January 3, 2013

Next time, fiscal fight to intensify

Struggles over spending and debt will return in two months, with Republicans expected to take a harder line on a borrowing cap and automatic cuts.

By ANDREW TAYLOR The Associated Press

WASHINGTON – Onward to the next fiscal crisis. Actually, several of them, potentially. The New Year's Day deal averting the so-called fiscal cliff lays the groundwork for more combustible struggles in Washington over taxes, spending and debt in the next few months.

President Obama's victory on taxes this week was the second, grudging round of piecemeal successes in as many years in chipping away at the nation's mountainous deficits. Despite the length and intensity of the debate, the deal to raise the top income tax rate on families earning over $450,000 a year -- about 1 percent of households -- and including only $12 billion in spending cuts turned out to be a relatively easy vote for many. This was particularly so because the alternative was to raise taxes on everyone.

But in banking $620 billion in higher taxes over the coming decade from wealthier earners, Obama and his Republican rivals have barely touched deficits still expected to be in the $650 billion range in the final year of his second term. And those back-of-the-envelope calculations assume policymakers can find more than $1 trillion 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 Obama's 2010 deficit commission. "We've taken two steps now, but those two steps combined aren't enough to put our fiscal house in order."

Resolving the tax debate did buoy stock markets Wednesday. The Dow Jones industrial average finished up 308.41 points to 13,412.55, and the S&P 500 closed up 36.23 points to 1,462.42. The tech-heavy Nasdaq ended up 92.75 points to 3,112.26.

Yet shortly after the markets closed, the rating agency Standard & Poor's warned that Washington didn't accomplish enough to remove the threat of further downgrades on the creditworthiness of U.S. government debt, according to McClatchy Newspapers.

"While congressional compromise designed to avoid the 'fiscal cliff' may support the still-fragile U.S. economic rebound, the compromise doesn't affect our view of the country's credit outlook," the agency said. "We believe yesterday's agreement does little to place the U.S.'s medium-term public finances on a more sustainable footing."

Similarly, Moody's Investors Service said Wednesday that the deal amounted to just a "further step" in clarifying the deficit and debt trajectory.

"It does not, however, provide a basis for a meaningful improvement in the government's debt ratios over the medium term," Moody's warned, making it clear that the United States remained on its negative watch list, where it's been since September.

If Moody's joins Standard & Poor's in downgrading U.S. bond ratings, borrowing costs for the already heavily indebted government might rise sharply. And if more than one rating agency takes away the AAA rating on U.S. debt, big pension funds and endowments that are required to hold only the safest of government bonds would have to shed their U.S. government bonds, McClatchy reported.

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 over 10 years.

The measure passed Tuesday prevents middle-class taxes from going up while raising rates on higher incomes. 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 percent cut in Medicare fees paid to doctors and prevents a possible doubling of milk prices.

The alternative was going over the cliff, an economy-bruising, 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 Social Security payroll taxes of 2 percentage points.

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