US dodges budget disaster

Updated: 2013-01-03 11:34

By Zhang Yuwei in New York (China Daily)

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US dodges budget disaster

Speaker of the House John Boehner (center) leaves the second House Republican Caucus meeting of the day with House Ways and Means Committee Chairman Dave Camp during a rare New Year's Day session on Tuesday in Washington. The House approved a Senate 'fiscal cliff' bill to avoid massive tax hikes and spending cuts. Chip Somodevilla / AFP via Getty Images

Despite Congress' late-breaking New Year's Day deal to avert - for now - tax hikes and budget cuts that could have pushed the US economy into a deeper recession, many find the political brinksmanship surrounding fiscal-policy debates in Washington unnerving.

While enough Republicans in the House of Representatives joined the Democratic minority to endorse a budget plan endorsed by President Barack Obama and approved earlier by the Senate, the package failed to resolve several issues. A new Congress, to be sworn into office on Thursday, will be left to address them in the coming weeks.

Coverage of the congressional tussle was heavy both in the US and internationally, since policy moves by the world's biggest economic power affect the world.

China's Xinhua News Agency said in a commentary that while Washington policy makers had come together to pass the budget plan, a lot of work remains. "With a total public debt of nearly $16.4 trillion, the US has bigger fiscal challenges ahead," Xinhua said.

"The most worrying thing about US politicians is that if they have come so close to falling off a 'cliff', they are far less likely to reach a deal to help their country climb out of an abyss," the commentary read.

It also noted that Congress and the president had "kicked the can" yet again - delaying until March their deadline for resolving fundamental issues such as the US federal budget, predetermined spending cuts and the debt ceiling, which affects the government's borrowing ability.

Had the House not voted for the compromise after a yearlong deadlock, $600 billion in tax increases and spending cuts would have gone into effect. But the deal struck late on Tuesday didn't raise the debt ceiling, address US unemployment or lay plans for shrinking the US budget deficit, leaving many observers to see it as short-lived. Many agreed with Xinhua's assessment that the big problems are yet to be resolved.

"Concern regarding the Band-Aid solution to the fiscal cliff is warranted," said Lawrence Goodman, president of the Center for Financial Stability - a think tank in New York.

"The fast fixes will do little to actually reduce US debt or other open-ended liabilities such as Medicare, Medicaid and Social Security," he said.

According to the International Monetary Fund, "more remains to be done to put US public finances back on a sustainable path without harming the still-fragile recovery".

"It is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills," IMF spokesman Gerry Rice said in Washington.

Asian stock markets surged on Wednesday on news of the US compromise deal, which raises income taxes on households making $450,000 a year or more but spares lower-income Americans. Top tax rates on capital gains and investment dividends will increase to nearly 24 percent from 15 percent.

China, as the world's No 2 economy, has reason to be concerned about US fiscal policies. The two countries' economic interdependence is closer than ever, while bilateral trade and investment are crucial to each other's growth and the health of the global economy.

Goodman said international investors such as China will need to keep close watch on markets and economic data.

"Market movements will reflect receptivity to investment," he said. "Similarly, growth will prove key for reducing relative imbalances and repairing balance sheets."

Jon Taylor, a political-science professor at the University of St Thomas in Houston, said the government's "avoidance" in dealing with underlying fiscal challenges will produce further political infighting and gridlock.

"It is this sustained gridlock that disillusions the average American regarding politics and politicians," he said. "Gridlock also gives the world the impression that the US has become somewhat politically unstable. Long-term, this could have a direct impact on foreign investment in the US, particularly US Treasury notes."

China, the biggest foreign creditor of the US, increased its holdings of US Treasurys slightly, to $1.16 trillion, in October despite the budget crisis in Washington. Experts say international investors have stuck with US bonds because they are safe compared with other countries' sovereign debt, especially as parts of Europe remain mired in crisis.

Tuesday's late deal reminded many of the summer of 2011, when Congress took its debate over whether to raise the debt ceiling - involving money already borrowed - down to the wire. That August, Obama and the divided Congress - Republicans control the House while the president's Democrats have a slim majority in the Senate - agreed to increase America's debt limit by $2 trillion, to $14.3 trillion. The standoff prompted ratings firm Standard & Poor's to downgrade the debt of the world's biggest economy by a notch from its sterling triple-A rating.

Some say the modest payroll tax increase included in the latest agreement could slow the US economy, although the impact will likely be far less severe than if income taxes had been allowed to rise broadly.

"A weak, recessionary US economy could drag the world down with it, potentially impacting China's economic growth for the coming year and beyond," said professor Taylor. "A weak US economy could also reduce US consumer demand for goods, which could hit China's manufacturing and exporters."