The US Senate moved the economy back from the edge of a “fiscal cliff” yesterday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.
In a rare New Year’s session at about 2am, senators voted 89 to 8 to raise some taxes on the wealthy, while making permanent low tax rates on the middle class that have been in place for a decade.
However, the measure did little to rein in huge annual budget deficits that have helped push the US debt to US$16.4 trillion.
The agreement came too late for US Congress to meet its own deadline of New Year’s Eve for passing laws to halt US$600 billion in tax hikes and spending cuts, which strictly speaking came into force yesterday.
Yet with the New Year’s Day holiday, there was no real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures.
That will need the backing of the House, where many of the Republicans who control the chamber complain that US President Barack Obama has shown little interest in cutting government spending and is too concerned with raising taxes.
All eyes are now on the House which was to hold a session yesterday at noon.
House members were thankful that financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff, but if lawmakers cannot pass legislation in the coming days, markets are likely to turn sour.
The US economy, still recovering from the 2008 and 2009 downturn, could stall again if Congress fails to fix the budget mess.
“If we do nothing, the threat of a recession is very real. Passing this agreement does not mean negotiations halt, far from it. We can all agree there is more work to be done,” House Democrat Majority Leader Harry Reid told the Senate floor.
A new, informal deadline for Congress to legislate has been set for today, when the current body expires and it is replaced by a new Congress.
The Senate bill, worked out after long negotiations on New Year’s Eve between US Vice President Joe Biden and Senate Republican Minority Leader Mitch McConnell, also postpones for two months a US$109 billion “sequester” of sweeping spending cuts on military and domestic programs. It extends unemployment insurance to 2 million people for a year and makes permanent the alternative minimum tax “patch” that was set to expire, protecting middle-income Americans from being taxed as if they were rich.
The tax hikes do not sit easy with Republicans, but conservative senators held their noses and voted to raise rates for the rich because not to do so would have meant increases for almost all working Americans.
House Speaker John Boehner said the House would consider the Senate deal, but he left open the possibility of the House amending it, which would spark another round of legislating.