A LAST-MINUTE deal to avoid the US “fiscal cliff” sent world stocks climbing yesterday but did not solve the massive budget deficit, meaning other battles on deep spending cuts are looming.
The Dow Jones industrial average jumped 1.8% as US markets opened.
A smiling President Barack Obama said he would sign the law “that raises taxes on the wealthiest 2% of Americans while preventing tax hikes that could have sent the economy back into recession.” Then he left for Hawaii to resume his holiday.
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 dollars in defence and domestic spending cuts.
Congress also will have to act as early as next month on raising the $16.4 trillion federal borrowing limit, which will allow the country to pay its bills.
“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,” Mr Obama said.
That means more potential drama ahead for those who have marvelled at the inability of US leaders to address chronic deficit spending.
Mr Obama warned that he will “not have another debate with this Congress” on the debt ceiling. The make-up of Congress changes today, 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 again and Americans would have faced automatic spending cuts and tax increases of more than $500bn this year alone.
The fiscal cliff, with its January 1 deadline, was put in place in 2011 as motivation for the Obama administration and Congress to find ways to reduce the deficit.
The deal passed a final hurdle when the House of Representatives passed it, despite loud protests from conservativeRepublicans who hate the idea of raising taxes. They wanted to see more spending cuts in the agreement.
“I’m embarrassed for this generation. Future generations deserve better,” said Republican opponent Louie Gohmert.
The deal put off the issue of spending cuts.