USA: Default averted

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After months of vicious manoeuvring between Republican and Democratic factions, the US Congress and president Obama agreed on a budget deal only hours before the deadline to raise the Federal government’s borrowing limit.

Dept limit, previously $14.3 trillion, the debt limit was raised by $2.4 trillion (in two stages). The deal effectively postpones further discussion of the debt limit until after the 2012 presidential and congressional elections. It provides for $2.5 trillion cuts in federal spending over the next ten years. However, there is no provision for tax increases, when the super-rich in the US enjoy some of the lowest tax rates in the world.

The deal appears as a propaganda victory for the right-wing Tea Party grouping within the Republican Party. They effectively blackmailed Obama, the Democrats, and even the old leadership of the Republican Party by threatening to force an unprecedented default on US government borrowing unless their demands were accepted. In the past, raising the borrowing limit was a purely technical decision, the outcome of previous congressional decisions on spending and taxation. However, the Tea Partiers seized on the procedure as a way of imposing fiscal restraints on Obama and the Democrats. In the event, some of the Tea Partyiers were disappointed that there were not $4 trillion of spending cuts. Nevertheless, they successfully excluded any mention of tax increases.

The Tea Partiers peddle a homespun philosophy of self-reliant individualism based on nostalgia for the mythical frontier and small-town America. Their policies, however, correspond with the agenda of big business, sections of which generously finance Tea Party candidates. They want to slash social spending and cut taxes for big business and the super-rich.

Faced with the intransigent blackmailing tactics of the Tea Party, Obama retreated all the way. After the setbacks for Democrats in last year’s mid-term elections, Obama has increasingly presented himself as a ‘fiscally responsible centrist’. Last year, he retreated on his earlier promise to end Bush’s tax breaks for the wealthy. To reach the current deal, Obama also dropped any further proposals for tax increases on the wealthy. He has accepted that three-quarters of the cuts will come from social spending. He even dropped proposals to extend unemployment pay.

There is no doubt at al that it will be working-class families, and especially the unemployed, minorities and the poor, who will suffer most. Obama claims this was necessary to avoid the danger of a default, which would have had catastrophic effects on the US and global economy. However, he could have used presidential powers under article 14 of the constitution to issue an executive order to raise the debt limit. Together with a campaign to mobilise public opinion against draconian cuts in social spending, this could have thwarted the blackmailing tactics of the Tea Party.

The deal agreed on 3/4 August provides for around $1 trillion cuts in discretionary spending. Federal discretionary spending is supposed to fall to 5.4% of gross domestic product by 2021. Since 1970, this spending has averaged about 8.7% of GDP.

The deal calls for a special congressional committee to come up with a further $1.5 trillion cuts in entitlement spending, that is on Social Security (the US pension system), Medicare and Medicaid. If there is no agreement on these cuts by November, the failure will trigger $1.3 trillion in across-the-board cuts during 2013. This is supposed to ensure that the Democrats will agree (on pain of cuts in social spending) and that the Republicans will agree (to avoid cuts in defence spending).

In reality, the conditions are likely to prove unworkable. Any rules that are imposed by Congress today can be undone by Congress tomorrow. For instance, on tax increases, Obama claims that there will be further tax increases. Republicans, on the other hand, claim the agreement rules out further tax increases.

The proposed cuts, moreover, are ‘back-loaded’, that is they are scheduled to become deeper at a later date. Two-thirds of the planned savings are proposed for 2017-21, while only a third are scheduled for the next five years.

European leaders have commented that these cuts, which amount to around 1% of the US GDP, are not as deep as those being imposed in many European countries (although federal cuts are in addition to severe state and municipal cuts). US politicians are keen to present themselves as ‘fiscally responsible’, but want to postpone the deepest cuts until after the 2012 elections in case they are blamed for the inevitable hardship that will follow.

One thing is very clear: there is nothing in the deal to stimulate growth of the US economy, which has been stagnating in recent months. The US federal budget deficit is around 10%, while the national debt is the equivalent of 70% of GDP (nothing like as high as the national debt of Japan or Italy). Even a moderate growth of GDP and moderate taxation of corporations and the wealthy (in line with the average of advanced capitalist countries) could very quickly reduce these debt levels.

All the signs, however, are that the US economy, which has not yet regained the output level of 2007 in real terms, is in danger of sliding back towards recession. The threat of a double-dip recession in the US, combined with a new phase in the sovereign debt/banking crisis in Europe, have produced further instability in the world economy, which is clearly at a tipping point.

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