We have avoided default but the deal fails to put US budget
policy on a sustainable path.
The debt-ceiling agreement is complicated and opaque. Critics
of both parties complain that, after frantic private
negotiations among a handful of participants, Congress was
presented with mission accomplished. Voters should feel equally
aggrieved. This was the very opposite of the public debate
that the US needs on budgetary ends and means.
The plan calls for spending cuts of roughly $900bn over 10 years
followed by a second phase of cuts to bring the 10-year total to
about $2,400bn. If achieved in full, this is only a little
more than half of what is required to stabilise the ratio
of public debt to gross domestic product at a safe level.
Worse, most of these cuts are still unspecified. The second
instalment is a mere instruction to a new bipartisan
committee of Congress to propose deficit reductions sufficient
to meet the target. There is no agreement on what form these
should take. If the committee deadlocks, the deal provides
for automatic cuts to programmes cherished by one party
or the other - including, notably, cuts in defence, which
Republicans are traditionally keen to protect.
On of the most consequential disagreements over US fiscal
policy is about the role, if any, that tax increases should
play alongside spending cuts. Most Republicans are celebrating
victory in the debt deal, and Democrats lamenting a crushing
defeat, because tax increases are not in the plan. But this
vital question is not settled, merely evaded.
The White House says the deal improves the chances of
increasing taxes on "millionaires and billionaires" starting
in 2013. The GOP says the opposite. Neither side has yet
turned serious attention to where it belongs -
comprehensive tax reform.
In one way, it is a blessing that the deal is timid, especially
in 2012 and 2013. With the economy showing worsening signs of
weakness, medium-term fiscal consolidation should have been
combined with further short-term stimulus: renewed payroll
tax-relief and extended unemployment benefits. Deficit
reduction phases in slowly under the agreement, which is
something, but those needed temporary provisions are
nowhere to be seen.
President Barack Obama and the parties' leaders in Congress
should stop and think. What the world has witnessed is a
serious failure of governance and leadership.
