Editorial: Still teetering on the brink of the fiscal cliff

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

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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.

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