US ECONOMY
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Fiscal Cliff

US economy faces bumpy ride despite budget deal

Last-minute budget pact pulls America back from the brink, but the truce looks fragile as President Obama warns of tough fight over spending cuts

PUBLISHED : Thursday, 03 January, 2013, 12:00am
UPDATED : Thursday, 03 January, 2013, 8:59am

The United States may have averted a financial calamity with a last-minute budget deal but continued political bickering threatens to shake the fragile economy well into the coming year.

President Barack Obama warned of tough bargaining ahead and vowed to avoid a repeat of last year's divisive fight with Congress over extending the nation's borrowing authority.

"While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up," Obama said.

"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."

His comments came after the House of Representatives passed a deal between the White House and Republicans to raise taxes on the rich and put off automatic US$109 billion budget cuts for two months, lifting the clouds of immediate crisis.

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 February, the US$16.4 trillion borrowing limit and regular budget bill extensions.

The deal came just as markets were opening and triggered a rally that sent European and Asian stocks up sharply. When Wall Street got back to work the main Dow Jones, Nasdaq and S&P indexes jumped 2 per cent.

In Britain, the FTSE 100 jumped 2.4 per cent to 6,041, its first foray above the 6,000 mark since July 2011. The CAC-40 in France rose 2.4 per cent, while Germany's DAX was up 2 per cent.

Asian stocks hit a five-month high and the dollar fell as markets welcomed the news.

The Hang Seng Index gained 2.89 per cent to finish at 23,311.98, breaching 23,000 for the first time since June 2011, with an additional boost from positive Chinese manufacturing data.

Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a "fiscal cliff" but a "fiscal abyss". Most of China's US$3.3 trillion foreign exchange reserves are held in dollars. "As the world's sole superpower, the United States is clearly not Greece," Xinhua said. "But economics and common sense do not lie."

The agreement hands a clear victory to Obama, who was re-elected on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.

When they arrived at the Capitol at noon, House Republicans were forced to decide whether to accept a US$620 billion tax rise over 10 years on the wealthiest or shoulder the blame for letting the country slip into budget chaos.

The Republicans mounted an effort to add hundreds of billions of dollars in spending cuts to the package and spark a confrontation with the Senate.

For a few hours, it looked like Washington would send the country over the fiscal cliff after all. In the end, they determined they did not have the votes for spending cuts and reluctantly approved the Senate bill by a bipartisan 257 to 167.

The vote underlined the precarious position of House speaker John Boehner, who will ask his Republicans to re-elect him today when a new Congress is sworn in. Boehner backed the bill but most House Republicans voted against it.

Families earning more than US$450,000 a year will now pay more tax and the deductions they can take will be limited.

Boehner warned that the focus would now turn to the Republicans' turf of tightening the budget. "The American people re-elected a Republican majority in the House, and we will use it ... to hold the president accountable for the balanced approach he promised," Boehner said, promising "significant spending cuts" and reforms to social welfare programmes.

 

No end in sight

The truce in Washington offered by Tuesday's fiscal deal is likely to be brief.

  • Battles loom over US$109 billion of spending cuts set to start automatically at the end of next month, as well as over regular budget bill extensions.
  • President Barack Obama, meanwhile, will be asking Congress to raise the borrowing limit, currently set at US$16.4 trillion. Republicans are already demanding concessions on expenditures in return for their agreement.
  • The next battle is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown.
  • Another crisis will occur whenever the temporary bill replacing the temporary funding bill expires.

Associated Press, Reuters, Agence France-Presse