'Fiscal cliff' averted, deficit battles looming

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Seth Wenig / The Associated Press A trader works on the floor at the New York Stock Exchange on Wednesday. (CP)

WASHINGTON -- A last-minute deal in Congress to avoid the economy-shaking "fiscal cliff" sent world stocks climbing Wednesday but doesn't solve the problem of the massive U.S. deficit, meaning other battles on deep spending cuts and the federal debt limit loom in the coming weeks and months.

All the major U.S. stock indexes jumped by at least two per cent and the Dow Jones industrial average saw its biggest surge in six months.

A smiling U.S. President Barack Obama said he would sign the law "that raises taxes on the wealthiest two per cent of Americans while preventing tax hikes that could have sent the economy back into recession." Then he left for Hawaii to resume his holiday break.

The deal that squeezed through a sharply divided Congress just hours before most financial markets reopened from the New Year's holiday keeps income taxes from rising on the middle class and the poor, but it puts off major decisions on more than $100 billion in defence and domestic spending cuts.

Congress also will have to act as early as February on raising the $16.4-trillion federal borrowing limit, which will allow the country to pay its bills. The U.S. officially hit that debt limit Monday.

"If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic -- far worse than the impact of a fiscal cliff," said Obama.

That means more potential drama ahead for those who have marvelled at the inability of U.S. leaders to address chronic deficit spending -- especially Europeans, who have faced plenty of debt problems of their own.

It also means fiscal issues risk crowding out ones such as gun violence, immigration and jobs.

Obama warned he will "not have another debate with this Congress" on the debt ceiling. The makeup of Congress changes on Thursday, when dozens of new members are seated.

If the fiscal deal had not been reached by then, the new Congress would have had to start over, and Americans would have faced automatic spending cuts and tax increases of more than $500 billion in 2013 alone.

The fiscal cliff, with its Jan. 1 deadline, was put in place in 2011 as motivation for the Obama administration and Congress to find ways to reduce the deficit, which now averages about $1 trillion a year.

Economists had warned the sudden combination of taxes and spending could have swung the country back into recession. Some have said even this limited fiscal deal with hurt economic growth this year.

The deal to avert that scenario -- and put in place the first significant tax increase in two decades -- passed a final hurdle when the House of Representatives passed it late Tuesday, despite loud protests from conservative Republicans who hate the idea of raising taxes at all. They wanted to see more spending cuts in the agreement.

"I'm embarrassed for this generation. Future generations deserve better," said one Republican opponent, Rep. Louie Gohmert.

The deal put off the issue of spending cuts, stopping $24 billion in spending cuts set to take effect over the next two months.

-- The Associated Press

Republished from the Winnipeg Free Press print edition January 3, 2013 B7