Editorial: Still teetering on the brink of the fiscal cliff

The 'grand bargain' optimists had hoped for seems further away than ever

Related Topics

And so, after yet another round of highly partisan brinkmanship, US policymakers have struck a deal and steered the economy away from the so-called "fiscal cliff". Or have they? The Senate has indeed agreed to raise taxes on some of America's wealthiest. But even if the Bill is passed by the House of Representatives it is far from a comprehensive solution to the country's budgetary woes. In fact, it is only the most tentative of beginnings.

There is, of course, no guarantee that the House will agree to the Senate's proposals. Plenty of opposition remains on both sides – from outraged liberal Democrats who wanted tax increases on all incomes of £250,000 or more, and from Republicans staunch in their resistance to any tax rises at all. But the alternative, which would see automatic tax rises to the tune of 2 per cent of GDP hit the vast majority of households, is so unpalatable that the balance of probability surely favours a Yes.

If so, at least some of the uncertainty weighing on the US economy will be removed. Alas, there the good news ends. Disputes over the expiry of Bush-era tax cuts are only one aspect of the negotiations required to avoid triggering the fiscal cliff's $600bn contraction. Moreover, despite such painful progress, it was always the easiest to resolve. The trickier job of agreeing a package of spending cuts to avoid the $300bn "sequester" slashing Government budgets across the board has simply been put off. And with Washington already butting up against its debt limit, horse-trading over cuts will now run in parallel with discussions over the debt ceiling.

The prognosis is far from promising. Not only have Mr Obama and House majority lea-der John Boehner proved inadequate dealmakers thus far (the tax compromise was, notably, put together by Vice-President Joe Biden and Senate Minority Leader Mitch McConnell). Even as the Republicans intend to use debt talks to force through cuts to entitlements such as pensions, Medicare and Medicaid that are opposed by Democrats, Mr Obama has also already warned that the conversation about tax is far from over.

The "grand bargain" that optimists were hoping for just a few weeks ago therefore seems further away than ever. And what of the bigger picture? Perhaps the most extraordinary aspect of the crisis over the fiscal cliff is that it is entirely self-inflicted. There is no economic reason for a 1 January cut-off. It is a political creation resulting from policymakers' inability to reach an agreement on Government debt last time the ceiling was reached. But it is no less real for all that; an automatic fiscal contraction equivalent to 4 per cent of GDP would plunge the US back into recession within weeks, perhaps dragging the rest of the world with it. Even if the more swingeing measures are avoided, though, the tax rises and spending cuts agreed in their place will still be a drag on the fragile recovery.

The timing is unfortunate, then. But unsustainably high Government spending cannot be ignored either. At fully 7 per cent of GDP, the US structural deficit is, among developed economies, second only to that of Japan. Although the dollar's reserve currency status insulates Washington from the market panic that has forced many European countries into drastic austerity to shrink their debts, even the US cannot live beyond its means forever.

If it is forthcoming, a deal on tax would, without question, be welcome. But the wrangling over fiscal policy is far from over. Not so much an avoidance of the cliff, then, as a slight slowing in the speed at which Washington is racing towards it.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Sauce Recruitment: Retail Planning Manager - Home Entertainment UK

salary equal to £40K pro-rata: Sauce Recruitment: Are you available to start a...

Ashdown Group: Front-End Developer - London - up to £40,000

£35000 - £40000 per annum: Ashdown Group: Creative Front-End Developer - Claph...

Recruitment Genius: Product Quality Assurance Technologist - Hardline & Electric

£18000 - £24000 per annum: Recruitment Genius: The role in this successful eco...

Ashdown Group: QA Tester - London - £30,000

£28000 - £30000 per annum: Ashdown Group: QA Tester - London - £30,000 QA Tes...

Day In a Page

Read Next

CPAC 2015: What I learnt from the US — and what the US could learn from Ukip

Nigel Farage

If I were Prime Minister: I would create a government that actually reflects its people

Kaliya Franklin
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower