Fiscal cliff deal is no grand bargain to save the US from growing debts

Ewan Watt
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WHILE revellers in New York greeted 2013 with renditions of Auld Lang Syne, Washington reflected on a year of fierce partisanship and brutal campaigning. But as the country welcomed in the New Year, so too came hopes of a new era of bipartisan co-operation, after a cross-party agreement passed the House of Representatives and the Senate to stop $600bn (£369bn) in automatic tax increases and spending cuts – the so-called fiscal cliff. To others, however, rather than a new era, it felt like business as usual.

Those looking to find a grand bargain on revenues and entitlement spending, or at least a down-payment on resolving America’s impending budget crisis, were left disappointed. Prolonged negotiations between President Barack Obama and speaker of the House John Boehner failed, highlighting the limited negotiation skills of the former and the ability of the latter to carry the Republican caucus.

The deal was left to vice president Joe Biden and Senate minority leader Mitch McConnell. Both parties can have their gripes about the agreement, but the Republicans will definitely have a prolonged New Year hangover.

For a country saddled with $16 trillion in debt, and approximately $60 trillion in unfunded liabilities, the agreement’s $41 in tax increases for every $1 in spending cuts raises more questions than it provides answers. As part of the package, the so-called “Bush tax cuts” stay largely intact. But rates for families and individuals earning over $450,000 and $400,000 respectively will increase to Clinton-era levels of 39.6 per cent. In addition, taxes on capital gains and dividends for these individuals increases to 20 per cent – a perplexing move given the need for more investment in a country facing anaemic growth. But rather than putting the budget on a positive trajectory, the deal will increase US debt by a further $4 trillion, and will only raise an additional $600bn in revenues over a decade. Such are the limitations of tax increases.

The White House has taken a victory lap, boasting that it has broken two decades of Republican intransigence on raising taxes. This has some truth to it. And yet amid all the gloom, there is a brightside for Republicans. As highlighted by anti-tax crusader Grover Norquist, in making 84 per cent of the Bush tax cuts permanent, Obama may have removed the issue from the agenda for the remainder of his term. This could potentially shift the debate towards the main driver of the country’s budgetary woes – spending. What’s more, despite being fresh from his re-election victory, the realities of divided government overwhelmed the President’s mandate, preventing him from realising a desired tax hike on individuals and families earning $200,000 and $250,000 respectively.

But for those Republicans who voted to oppose the measures, there is a sense that, rather than bipartisanship, the agreement represents an ugly consensus between Republicans and Democrats to sweep the country’s problems under the rug. With spending cuts delayed a further two months, this saga looks set to commence again. The White House and Congress will next debate steps to raise the country’s debt ceiling, a move Republicans have stated must be joined by real reforms to programmes like Social Security, Medicare and Medicaid. Having already cajoled Republicans into increasing taxes, Democrats have shown little intent to touch these sacred cows. Few believe this to be a realistic option. Even the Washington Post, hardly a bastion of conservatism, recently chastised Democrats for failing to “meet an entitlement reform they like.” Compared to the coming fight over the debt ceiling and entitlements, the fiscal cliff saga may look rather tame.

Having seen a majority of his Republican colleagues rebel against the deal, rumours have circulated that Boehner may now be the subject of a coup. If he went, the White House would be losing a pragmatist it could do business with. Given Obama’s questionable handling of the talks, it’s unclear whether doing business has ever been a priority of this administration. However, with a new term on the horizon, the President still has time to work with Republicans in a new Congress and strike a grand bargain. It just depends whether he wants to be remembered as a reformer willing to address the country’s fiscal peril.

Ewan Watt is a Washington, D.C.-based consultant. You can follow him on Twitter @ewancwatt