The US Congress pulled back from the brink of a “fiscal cliff” disaster and sparked a New Year stock rally with a last-minute deal averting tax hikes and massive spending cuts that threatened to unleash economic calamity.
Relief rippled out through European and Asian stock markets, with stocks in Spain and Italy surging by more than 3 percent before the all-important opening on Wall Street.
The US House of Representatives passed a deal between the White House and Republicans late on Tuesday to raise taxes on the rich and put off automatic US$109 billion budget cuts for two months, lifting the clouds of immediate crisis.
However, more hard haggling is due in two months’ time over further specific budget measures.
The deal’s fate had hung in the balance for hours as House conservatives sought to add spending reductions to a version passed by the Senate in the early hours of this year that would likely have killed the compromise.
In the end, the House voted 257 to 167 to pass the original bill, with minority Democrats joining a smaller band of majority Republicans to pass the legislation after a fiercely contested and unusual session on New Year’s Day.
US President Barack Obama, who campaigned for re-election on a platform of building a more equitable economic system, said that the deal was a promise kept, despite falling short of earlier hopes for a grand deficit bargain.
“I will sign a law that raises taxes on the wealthiest 2 percent of Americans, while preventing a middle-class tax hike that could have sent the economy back into recession,” Obama told reporters after the vote.
“The deficit needs to be reduced in way that’s balanced. Everyone pays their fair share. Everyone does their part,” Obama said, before heading to Air Force One to resume his interrupted annual vacation in Hawaii.
Relief was felt internationally, with Asian and European stock markets soaring yesterday. However, not all observers found the development encouraging. China’s official news agency warned that the US was heading toward an “abyss” — fiscal deal or no deal.
“As the world’s sole superpower, the United States is clearly not Greece,” Xinhua news agency said. “But economics and common sense do not lie.
“People, or governments, can overspend for some time, but they simply cannot live on borrowed prosperity forever,” it said.
The truce in Washington is likely to be brief, given the fight that will ensue over the spending cuts that now loom at the end of next month, as well as over regular budget bill extensions.
Those fights will be paralleled by one over a request by Obama for Congress to lift the country’s US$16 trillion borrowing limit. Republicans are already demanding concessions on expenditures in return for allowing it to rise.
Obama issued a blunt warning on Tuesday that he would not play ball with Republicans by enjoining in another battle over the debt ceiling.
“If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff,” he warned.