US faces new financial furore

The White House and a divided US Congress avoided the “cliff” – and can now move on to the next fiscal crisis, with more explosive battles looming over taxes, spending and debt.

President Barack Obama’s victory on taxes this week was the second, grudging round of a piecemeal battle in as many years over mountainous US deficits.

Despite the length and intensity of the debate, the deal to raise the top income tax rate on families earning over 450,000 dollars a year - about 1% of households – and including only 12 billion in spending cuts turned out to be a relatively easy vote for many members of Congress.

This was particularly so because the alternative was to raise taxes on everyone.

But in banking 620 billion dollars in higher taxes over the coming decade from wealthier earners, Mr Obama and his Republican rivals have barely touched deficits still expected to be in the 650 billion dollar range by the end of his second term.

And those calculations assume policymakers can find more than one trillion dollars over 10 years to replace automatic across-the-board spending cuts known as a sequester.

“They didn’t do any of the tough stuff,” said Erskine Bowles, chairman of a 2010 deficit commission. “We’ve taken two steps now, but those two steps combined aren’t enough to put our fiscal house in order.”

In 2011 the government adopted tighter caps on day-to-day operating budgets of the Pentagon and other Cabinet agencies to save 1.1 trillion dollars over 10 years.

The measure passed yesterday prevents automatic tax rises for everyone but higher-income earners. It also blocks severe across-the-board spending cuts for two months, extends unemployment benefits for the long-term jobless for a year, stops a 27% cut in fees paid to doctors treating patients under the Medicare programme for the elderly, and prevents a possible doubling of milk prices.

The alternative was going over the “fiscal cliff” – an economy-punching half-trillion-dollar combination of sweeping tax increases and spending cuts.

Despite the deal, the government partially went over the brink anyway with the expiration of a two-year cut in payroll taxes for the Social Security pension programme.

Action inside a dysfunctional Washington now only comes with binding deadlines, therefore this week’s hard-fought bargain sets up another crisis in two months, when painful across-the-board spending cuts to the Pentagon and domestic programmes are set to kick in and the government runs out of the ability to juggle its 16.4 trillion-dollar debt without having to borrow more money.

Unless Congress increases or allows Mr Obama to increase that borrowing cap, the government risks a first-ever default on US obligations. Republicans will use this as an opportunity to leverage more spending cuts from Mr Obama, just like they did in the summer of 2011.

House of Representatives speaker John Boehner, the top Republican in Washington, insists that any increase in the debt limit – which needs to be enacted by Congress by the end of February or some time in March – must be accompanied by an equal amount in cuts to government spending.

That puts him on yet another collision course with Mr Obama, who has vowed anew that he will not let haggling over spending cuts complicate the debate over the debt limit.

The cliff compromise represented the first time since 1990 that Republicans condoned a tax increase. That has whipped up a fury among the conservative tea party movement and increased the pressure on Mr Boehner to adopt a hard line in coming confrontations over the borrowing cap and the spending cuts that won only a two-month reprieve in this week’s deal.

House Republicans are demanding new spending cuts – possibly through changes in Social Security and Medicare benefit formulas – as a scalp, and they are dead set against raising more revenues through anything less than an overhaul of the tax code now that Mr Obama has won higher taxes on the wealthy.

“Now the focus turns to spending,” Mr Boehner said after yesterday’s vote, promising that future budget battles will centre on “significant spending cuts and reforms to the entitlement programmes that are driving our country deeper and deeper into debt”.

Mr Obama is just as adamant on the other side, saying higher revenues have to be part of any formula for further diverting the automatic spending cuts.

The refusal of Republicans to consider additional new taxes is sure to stir up resistance among Democrats when they are asked to consider politically painful cuts to so-called entitlement programmes like Medicare. Democratic protests led Mr Obama and Mr Boehner to take a proposal to increase the Medicare eligibility age off the table in the recent round of talks.

The upshot is that more scorched-earth politics on the budget will probably dominate the initial few months of Mr Obama’s second term, when the president would prefer to focus on legacy accomplishments like fixing the immigration problem and implementing his overhaul of health care.