Fiscal deal ‘will keep US out of recession for now’

2013-01-01 11:10

Washington – A deal worked out by US Senate leaders to avoid the “fiscal cliff” could help the country steer clear of recession, although enough austerity would remain in place to likely keep the economy growing at a lacklustre pace.

The Senate approved a last-minute deal early today to scale back $600 billion (R5.076 trillion) in scheduled tax hikes and government spending cuts that economists widely agree would tip the economy into recession.

The deal would hike taxes permanently for household incomes over $450 000 (R3.8 million) a year, but keep existing lower rates in force for everyone else.

It would make permanent the alternative minimum tax “patch” that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

Scheduled cuts in defence and non-defence spending were simply postponed for two months.

Economists said that if the emerging package were to become law, it would represent at least a temporary reprieve for the economy. “This keeps us out of recession for now,” said Menzie Chinn, an economist at the University of Wisconsin-Madison.

The contours of the deal suggest that roughly one-third of the scheduled fiscal tightening could still take place, said Brett Ryan, an economist at Deutsche Bank in New York.

That is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9% for 2013 would likely hold.

At midnight yesterday, low tax rates enacted under then-President George W. Bush in 2001 and 2003 expired. If the House of Representatives agrees with the Senate – and there remained considerable doubt on that score – the new rates would be extended retroactively.

Otherwise, together with other planned tax hikes, the average household would pay an estimated $3 500 (R29 610) more in taxes, according to the Tax Policy Center, a Washington think tank. Budget experts expect the economy would take a hit as families cut back on spending.

Provisions in the Senate bill would avoid scheduled cuts to jobless benefits and to payments to doctors under a federal health insurance programme.

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