The Fiscal Cliff? That was easy. Get ready for the Budget Super-Cliff (or Debt Mountain, depending on how far ahead you look)!
09/01/2013 | FxM – Evan Brock Gray
At around 2 a.m. on January 1st, 2013, the U.S. Senate overwhelmingly passed (89-8 votes, 3 abstaining) a bill to narrowly avoid the so called “fiscal cliff” – a moment in which automatic spending cuts and tax increases would have spelt disaster for the U.S. economy. And, after the House of Representatives´ approval (257-167), the bill put an end to more than a year of debate and worry about what to do with the nation´s taxes, spending programmes, budgetary issues and the (soon to be sorely maxed-out) debt ceiling. Or did it…?
The very short-term answer is `yes´. An economist´s answer would be `it depends´. But the general consensus from almost everyone involved and almost everyone who´s been following the negotiations is a clear `NO´.
Even though the bill is considered to be a move in the right direction, “the deal approved…is truly a missed opportunity to do something big to reduce our long term fiscal problems, but it is a small step forward in our efforts to reduce the federal deficit”, said Erskine Bowles, former co-chair of Obama´s National Commission on Fiscal Responsibility and Reform, along with the other co-chair, Alan Simpson, in a joint statement from their newly created group The Campaign to Fix the Debt. However, this bill and last year´s Budget Control Act are “both steps (that) advance the efforts to put our fiscal house in order, neither one nor the combination of the two come close to solving our Nation´s debt and deficit problems” they said.
So, what exactly did the American Taxpayer Relief Act (the official name of the bill, or ATRA) do to stave off the fiscal cliff and what is still left to be done? First, the achievements, shortcomings and failures of the bill will be presented and summarized. Then, the areas that still are in question and the implications for the future budget and U.S. sovereign debt will be set forth.
Achievements (or what the bill actually did):
Shortcomings (or what the bill didn´t really do):
Failures (or what politicians failed to do):
The debt ceiling is really not supposed to be raised, as it was set up that way during the First World War, unless there is political approval. In The Financial Times, an article from the LEX COLUMN makes an interesting point about the debt ceiling´s (officially known as the debt limit) history, what is happening today and what will be happening briefly:
Defaulting on debt obligations would be disastrous for the world´s top economy, for the world economy in general and would also set the wrong kind of precedent that other countries might follow (“hey, if they did it, why can´t we?”). The $16.4 trillion debt ceiling was hit on January 1st, only to be averted for another two months. This, along with the fact that “the government´s budget authority runs out on March 27th”, means that not only could there be a default on debt but “without a deal, there could be a government shutdown”, according to Shahien Nasiripour and Tom Burgis of The Financial Times.
However, not controlling the debt now or in the future would also have undesirable consequences like: `extraordinary´ actions by the Department of Treasury which have already started (described below); a large decrease in domestic and foreign investment; a raise in interest rates to attract investment but that would mean greater costs for the government and slower economic growth; a decrease in confidence levels and even another downgrade in the U.S. credit rating by ratings agencies; preferential payments and the political fall-out over who gets what and when; not being able to meet domestic obligations like contributing to healthcare programmes, funding schools or paying federal employees and, lastly, a severe debt and economic crisis.
According to The Committee for a Responsible Federal Budget (or CRFD) which is a bipartisan, non-profit organization in the United States committed to educating the public about issues that have significant fiscal policy impact and is headed by Maya McGuineas (Harvard University):
U.S. national public debt today is more t
taxes, spending, budgets and the national debt ceiling are the biggest issues on the U.S. government´s plate right now. Since it seems that the first issue was “settled” with the ATRA from the “fiscal cliff” deal, the other three areas are about to take centre stage. If you thought the “fiscal cliff” negotiations were tense and last-minute, get ready for the “budget super-cliff” and “debt mountain” because they are right around the corner and even more important.