Analysis: "Fiscal cliff" deal called a dud on deficit front

Speaker of the House John Boehner (R-OH) arrives at the U.S. Capitol in Washington January 1, 2013. The Senate moved the U.S. economy back from the edge of a ''fiscal cliff'' on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.

WASHINGTON (Reuters) - In the controversy surrounding the "fiscal cliff" issue, it's easy to forget that the origin of the entire debate was a professed desire to reduce swollen federal deficits.

Whether the target was $4 trillion over 10 years, as proposed by the Bowles-Simpson deficit reduction commission, or in the $2 trillion range, as tossed around by House of Representatives Speaker John Boehner and President Barack Obama, the idea was to rein in total debt that now tops $16 trillion.

By those standards, the bill passed by the U.S. Senate early on New Year's Day to avoid the cliff's automatic steep tax hikes and across-the-board spending cuts, looks paltry indeed.

The legislation, which as of Tuesday evening had yet to be passed by the House, would add nearly $4 trillion to federal deficits over a decade compared to the debt reduction envisioned in the extreme scenario of the cliff, according to the non-partisan Congressional Budget Office.

This is largely because it extends low income tax rates for nearly every American except the relative handful above the $400,000 threshold.

It's also because it put off for at least two months the automatic budget cuts that were part of the cliff and would have saved about $109 billion in federal spending on defense and non-defense programs alike.

The Senate bill, which ultimately came down to a fight about tax equity rather than federal spending, did to deficit reduction what Obama and congressional leaders always promise to resist: It "kicked the can down the road" to a later date.

In explaining the measure to the news media, the White House, which helped broker it, gave no particular figure for how much it would bring down the deficit, stating only that, somehow, "with a strengthening economy," it would.

Whether it ultimately succeeds will depend in part on what happens to the now-delayed "automatic" spending cuts, including whether Obama follows through on reductions in outlays.

FULL CIRCLE

The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.

That will bring everything full circle to where the cliff originated during a struggle between Obama and Republicans over raising the federal debt ceiling above $14.5 trillion.

That struggle ended in August, 2011 with a bipartisan deal designed to scare Congress into legislating significant long-term cuts in federal spending.

The idea was that by setting a strict deadline of January 2, 2013 and dire consequences in the form of draconian spending cuts for failing to meet it, the White House and Congress would be forced into action.

Republican Representative Paul Ryan, a self-described deficit hawk who served as the Republican vice-presidential candidate, declared the moment a "huge cultural change."

Coincidentally, low tax rates that originated during the administration of President George W. Bush were also set to expire on December 31, making the prospect of inaction so threatening that the Congressional Budget Office determined that failure to intervene could cause a new recession.

But the controversy over taxes, coming on the heels of a presidential campaign built around Obama's demand for middle-class tax justice, ultimately consumed the argument over the cliff, leaving deficit reduction as the forgotten issue.

Among those disappointed by the process was Alice Rivlin, a Brookings Institution scholar, former U.S. budget director and co-author of another widely discussed deficit reduction plan named for herself and former U.S. Senator Pete Domenici, a Republican from New Mexico.

"I'd been optimistic," Rivlin said in an interview with Reuters. "I thought that we might get might get it done" and that Boehner and Obama "might get to a grand bargain."

Maya MacGuineas, a budget hawk who has led a group of corporate chieftains in a group called "Fix the Debt," was also unenthusiastic about the bill.

"This is one of the lowest common denominator deals," MacGuineas said. "I wish I had something nice to say, but not so much."

(Reporting By Kim Dixon, Rachelle Younglai, David Lawder and Richard Cowan and Fred Barbash; Editing by Fred Barbash and Eric Walsh)