US last-minute fiscal deal leaves major fights ahead on massive deficit, spending cuts

WASHINGTON – A last-minute deal in Congress to avoid the economy-shaking “fiscal cliff” sent world stocks climbing Wednesday but doesn’t solve the problem of the massive U.S. deficit, meaning other battles on deep spending cuts and the federal debt limit loom in the coming weeks and months.

All the major U.S. stock indexes jumped by at least 2 per cent, and the Dow Jones industrial average saw its biggest surge in six months.

A smiling President Barack Obama said he would sign the law “that raises taxes on the wealthiest 2 per cent of Americans while preventing tax hikes that could have sent the economy back into recession.” Then he left for Hawaii to resume his holiday break.

The deal that squeezed through a sharply divided Congress just hours before most financial markets reopened from the New Year’s holiday keeps income taxes from rising on the middle class and the poor, but it puts off major decisions on more than $100 billion in defence and domestic spending cuts.

Congress also will have to act as early as February on raising the $16.4 trillion federal borrowing limit, which will allow the country to pay its bills. The U.S. officially hit that debt limit Monday. “If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff,” Obama said.

That means more potential drama ahead for those who have marveled at the inability of U.S. leaders to address chronic deficit spending — especially Europeans, who have faced plenty of debt problems of their own.

It also means that fiscal issues risk crowding out ones such as gun violence, immigration and jobs.

Obama warned that he will “not have another debate with this Congress” on the debt ceiling. The makeup of Congress changes on Thursday, when dozens of new members are seated.

If the fiscal deal had not been reached by then, the new Congress would have had to start over, and Americans would have faced automatic spending cuts and tax increases of more than $500 billion in 2013 alone.

The fiscal cliff, with its Jan. 1 deadline, was put in place in 2011 as motivation for the Obama administration and Congress to find ways to reduce the deficit, which now averages about $1 trillion a year.

Economists had warned that the sudden combination of taxes and spending could have swung the country back into recession. Some have said even this limited fiscal deal with hurt economic growth this year.

The deal to avert that scenario — and put in place the first significant tax increase in two decades — passed a final hurdle when the House of Representatives passed it late Tuesday, despite loud protests from conservative Republicans who hate the idea of raising taxes at all. They wanted to see more spending cuts in the agreement.

“I’m embarrassed for this generation. Future generations deserve better,” said one Republican opponent, Rep. Louie Gohmert.

The deal put off the issue of spending cuts, stopping $24 billion in spending cuts set to take effect over the next two months.

Moments after the vote, Obama strode into the White House briefing room and claimed a victory, though it was Vice-President Joe Biden, a decades-long veteran of the Senate, who was called to the negotiating table to work with Senate Republican Leader Mitch McConnell to get the deal through the Senate in the early hours of the new year.

Some liberal Democrats criticized Obama for not sticking to a harder line in negotiations, considering that he no longer faces re-election.

Obama now can sign the bill remotely using a machine called an “autopen,” or the bill can be flown to Hawaii for his signature.

The bill tackles the most sensitive issue, higher taxes. It would boost the top 35 per cent income tax rate to 39.6 per cent for households making more than $450,000 a year, while continuing decade-old income tax cuts for everyone else. In his re-election campaign last year, Obama had wanted higher taxes for households making more than $250,000 a year.

The measure would raise taxes by about $600 billion over 10 years, but it is not balanced enough to shrink the federal deficit. The nonpartisan Congressional Budget Office said it would add nearly $4 trillion over a decade, a calculation that assumed taxes would otherwise have risen on taxpayers at all income levels.

Scores of Republican lawmakers voted for the measure, reversing a quarter-century of solid opposition by their party to raising any tax rates at all.

The most powerful Republican in Congress, House Speaker John Boehner, voted for the bill, an unusual step because speakers seldom vote. Republicans, who control the House, voted against the measure by a 151-85 margin, but Democrats in the House voted by an overwhelming 172-16 for the agreement.

Supporters of the bill in both parties expressed regret that the bill was narrowly drawn and fell far short of a sweeping plan that combined tax changes and spending cuts to reduce federal deficits.

Another round of fighting about the deficit is coming almost as soon as the new Congress convenes.

The Treasury is expected to need an expansion in borrowing authority in the next few months, and funding authority for most government programs is set to expire in late March. Republicans have made it clear they intend to use those events as leverage with the administration to make cuts to the Medicare health care program for the elderly and other government benefit programs.

“Now the focus turns to spending,” Boehner said after the House vote. “The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt.”


Associated Press writers David Espo, Alan Fram, Andrew Taylor, Larry Margasak and Julie Pace contributed to this story.