The United States averted economic calamity on Tuesday when lawmakers approved a deal to prevent huge tax hikes and spending cuts that would have pushed the world’s largest economy off a “fiscal cliff” and into recession.
The agreement hands a clear victory to President Barack Obama, who won re-election on a promise to address budget woes in part by raising taxes on the wealthiest Americans. His Republican antagonists were forced to vote against a core tenet of their anti-tax conservative faith.
The deal appeared in danger yesterday when Jewish Republican leader Eric Cantor declared he opposed the bill and many Republicans seeemed ready to tack on deal-busting amendments. That plan collapsed when the House GOP realized it didn’t have support from its own membership to pass it.
The deal also resolves, for now, the question of whether Washington can overcome deep ideological differences to avoid harming an economy that is only now beginning to pick up steam after the deepest recession in 80 years.
Consumers, businesses and financial markets have been rattled by the months of budget brinkmanship. The crisis ended when dozens of Republicans in the House of Representatives buckled and backed tax hikes approved by the Democratic-controlled Senate.
Asian stocks hit a five-month high and the dollar fell as markets welcomed the news. China’s state news agency Xinhua took a more severe view, warning the United States must get to grips with a budget deficit that threatened not a “fiscal cliff” but a “fiscal abyss”. Most of China’s $3.3 trillion foreign exchange reserves are held in dollars.
The vote averted immediate pain like tax hikes for almost all U.S. households, but did nothing to resolve other political showdowns on the budget that loom in coming months. Spending cuts of $109 billion in military and domestic programs were only delayed for two months.
Obama urged “a little less drama” when the Congress and White House next address thorny fiscal issues like the government’s rapidly mounting $16 trillion debt load.
There was plenty of drama on the first day of 2013 as lawmakers scrambled to avert the “fiscal cliff” of across-the-board tax hikes and spending cuts that would have punched a $600 billion hole in the economy this year.
As the rest of the country celebrated New Year’s Day with parties and college football games, the Senate stayed up past 2 a.m. on Tuesday and passed the bill by an overwhelming margin of 89 to 8.