Dec 24, 2012

What’s over the fiscal cliff? We may be about to find out

Congress and Barack Obama have gone on holidays without a deal on the "fiscal cliff". The chances of anything more than a temporary fix now look remote.

Bernard Keane — Politics editor

Bernard Keane

Politics editor

The United States isn't quite teetering on the edge of the fiscal cliff but it's currently a whole lot closer than many would be comfortable with after Congress went home for the Christmas break and President Barack Obama flew to Hawaii with no deal. Under the terms of the debt ceiling agreement thrashed out in August last year, US$109 billion in 'sequestrations" a year will kick in on January 2, while a round of Dubya-era tax cuts expires on 1 January. Obama had proposed that the tax cuts be made permanent for those on incomes below $250,000 while the rest expire. House GOP leader and Speaker John Boehner tried to put forward a bill to make permanent tax cuts for those on incomes below $1 million, but such is the intense antipathy toward taxes in the House GOP caucus, where Tea Party sentiment runs strong, that this was rejected by his own party. Boehner withdrew that bill rather than put it to a vote. Hopes for a "grand bargain" in which spending cuts and limited tax rises would be agreed now appear off the table after negotiations between Obama and Boehner broke down. According to a reconstruction of negotiations by The Wall Street Journal, the re-elected president played hardball with the Republican, conscious that the GOP has managed to identify itself as the party of political dysfunction in the eyes of most voters. Obama knows the Republicans will wear the blame if there's no deal. The best hope now is a bill to limit tax rises to incomes above $400,000 or $500,000 and, likely, a delay in the sequestration for further negotiations over a long-term deal on spending. The problem is, if Boehner can't deliver his party for tax rises for millionaires, delivering it for a lower figure looks problematic. There is also the possibility Republicans may filibuster in the Senate to prevent such a deal. The talk now is thus what happens when, rather than if, the US goes over the cliff, although a deal in January would avert nearly all of the sequestration impacts. But even an agreement to simply delay a resolution of the debt ceiling and budget deficit issues may weigh heavily on the US dollar, with flow-on upward pressure on the Australian dollar, and the US stock market, with flow-on effects for local markets (there is also a theory that a successful resolution of the issue, which would be good news for the global economy, would also weigh down safe haven currencies like the US dollar and, perhaps, the Australian dollar). Ratings agencies may also react adversely, given Standard and Poor's has already downgraded the US's credit rating once in response to political deadlock over this issue -- although there was no visible impact on the US's capacity to borrow, which has never been healthier. As the Republicans' intransigence demonstrates, there's no will to compromise despite Obama's emphatic re-election. Indeed, for many in the GOP, which easily retained the House of Representatives, the anti-tax sentiment is stronger than ever, even despite the notoriously tax-hostile Grover Norquist, in a significant shift, giving the tick to Boehner's US$1 million plan. Thus, many Tea Party GOP representatives are now even more extreme than the heart-and-soul of the anti-tax movement. There's unlikely to be an outcome from all this that does anything to help Wayne Swan's faint chances of securing a surplus -- another reason why last week's admission of defeat on that front was necessary for the government. Keep an eye on the issue over the break and into January -- it's likely to have a significant bearing on the progress of the Australian economy through 2013.

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