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Business Analysis & Features

Finally a deal, of sorts, is close on the US debt crisis

Legislators are brokering an agreement that will put an end to the threat of another costly shutdown

Political theatre can be costly. The shutdown that left parts of the US government in suspended animation earlier this year is expected to reduce fourth quarter growth in the world’s largest economy by anywhere from 0.2 to 0.6 per cent. According to a detailed report from the White House last month, servicing back-pay for the federal employees who were sent home – or to use the jargon, furloughed – will hit the government wallet to the tune of roughly $2bn.

But there was also a political cost: opinion polls in the wake of the latest fist-fight over the federal budget showed that ordinary Americans were growing increasingly impatient with their elected representatives. The GOP, in particular, saw ratings tumble.

Now moves are afoot in Washington to seal an agreement by the end of this week that might spare the country another round of economically risky theatrics in the New Year.

A special panel of legislators, put in place after the last round of bickering, has until Friday to find common ground over a deal to end the repeated budget battles that have bruised the US economy in recent years.

“I’m hopeful that... we can produce something that is smarter than the way we’re going about things now,” Eric Cantor, the majority leader in the Republican-controlled House of Representatives, said last week.

The stakes are high, and not just because of the threat of another divisive and damaging fight. Inaction would mean that, starting in January, the second round of the sequester – the package of deep spending cuts that began to come into force at the beginning of this year – would hit the still-weak US economy.

According to the Center for American Progress, a left-leaning think-tank, the cuts for 2014 will leave a hole that is $24bn (£14.6bn) bigger than the reductions endured by the US in 2013. Moreover, it said in a recent report, “many of the cuts that were legally made this year have not actually been implemented yet.” The result would be damaging for an array of government departments, including the Pentagon, and for the economy at large.

Mindful of the impact, the talks currently under way among lawmakers in Washington are moving towards a deal that would water-down the cuts, though a complete reversal remains unlikely.

But the agreement is likely to be limited in scope. By all accounts there still won’t be a “grand bargain” that would deal with the thorny issues of reforming entitlement programmes – a longstanding issue for Paul Ryan, the main negotiator from the Republicans in the current talks – or with the matter of closing tax loopholes, something that has long been on the wish-list of Democrats. Nor, according to The Washington Post, would the deal currently on the table tackle the country’s $17trn-plus debt pile.

Instead, the focus in the talks being led by Mr Ryan and the Democratic senator Patty Murray, is on finding a way to agree spending levels that would erase the prospect of yet another near-term budget standoff that could trigger another damaging government shutdown. One of the main potential obstacles could be demands from within the Democratic caucus that any deal include an extension of emergency unemployment benefits. As it stands, at the end of this year, some 1.3 million Americans will lose their unemployment benefits.

The issue is an important one, for although the recent non-farm payrolls evidence a strong rise in jobs, the labour market is far from recovered. Extending the benefits for a year would cost in the region of $25bn, something that could prove to be a sticking point between leaders on the two sides, who would have to shepherd any pact through the two houses of Congress.

Last week, the leader of the Democratic minority in the House, Nancy Pelosi, signalled her opposition to letting the benefits programme lapse when she said that “it would undermine who we are as a country”, although she has since moderated her remarks, suggesting an agreement could be on the way.

Fans of political theatre need not despair: even if an agreement is finalised this week and eventually steered through Congress, the emerging deal does not appear to have anything to say about the debt ceiling, which will come back on the agenda next spring.