Cliff averted, now on to next US fiscal crisis

Barack Obama

The White House and a divided Congress can now move on to the next fiscal crisis after a last-minute deal to avert the "fiscal cliff" laid the foundation for more combustible struggles over taxes, spending and debt in the next few months.

President Barack Obama's victory on taxes this week was the second, grudging round of a piecemeal battle in as many years over mountainous US 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 per cent of households - and including only $12 billion in spending cuts turned out to be a relatively easy vote for many members of Congress. This was particularly so because the alternative was to raise taxes on everyone.

Obama signed the bill Wednesday night.

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 by the end of his second term. And those 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 a 2010 deficit commission. "We've taken two steps now, but those two steps combined aren't enough to put our fiscal house in order."

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 automatic tax hikes for everyone but higher-income earners. 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 per cent cut in fees paid to doctors treating patients under the Medicare program for the elderly, and prevents a possible doubling of milk prices.

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