The fiscal cliff deal

It looks like there will be an agreement to avoid the so called fiscal cliff. That is good in the short term for Americans, but the deal looks like it will do little to reduce the deficit – which is why such an unpalatable fiscal cliff was designed – to force the President and Congress to make their own steps to reduce the deficit.

AP reports:

The contours of a deal to avert the ‘fiscal cliff’ are emerging early today (NZ time), with Democrats and Republicans agreeing to raise tax rates on family income over US$450,000 a year, increase the estate tax rate and extend unemployment benefits for one year, officials familiar with the negotiations said.

That side of the deal seems like a reasonable compromise on both sides. In reality come 1 January all the Bush tax cuts had expired anyway, so for the Republicans they are no longer voting for any tax increases – they are just voting for what tax cuts to reinstate. There is a significant difference. They can not get the numbers to reinstate all the tax cuts – so the tax side of the compromise seems okay.

But with a midnight deadline rapidly approaching, both sides were at an impasse over whether to put off automatic, across-the-board spending cuts set to take effect on January 1, and if so, how to pay for that. Democrats want to put off the cuts for one year and offset the so-called sequester with unspecified revenue.

The Republicans are proposing just a three month deferral of the spending cuts. I think a year delay means they will never get agreement on a sustainable plan to reduce spending, so the US Government can live within its means. They need the pressure of a looming deadline.