With tax deal, U.S. is off the cliff but not out of the woods

01/02/2013 5:06 PM

08/05/2014 10:49 PM

A day after the nation edged away from a fiscal cliff that had threatened economic doom, the realization that other ominous fiscal battles loom tempered any sense of celebration Wednesday in the nation’s capital.

The American Taxpayer Relief Act of 2012, passed late Tuesday, addressed just one of the three major issues that composed the cliff, the expiring Bush-era income tax cuts. The government faces more jarring fights in about two months, as it needs congressional approval to borrow more money and as automatic spending cuts – delayed this week to allow more time to find better alternatives – are scheduled to kick in.

Resolving the tax debate did buoy stock markets. The Dow Jones industrial average finished up 308.41 points to 13,412.55, while 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.

“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.

Simply put, there’s a lot at stake as the White House and Congress try to resolve their impasse on debt and deficits, which has stymied them for years.

The Treasury Department says the federal government hit its debt ceiling Monday, meaning that the agency is taking extraordinary measures to prevent default on payments already owed to creditors. Analysts suggest that those measures will run out somewhere between mid-February and mid-March, putting real urgency on coming talks to raise the debt ceiling before then.

And Tuesday’s deal punted on the automatic spending cuts due that were due to take effect this month, putting them off until March, the same month the federal government’s spending authority expires.

The two unresolved matters amount to two more major challenges involving federal spending and borrowing that threaten the economic well-being of ordinary Americans.

“The deal this week to avert the fiscal cliff provides some clarity to individuals and business decision-makers; however, the relief may be temporary,” John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C., warned in a note to investors.

The looming battle over debt and deficits falls to the 113th Congress, which will convene at noon Thursday with slightly more Democrats than the Congress that passed the deal this week to avert the cliff. While Democrats will control 55 of the Senate’s 100 seats, Republicans will retain a sizable majority in the House of Representatives.

The deal, which President Barack Obama is expected to sign into law, retains the Bush-era tax rates for all but individuals who earn more than $400,000 annually and families that make more than $450,000. The top rate, 35 percent last year, climbs to 39.6 percent.

Lawmakers readily conceded that the agreement does virtually nothing to reduce the nation’s $16.4 trillion debt. In fact, the debt will continue to grow every year over the next decade.

“I hate this agreement. I hate it with every fiber of my being, because this is not the grand bargain that I hoped for,” said Senate Budget Committee Chairman Kent Conrad, D-N.D., who voted for the deal nevertheless. “This is not by any standard a deficit-reduction plan.”

Budget watchdogs were equally unimpressed.

“The main accomplishment of this bill was to make permanent most of the Bush tax cuts, and the Republicans seem to be ticked off about it and the Democrats are crowing about it. If you go back to 2007, this would have seemed like Alice in Wonderland,” said Robert Bixby, the executive director of the Concord Coalition, a nonpartisan budget-watchdog group. “If you see it as an attempt to deal with the long-term structural deficit, it’s a near failure.”

At the Capitol, partisan fury was as intense as ever on Wednesday, suggesting little hope for the kind of grand bargain Obama and Republicans have been seeking for years.

“Let’s hope Reid and President Obama resolve to be honest about the crisis our nation faces with the coming wave of entitlement obligations,” said Rep. Ed Royce, R-Calif., referring to Senate Majority Leader Harry Reid, D-Nev., and to rising Medicare costs.

Hearing that, Rep. Sander Levin of Michigan, the top Democrat on the tax-writing House Ways and Means Committee, was annoyed.

“That is not true,” he said of Royce’s comment. “It was the Republican leadership in the House that walked away from a big package.”

It’s unclear when talks will resume on a grand bargain. On spending reductions, the White House and House Speaker John Boehner, R-Ohio, were seen as close in the fall, with Obama proposing $1.2 trillion in spending reductions while Boehner offered $1 trillion.

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