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RAZOR’S EDGE

When the world’s largest economy — accounting for more than a quarter of the global gross domestic product — falls off a cliff, it drags the rest of the world over too. So the world may have breathed a collective sigh of relief after the United States Congress signed a budget deal, but the deal was a near emergency measure rather than a seriously thought out and detailed process that would fix the United States of America’s fiscal mess. One commentator described the result as leaving the front wheels of the US economy hanging over the edge of the fiscal cliff (so called to describe a set of automatic government spending cuts and tax increases that will come into effect if no agreement is reached between the Republican Party dominated Congress and US President Barack Obama’s administration). For one thing, the measures in this deal focused only on the tax side; it raised taxes on individuals and families with an annual income of more than $450,000 a year by 4.6 per cent, taking their marginal tax rate to 39.6 per cent. It also raised taxes on dividends and capital gains on those families from 15 to 20 per cent. There are tax increases on ordinary middle-class Americans too: a 2 per cent cut in payroll taxes (state and federal taxes deducted by employers from employee salaries) has been rescinded, so ordinary people pay more taxes too.

The deal — which was intended to reduce the budget deficit — ignored the expenditure side; proposed spending cuts of $110 billion that would have come into effect on January 3 and another $30 billion cut in unemployment benefits have been postponed by two months; members of the Congress gave themselves two more months to negotiate what spending programmes will be cut. But this hastily approved deal also left the elephant in the room: the $16.4 trillion federal debt, which ballooned from $10.7 trillion in December 2008, and $5.7 trillion in January 2001, when George W. Bush became president. But it only postpones the inevitable: a bitter fight between Mr Obama’s Democratic Party and the Republican Party-dominated US Congress over budget and tax priorities and philosophy. The fight will renew over the next two months, particularly over raising the debt ceiling. There was a budget fight between the two political parties in 2011 over the same issues; resulting in a reduction is the US credit rating by international rating agencies. Like a veritable sword of Damocles, the same threat looms again.