Republican deal sets up a new US budget battle

Ben Southwood
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EPUBLICANS have threatened to use the debt ceiling as a political tool once again in March, after yesterday’s budget deal included huge tax hikes with little spending reform.

The US has once again hit the legal limit for the total it can borrow – set at $16.4 trillion (£10.1 trillion) – and government could grind to a halt without Congressional approval of an increased cap.

But many Republicans in the Republican-controlled House of Representatives have suggested they will not vote for a higher limit without significant reform to entitlements, putting the US budget on a long-term sustainable path.

“Our opportunity here is on the debt ceiling,” Senator Pat Toomey of Pennsylvania said on MSNBC. “We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean.”

This brinkmanship would hark back to the fractured budget talks of 2011, when many of the measures that became the fiscal cliff were set in place, in an attempt to rein in ballooning government spending on healthcare and pensions.

It comes after a deal on the fiscal cliff that passed through the House 257 to 167 late on Tuesday, US time, after passing through the Senate 89 to 8 at 2am on the morning of 1 January.

The deal permanently resolved tax measures, with marginal rates on couples earning above $450,000 rising to 39.6 per cent, from 35 per cent, and the payroll tax rising from 4.2 per cent to 6.2 per cent on the first $100,000 of an individual’s earnings.

But spending issues have not been resolved, with Congress actually agreeing on $24bn of extra spending to tide them over until a decision is made on the so-called sequester of $109bn of automatic cuts now delayed an extra two months to March.

Since the deal saw very little in spending cuts – going against the recommendations of the bipartisan Bowles-Simpson commission Obama commissioned, Republicans feel they will need to fight for healthcare and pension reform.

“This is going to be much uglier to me than the tax issue...this is going to be about entitlement reform,” said Republican Senator Bob Corker on CNBC. But Obama called for “a little less” drama when talks on spending and the debt limit come to a head.


The fiscal cliff was a package of spending cuts and tax hikes that technically came into force at the very beginning of 2013 but have now been partially rolled back.

The measures hit the US economy with a fiscal consolidation originally estimated at $607bn (£373.7bn) and then revised to $503bn, according to the Congressional Budget Office (CBO) – Congress’s fiscal watchdog. The discrepancy is dependent on which measures one includes.

The deal reduced the consolidation to around $173bn, if we use the $503bn measure of the fiscal cliff. On the $607bn measure the total consolidation is $277bn after the deal.

The warring groups will also have to agree on another deal in March, as the $109bn of automatic spending cuts known as the sequester have only been postponed for two months.

The cost of paying for this delay – estimated at $24bn – will be paid for with $12bn in extra revenue and $12bn in extra spending cuts.

The US budget deficit will total $1.1 trillion for 2012, the fourth successive year with a deficit above $1 trillion, the CBO estimated.

The fiscal cliff would have taken around half of that away, but the deal which passed the Senate and the House of Representatives yesterday will only reduce the deficit by around $173bn in 2013.

Compared to a baseline of sustaining all the tax rises and spending cuts contained in the fiscal cliff, the deal will add around $3.64 trillion to the US national debt over ten years.