By Joan Akello
Just hours into 2013, US congressmen had a burden on their shoulders during the festive season. They had to either meet the Jan.1 deadline and save the economy or reject and drag the other world economies in a possible recession.
Even the president Barack Obama had his Christmas holiday in Hawaii interrupted to express his relief and signed the bill into law after it was passed yesterday.
There had been intense pressure for the vote to be passed before financial markets reopened today.
This deadline triggered tax increases of about $536bn and federal spending cuts of $109bn from domestic and military programmes.
The “fiscal cliff” measures – cutting spending and increasing taxes dramatically – came into effect automatically at midnight on Monday when George W Bush-era tax cuts expired.
Economists were concerned that the full effects of the fiscal cliff if allowed to take hold would spark a new recession due to reduction in consumer spending.
“The US fiscal cliff represents the single biggest near-term threat to a global economic recovery,” the Fitch ratings agency said recently. “The dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economy into recession.
This deal dubbed “Compromise deal’ extends the tax cuts for Americans earning under $400,000 (about £246,000) – up from the $250,000 level. This was the Democrats’ initial plan.
The deal also includes rises in inheritance taxes from 35% to 40% after the first $5m for an individual and $10m for a couple; rises in capital taxes – affecting some investment income – of up to 20%, but less than the 39.6% that would prevail without a deal; one-year extension for unemployment benefits, affecting two million people and five-year extension for tax credits that help poorer and middle-class families.
The nonpartisan Congressional Budget Office say the measure would cause the national debt to be $4 trillion higher by 2022 than if all of the cliff’s tax increases and spending cuts had been allowed to take effect. The cliff originated during a struggle between Obama and Republicans over raising the federal debt ceiling above $14.5 trillion.
The critics also say the controversy over taxes, built around Obama’s demand for middle-class tax justice, ultimately consumed the argument over the cliff, leaving deficit reduction as the forgotten issue.
Republican led House passed the bill that had majority support from Democratic led Senate in the early hours of New Year’s Day. Republicans however were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt.
The bill drew 85 votes from Republicans and 172 from Democrats, meaning more than half of its support came from the Democratic minority. Three Democrats voted against the measure, including liberal Tom Harkin (Iowa), and moderates Thomas R. Carper (Del.) and Michael F. Bennet (Colo.).