US: "Fiscal cliff" averted as deal is reached

Updated On: Jan 03, 2013

The US Congress has approved late Tuesday a compromise deal that ends heated partisan wrangling over the "fiscal cliff", averting scheduled tax increases and spending cuts that economists say would have plunged the US economy back into recession. The Republcian-led House of Representatives voted to send the measure for Obama to sign, after the Senate overwhelmingly approved the legislation, marking a compromise among Republicans who opposed raising taxes without any significant spending cuts. The bill will keep tax rates for middle-class taxpayers from rising, but will let tax rates rise on wages and investment profits of households earning US$450,000 a year. The measure will also extend unemployment benefits and delay for two months automatic cuts to government spending.

Report: Congress approves ‘fiscal cliff’ measure [Washington Post, 2 Jan 2013]

Analysts see short-term gain but long-term implications

Short-term relief over averting the fiscal cliff was evident as markets throughout the world rallied on Wednesday after the deal was reached. However, analysts cautioned that the deal failed to address the long-term issue of the huge spending that threatens global economic growth. US lawmakers had simply set up potentially contentious battle over the next two months on spending cuts and an increase in the nation's limit on borrowing, or the debt ceiling, according to analysts.

While President Obama and Democrats may be emboldened by their first victory, Republicans believe they will have greater influence when Democrats must consider raising the debt ceiling in February. Failure to close a deal could mean a default on US debt or another US credit rating downgrade. President Obama urged "less drama" when Congress and White House move forward with discussing budget issues, with President Obama vowing to avoid another divisive debt-ceiling fight.

However, worsening relations between leaders in the two parties do not bode well for the more contentious fights ahead. Rating agencies Moody's and Standard & Poor's said the measure did not put the budget on a more sustainable path. The IMF said raising the debt ceiling would be a crucial move. Spending cuts have always been an incendiary topic for Republicans and Democrats -- One of the key difficult issues would be the debate over "entitlement" programmes,  such as Medicare and Medicaid for retirees and the poor, for which Republicans want to cut spending, a move opposed by Democrats.

Report: Bigger fights loom after "fiscal cliff" deal [Reuters, 2 Jan 2013]

Report: US "fiscal cliff" deal only provides short-term relief: analysts [Xinhua, 1 Jan 2013]