Cliffhanger: Still hanging
- 2 January 2013
- From the section Business
If the global economy could vote, would it have voted for the messy budget compromise that US politicians cobbled together in the first hours of 2013?
The answer is it probably would. But like the authors of the deal, it may well live to regret it.
The world's financial markets are in favour, if early moves in Asian and European share prices are anything to go by.
But some will say that only goes to show how short-sighted those markets really are.
Think about it. There were three things about America that were troubling investors a week ago: the dysfunctional relationship between its two most important branches of government; the uncertainty over its short and long-term budget policies; and finally, the fear that the combination of these two things might accidentally tip the economy into a recession.
This week's deal lifts the risk of an accidental recession - at least for a while. But it does little to address the first two issues: in fact, it makes another scary stand-off, over spending cuts and raising the amount of debt that the Federal government can legally issue, almost inevitable.
There are two big numbers that are helpful in thinking about what Congress and President Obama did, or did not, achieve this week.
The first is $2.3 trillion (£1.41 trillion). That is a lot of money, but it is what the Congressional Budget Office (CBO) reckons the US federal government would have needed to borrow over the next 10 years if Congress and the President had done nothing.
In other words, $2.3 trillion is the borrowing that would happen under the "tight", fiscal cliff scenario: with roughly 4% of gross domestic product in spending cuts and tax rises in 2013, and more after that.
The second number is $7.9 trillion.
That is roughly what the Federal government would need to borrow between 2013 and 2022, if Congress and President Obama had agreed to keep tax rates and spending policies more or less the same as they were at the end of 2012, minus temporary stimulus measures such as President Obama's payroll tax cut, which have now been allowed to expire.
Neither of these two scenarios looked very sustainable to economists: the first, in the view of most, meant tightening too quickly. The second involved tightening too little.
And neither involved raising nearly enough in tax revenues, relative to the size of America's economy or its long-term appetite for public spending.
If you didn't know anything about US politics, you might have hoped that the bargaining between Republicans and Democrats would produce a Goldilocks scenario: a programme for spending and taxes that lay somewhere in between the too-cold $2.3 trillion and the too hot $7.9 trillion.
Short answer: they didn't. In fact, the two sides agreed to spend $4.6 trillion over 10 years and "save" $650bn. So, if nothing else happens, borrowing between now and 2022 will still be well over $7 trillion.
In fact, we know that plenty more will happen over the next ten years.
Today's deal introduces a lot of certainty to US income tax rates but it leaves nearly all the key spending issues up in the air - and it does not pave the way for the rise in tax revenues, relative to GDP, which most economists think will be crucial to filling the long-term hole in America's federal budget.
The next stand-off will happen in a matter of weeks.
The US Treasury Department reckons it will run out of ways to avoid breaching the debt ceiling in about two months. If the past two years are any guide, there will be more tussles between Congress and the White House after that.
Investors are right to be grateful to Congress for not plunging the US into an entirely avoidable downturn.
If the global economy is going to thrive in 2013, it needs all the forward momentum it can get from the US, especially in the first few months. US fiscal policy will tighten by about 1% of GDP this year, but that's similar to the tightening that occurred in 2012.
It won't tank the economy.
Investors are also probably right to forgive America's leaders for failing to resolve the country's long-term fiscal problems.
Compared to many European countries, America's fiscal hole is indeed long-term. Short-term, most of its borrowing is temporary and is coming down.
America's federal deficit has been falling steadily, from nearly 9% in 2011 to (probably) around 5.5% in 2013, even with this deal. The real problems set in in about five years' time, as a result of long-term growth in health and social security spending.
Realistically, Congress and President Obama were never going to solve all of America's budget problems this week. But it would have been a lot better for the global economy if they had been able to resolve their differences for more than a few weeks.
Today, financial markets seem to think it's better to have a short-term stopgap than nothing at all. I wonder whether they will still take that view, when America seems to be back on the brink of fiscal disaster, in just a few weeks' time.