Debt ceiling next hurdle for Congress

Solving the United States national debt-ceiling problem is the next major hurdle for a divided Congress to battle over this year, and President Barack Obama appears in no mood to give any ground to his Republican rivals.

The fiscal cliff deal, approved at the last minute before tax hikes for all and compulsory spending cuts came in, just postponed the harder decisions the politicians have yet to agree on - spending cuts and the debt ceiling.

The US officially hit its current authorised debt ceiling of $US16.4 trillion ($NZ19.8 trillion) on Monday, although Treasury Secretary Timothy Geithner had informed Congress previously he was able to avoid breaching the limit for a few weeks through ''extraordinary measures''.

That news set up a renewal of the conflict from 2011 that brought the US within days of default and led to the first-ever downgrading of the federal Government's credit rating. Congressional Republicans insist they will continue to demand, as they did in 2011, that any increase in the debt limit be tied to significant spending cuts. However, President Obama said that this time, he would not negotiate over the limit.

''I will not have another debate with this Congress over whether or not they should pay the bills that they've al-ready racked up through the laws that they have passed,'' Mr Obama said on New Year's Day.

Spending cuts and the debt ceiling need to be addressed by the end of February, and Republicans are likely to demand deep cuts, particularly to entitlement programmes such as social security, in return for an increase in the legal cap on Government borrowing.

Entitlement payments are expected to rise sharply in the coming decades as the baby-boom generation retires and enters old age, entailing more Government-funded medical care. The Democrats prefer to reduce the Government's deficit through higher taxes.

Market reaction to the fiscal cliff deal was positive, global markets rallying. In New York, the Dow Jones closed up 2.4% and European shares were up about 2% for the day.

The deal resolved the most serious of the issues facing the US including. -

• Making tax cuts that date back to George W. Bush's presidency permanent for individuals earning less than $US400,000.

• Postponing $US65 billion of automatic spending cuts for two months.

• Keeping benefits for the long-term unemployed, worth $US26 billion, available for another year.

• Postponing for a year an $US11 billion cut in Medicare payments.

But the deal also allowed some tax cuts to go ahead, including. -

• The expiry of a payroll tax holiday, expected to raise $US95 billion in additional annual revenue.

• Allowing the Bush-era income tax cuts for individuals to come to an end, with the top rate increasing from 35% to 40%.

• Higher taxes on dividend income, capital gains and inheritance for those same top earners.

• Phasing out certain income tax deductions for individuals earning more than $US200,000.

According to latimes.com/business, every working person earning up to $US113,700 in wages this year will shoulder an instant tax increase of 2%. The tax holiday, which cut the employee's share of the Social Security tax to 4.2% from 6.2% of income up to the annual wage cap, was always designed as a temporary stimulus measure. But few expected it would expire at a single stroke - and without a countervailing working-class tax credit to soften the blow.

US executives aligned with the ''Fix the Debt'' group sharply criticised the fiscal cliff deal because it did not do enough to stem the rise in the nation's debt.

They blasted the political log-jam that prevented the deal being reached until January 1, leading to months of uncertainty that some contended hurt the economy by causing businesses and consumers to delay spending. They noted that a similar period of anxiety lay ahead as Congress determined whether to raise the country's debt limit.


Overview
US federal law requires Congress to authorise the Government to borrow any money that is needed to pay for programmes Congress has passed. The Constitution gives Congress the power to control spending and borrowing. The debt limit or debt ceiling was introduced in 1917 and was meant to give the Treasury greater flexibility by not having to have Congress approve every new issuance of debt every time the Government needed to borrow to pay for things Congress had already voted for.


- dene.mackenzie@odt.co.nz

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