US debt ceiling. The prospect of a catastrophic national default two months from now looms large on the horizon, with the US Treasury having hit the 16.4 trillion dollar debt ceiling.

President Obama had a tough time negotiating for a rise in debt ceiling in 2011 and the political difficulties forced S and Poor’s to downgrade the US sovereign credit rating for the first time in history. The current deal to avert the fiscal cliff came through after tortuous negotiations for weeks between the White House and hardened Republicans, focussed on spending cuts, and thus the President’s hopes of achieving an early breakthrough for a broader balanced tax and spending package for growing economy and creating jobs were dashed.

Vice-President Joe Bidden was commissioned to negotiate with Senate Republicans as the clock was ticking to usher in the New Year. The agreed text was approved by the Senate overwhelmingly by 89 votes to 8. After 24 hours, Republicans in the House were still unreconciled but finally the measure secured passage with 257 votes to 167, only 85 Republicans joining 172 Democrats. President Obama welcomed the agreement in the Congress which makes the millionaires and billionaires pay their ‘fair share’ from now on - for the first time in 20 years - and asserted that, going forward, his Administration would address fiscal challenges and reduce deficits through ‘a combination of new spending cuts and new revenues from the wealthiest Americans’.

On Republican threats of bargaining for more cuts in expenditure before raising the debt ceiling, the President has warned that if Congress did not enable government to pay bills on time, there would be ‘catastrophic consequences for the entire global economy’, which would be far worse than the impact of a fiscal cliff. America cannot go through again what happened in 2011, he said. Under the latest bipartisan deal, there would be no income tax rise for more than 98 per cent of Americans and 97 per cent of small businesses, on the lines the President had promised. The tax rise for the two per cent of Americans earning above 400,000 dollars or 450,000 for married couples would raise revenue of 620 billion over a decade. The deal restores the 39.6 per cent tax rate for high-income households as in 1990s, before President Bush slashed taxes twice in 2001 and 2003 lowering the tax ceiling at 35 per cent.

According to White House Factsheet, the permanent extension of middle class tax cuts would cover 114 million households as also an expanded Child Tax Credit. The deal retains tax credits for companies for research and investments they make and clean energy jobs that are created. The unemployment insurance has been extended and would benefit two million but only for one year only. There are over 12 million Americans looking for a job.

But what the middle class gained from the income tax cuts continuing would be offset to a large extent by the restoration of the old pay roll tax rates, as the two per centage point cut extended to the working class was allowed to lapse. This would mean take-home, pay may be less despite the reduced income taxes. Some 77 per cent of Americans could pay more overall to the federal government in 2013, according to the Tax Policy Centre, a nonpartisan research group in Washington. But America is yet to come up with a clear path of debt reduction over the long term. This would depend to a great extent on the new tax code. Cutting out exemptions, to be negotiated by the Administration with the House Republicans. Public debt as a per centage of gross domestic product is around 74 per cent at present. It could get close to 100 per  cent in a decade. By 2025, entitlement spending and debt payments are projected to suck up all federal revenue, according to fiscal analysts.

President Obama who has signed the legislation from the Congress is hopeful that ‘the agreements we’ve reached so far proves that there is a path forward, that it is possible if we focus not on our politics but on what’s right for the country. And the one thing that I think, hopefully, in the New Year we’ll focus on is seeing if we can put a package like this together with a little bit less drama and a little less brinkmanship’. (IPA)
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