Wednesday, 2 January 2013

Congress hands America a Wile E Coyote moment…

"I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up." Image: Alamy
The Fiscal Cliff has been averted but not without America experiencing a Wile E Coyote moment; hovering beyond the fiscal cliff for a full two hours before the Senate passed its bipartisan agreement with strong support from Republican senators. This was not so much an 11th hour deal as a 14th hour deal - or a 23rd hour deal by the time the House of Representatives eventually passed the bill too (with significantly less Republican support). The lack of enthusiasm was understandable as this is not the deal everyone had been hoping for. Rather than a plan to restore America’s fiscal sustainability, this is a plan not to have a plan.

Delaying $110bn of spending cuts for two more months, whilst allowing tax increases for those families earning over $450,000 and allowing a 2% payroll tax cut to expire is a long way from the grand bargain investors were hoping for. Instead it realigns the spending cuts with the expected date at which the government will hit the debt ceiling – remember a fiscal cliff isn’t just for Christmas…

Claiming victory and attempting to head off the debt ceiling wrangling President Obama announced: "While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up." Congressional Republicans meanwhile reassured their Representatives that by voting for this deal now they will have the moral high ground when it comes to the debt ceiling negotiations in March. Clearly this bill cannot strengthen the hand of both parties so somebody is going to be disappointed.
It is not hard to see opinion swinging in the Republicans’ favour now that the Democrats seem to have achieved so much of their policy agenda (raising revenue and cutting spending) and have raised taxes on 77% of households (according to Congressional Budget Office figures).  Polling will reveal whether the public’s sympathy with House Republicans has grown and by implication whether they will indeed be in a stronger position to press their cause in a couple of months.

Another factor which is likely to be critical surrounds the election of the Speaker for the 113th Congress, convening on Thursday.  Speaker Boehner was one of a minority of Republicans in the House who approved the bill.  Eric Cantor, the Majority Leader voted against it.  If this is an indication that Cantor wishes to run for Speaker himself, embroiling the Republicans in bitter infighting, it would help to cement their reputation as dysfunctional spoilers and hand the moral high ground back to the Democrats. 

Either way, for the moment the can has been kicked, not very far, down the road again.

Guy Foster
Head of Portfolio Strategy

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