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After weeks of brinkmanship and fraught final hours of negotiations, US lawmakers have reached a deal that averts the fiscal cliff. It raises income tax for affluent Americans and postpones – for now – deep automatic cuts to spending. But Congress and the White House have only taken, in President Barack Obama’s words, “a bite out of the cliff”. At least four more budgetary battles lie ahead.
Wielding the axe
The 11th-hour compromise between Republicans and Democrats addressed only questions of tax. It included some stopgap measures to trim government outlay but simply moved from January 1 to March 1 the trigger date for the “sequester” of automatic spending cuts totalling $1.2tn over nearly a decade.
The underlying idea is to address the US government’s chronic deficit spending but the two parties remain at odds over what mixture of spending reductions and further tax increases should be used to achieve this.
Republicans, who control the House of Representatives, are expected to resist fiercely any further tax increases. However, even before Tuesday’s agreement, Mr Obama had signalled that he would continue to push for more revenue-raising measures.
“If Republicans think I will finish the job of deficit reduction through spending cuts alone, and you hear that sometimes coming from them, that sort of after today, we’re just going to try to shove only spending cuts down . . . they’ve got another thing coming,” the president said. “That’s not how it’s going to work.”
Raising the ceiling
Around the end of February, the US government will reach its $16.4tn borrowing limit. That adds a powerful new dynamic to the fiscal negotiations because the Treasury is already resorting to “extraordinary measures” to keep funding flowing. Raising the debt ceiling requires congressional approval, giving Republicans new cards to play in those negotiations.
A stand-off between congressional Republicans and the Obama administration over the debt limit in 2011 brought the world’s biggest economy within a whisker of default. Even if a deal is agreed, some analysts predict that the combination of political uncertainty, fiscal tightening and the prospect of repeated duels over the debt ceiling will see credit rating agencies downgrade the US.
Tim Geithner, US Treasury secretary, told lawmakers after Christmas that his special measures would give the US a $200bn debt cushion, amounting to about two months’ breathing space, though that estimate was subject to any budget changes agreed in the fiscal cliff negotiations.
The scramble for the gavel
As the drama on Capitol Hill demonstrated, the fiscal cliff negotiations have as much to do with politics as economics. And the authority of one of the principal actors – the Republican House speaker John Boehner – hangs in the balance.
On Thursday, the new Congress that was elected in November will be sworn in. The Republicans who form the majority in the lower chamber will elect their leader, who serves as House speaker and will have a central role in the budget negotiations.
Mr Boehner has held the gavel since the 2010 midterm elections but his standing has been damaged by the rejection of his plan B fiscal cliff proposal by his fellow Republican legislators. On Tuesday, his own deputy, Eric Cantor, was among the rebels who voted against the compromise deal. It passed all the same but Mr Boehner, who steered it through, faces the wrath of the party’s right after agreeing to tax increases.
Many predict that Mr Boehner will, nonetheless, retain his position. If he is ousted, frontrunners to replace him include Mr Cantor and Paul Ryan, the budget hawk who was running mate to Republican candidate Mitt Romney in November’s presidential race. If he clings on, the question will be the extent to which he can unify and direct his troops.
Put up or shut down
Even without the debt ceiling, Republicans would have had leverage in the coming fiscal bartering in the form of the need to pass a new resolution to extend the government’s budgetary authority.
Because it has been years since Congress enacted a fully fledged budget, government funding is mandated by “continuing resolutions” passed by lawmakers. The latest one, passed in September, expires on March 27.
If a new one does not materialise, funding for all non-essential services could be halted, in a repeat of the government shutdown that resulted from the 1995 stand-off between Bill Clinton, then the Democratic president, and a Republican-controlled House led by then speaker Newt Gingrich.
A government shutdown was narrowly averted in 2011 following a tussle between the Obama administration and Democratic Senate against House Republicans strongly influenced by the newly potent Tea Party movement.