Still at the brink

United States politicians of all shades failed to distinguish themselves with glory in the protracted negotiations to resolve the fiscal cliff that would have brought in automatic tax hikes and spending cuts on January 1. Instead, the politicians indulged themselves in self-serving rhetoric, with each side of the political spectrum blaming the other for the defeat of their respective, and previously non-negotiable, principles.

President Obama claimed victory of sorts by having some of the existing tax cuts permanently legislated but it was hardly a victory for the lower-paid. Only people earning $US400,000 ($NZ479,000) a year have to pay more tax, with the top rate rising from 35% to 40%. Previously, Mr Obama wanted the tax cuts to remain for only those earning $US250,000 or less while the Republicans wanted the tax hikes to affect only those earning $US1 million or more. Buried in the detail was the removal of the holiday from payroll tax for those earning $US173,000 or less. Those workers, qualifying as ''blue collar'' in many of the columns written about the fiscal cliff, face an immediate 2% increase in tax.

Worryingly, it seems the divisions in US politics seen before and during the presidential election remain even more entrenched. There is no honeymoon period for Mr Obama. The Republicans who still control the House of Representatives seem to personally dislike him. The Senate is controlled by the Democrats. Gerrymandering ensures most seats up for election stay almost unchanged during the long-winded congressional elections. The House of Representatives elections are held every two years with the Senate elections held every six years. The Senate elections are staggered so a third of representatives come up for election every two years.

The problems for Mr Obama really started when Democrats lost control of the House of Representatives in 2010 as voters showed their displeasure with his lack of progress on election promises made in 2008. Democrats made only slight gains in the November elections, increasing their majority in the Senate. House Speaker John Boehner (Republican) was re-elected amid the prospect of more budget battles with the White House.

In his acceptance speech, Mr Boehner alluded to the forthcoming discussions over government spending. The American dream was in peril so long as its namesake was weighed down by the anchor of debt. Break its hold, and the economy would be set free. Jobs would come. Confidence would come back, he said.

What the world economies now should worry about is the postponement of some of the hardest decisions the US must face this year. The fiscal cliff is still crumbling as far as the US economy is concerned. The huge debt the US owes to the world, particularly China, looks likely to be increased. While Mr Obama says he will not take part in protracted negotiations with the Republicans about sharp spending cuts as part of their agreement to lifting the more than $US16.4 trillion debt ceiling, what choice does he have?

Mr Obama and his Democrats favour raising taxes to reduce debt while keeping spending intact. The Republicans favour slashing spending, especially to entitlements that in New Zealand would be regarded as social welfare. Pensions and healthcare payments, like in most parts of the world, are starting to rise disproportionately in the US as baby-boomers - those born after the end of World War 2 - start retiring.

What also became clear during the latest votes on the fiscal cliff was how divided the Republicans remain. Many, especially those backed by the ultra-right Tea Party, want to remain ideologically pure, able to go back to their districts saying they had not voted for tax increases.

When the last showdown over the debt ceiling occurred in 2011, the federal Government almost shut down. Mr Obama, who can by law lift the debt ceiling by proclamation if needed, said he did not want to repeat that 2011 situation and would leave the latest debate to Congress rather than becoming directly involved. In the end, it is difficult to see how he can remain aloof, given the divisiveness of politics and the consequences of the US being unable to meet its debt obligations.

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