Thu, Jan 03, 2013 - Page 7 News List

ANALYSIS: US ‘fiscal cliff’ deal is called a dud on deficit front


In the controversy surrounding the “fiscal cliff” issue, it is easy to forget that the origin of the entire debate was a professed desire to reduce swollen federal deficits.

Whether the target was US$4 trillion over 10 years, as proposed by the Bowles-Simpson deficit reduction commission, or in the US$2 trillion range, as tossed around by US House of Representatives Speaker John Boehner and US President Barack Obama, the idea was to rein in total debt that now tops US$16 trillion.

By those standards, the bill passed by Congress on Tuesday to avoid the cliff’s automatic steep tax hikes and across-the-board spending cuts looks paltry indeed.

The legislation, which won final approval in the House late on Tuesday after passing the US Senate early in the day, adds nearly US$4 trillion to federal deficits over a decade compared with the debt reduction envisioned in the extreme scenario of the cliff, according to the non-partisan Congressional Budget Office.

This is largely because it extends low income tax rates for nearly every American except the relative handful above the US$400,000 threshold.

It is also because it put off for at least two months the automatic budget cuts that were part of the cliff and would have saved about US$109 billion in federal spending on defense and non-defense programs alike. The legislation, which ultimately came down to a fight about tax equity rather than federal spending, did to deficit reduction what Obama and congressional leaders always promise to resist: It “kicked the can down the road” to a later date.

In explaining the measure to the news media, the White House, which helped broker it, gave no particular figure for how much it would bring down the deficit, stating only that, somehow, “with a strengthening economy,” it would.

Whether it ultimately succeeds will depend in part on what happens to the now-delayed “automatic” spending cuts, including whether Obama follows through on reductions in outlays.

The legislation also sets up what is likely to be an even more heated fight late next month, when the Treasury Department must come to Congress to seek an increase in the government’s borrowing limit.

That will bring everything full circle to where the cliff originated during a struggle between Obama and Republicans over raising the federal debt ceiling above US$14.5 trillion.

That struggle ended in August 2011, with a bipartisan deal designed to scare Congress into legislating significant long-term cuts in federal spending.

The idea was that by setting a strict deadline of Jan. 2 this year, and dire consequences in the form of draconian spending cuts for failing to meet it, the White House and Congress would be forced into action.

Republican US Representative Paul Ryan, a self-described deficit hawk who served as the Republican US vice presidential candidate in November’s election, declared the moment a “huge cultural change.”

Coincidentally, low tax rates that originated during the administration of former US president George W. Bush were also set to expire at the end of last year, making the prospect of inaction so threatening that the Congressional Budget Office determined that failure to intervene could cause a new recession.

However, the controversy over taxes, coming on the heels of a presidential campaign built around Obama’s demand for middle-class tax justice, ultimately consumed the argument over the cliff, leaving deficit reduction as the forgotten issue.

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