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

WASHINGTON Tue Jan 1, 2013 7:05pm EST

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. REUTERS/Mary F. Calvert

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.

Credit: Reuters/Mary F. Calvert

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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)

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Comments (3)
lawgone wrote:
So basically all that was accomplished was raising taxes on people who make 400K or more by 5%, 5% more on estate tax and 5% more on capital gains and dividends on 400K or more which will run the fed for 8-9 days.

Also in the deal is resetting the Social Security payroll tax to the level it was 2 years ago to 6.2% which is a 2% hike from the previous two years.

What is not be reported is that taxes are going to increase for many starting today to cover Obamacare. Yes, you are still going to pay the tab to cover the cost of HC for those that don’t have it and if your HC insurance co is like mine, you’ve already been given notice that your premiums are slated to go up in 2013 and the cost of your co-pay for prescriptions, doctor visits and ER services have literally doubled, that is just the beginning. When 2014 rolls around anyone making 29K or less will automatically be placed on Medicaid. This will not only make your visit to the ER more joyful is if wasn’t joyful enough but you will pay double the co-pay you were paying the previous year for the same visit.

I fail to see how Obamacare has made HC less expensive when taxes, HC insurance premiums and co-pays have gone up.

Jan 01, 2013 9:36pm EST  --  Report as abuse
McBob08 wrote:
The deficit doesn’t matter. The debt doesn’t matter. Only billionaires care about that, because lower debt and deficit means more profits for them. It means NOTHING to the typical American. Debts and Deficits will wail. Right now, the most important issue is the Bush-generated recession that’s been going on for 4 years now. THAT is what the deal needs to address, not the debt or the deficit. In fact, the deal should have MORE domestic spending; that’s the only thing that can improve the economy. Infrastructure and Domestic program spending puts money into the economy, making it possible for companies to populate jobs for proving those government employees and contractors with goods and services. That’s how the economy works — the rich are not necessary to the equation (in fact, they make the equation fail by sucking money out of the economy and not returning it because of their unnaturally low taxes).

Time to stop listening to the idiot drumbeat of “Fix the Debt”, and start chanting “Fix the Economy! Fix the Social Safety Net!” instead.

Jan 01, 2013 10:58pm EST  --  Report as abuse
McBob08 wrote:
@Lawgone; you’re lying. No one is going to be paying anything more in taxes due to the Affordable Care Act; in fact, they’ll be paying less overall, because their Medical Insurance payments will have to drop to reasonable levels, due to the Affordable Care Act.

Typical Republican Terrorist trying to scare people with Lie Bombs.

Jan 01, 2013 11:00pm EST  --  Report as abuse
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