President Barack Obama and the United States Congress go right down to the wire as they only just avoid going over the fiscal cliff.

Barack Obama has won the tense stand-off with Republicans in Congress that had threatened to send America, and the rest of the world, off a fiscal cliff.

At midnight on the December 31st, as the rest of the world celebrated the start of a new year, the American economic recovery was threatened with collapse thanks to the machinations of the Republican Party.

The tension over whether President Obama and the Republican controlled House of Representatives would reach a deal on how the government will save money over the next 10 years, has been building since the election on November 6th.

The fiscal cliff is the informal name given to the expiration date agreed by Obama and Congress in 2011, when the Bush-era tax cuts and other provisions such as long term unemployment support expire.

In practice, this means the USA was saved from almost $536 billion of tax rises and $109bn of spending cuts, which would have come into effect had the government not reached an agreement.

These would have include changes to the Medicare allowance for the elderly and an end to long term unemployment benefits which are currently $300 a week and will immediately affect 2 million people and the return of the “alternative minimum tax” on all pay packets.

The US-based Tax Policy Center (TPC) said the average American’s tax bill will rise by $3,500, however the tax of the super-rich American, earning more than $120,500 a year, will rise by just $412. Similarly, the inability to reach a deal will affect the markets and threaten the recovery if businesses are faced with higher taxes and less spending. Experts estimate it would cause a 4-5 per cent cut in the country’s output.

Unemployment, already at 8 per cent, would also rise.

Whilst a last-minute deal was agreed and voted through the Senate early on Tuesday morning, the Republicans in the House continued to drag their heels on an agreement on tax rises until the 12th hour. They eventually agreed to pass the measure that would see spending postponed for two months and increase taxes for America’s richest for the first time in 12 years.

The motion was passed 257 to 167, with the majority of Republicans (151 against compared to 85 for) still voting against the bill compared to only 16 rebellions from Democrats.

More mainstream Republicans have now come to terms with their election defeat and four more years of a Democrat President but the Tea Party fringe is still refusing to agree to any tax rises for the 1 per cent and are holding the rest of their party to ransom. Despite the American public’s rejection of their values and hard-right political stance at the election, the Tea Party still holds a disproportionate sway over the internal politics of the GOP.

Speaker of the House, John Boehner, a Republican congressman from Ohio, is facing an internal re-election contest for his position tomorrow and does not want to risk provoking a rebellion by appearing to be too conciliatory towards Obama.

Obama was committed to preventing tax rises for the country’s poorest and was feeling newly confident since his election victory. This deal has meant an extension of tax cuts to Americans earning up to $400,000, which was up from the $250,000 the Democrats originally wanted.

However, this deal was a modest triumph for Obama who has been able to capitalise on the Tea Party’s declining relevance within their party.

The package will include:

• An increase in inheritance tax from 35 per cent to 40 per cent after the first $5 million 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;

• Five-year extension for tax credits that help poorer and middle-class families.

Obama, in signing the deal, said he was fulfilling his campaign promise:

“I will sign a law that raises taxes on the wealthiest 2% of Americans… while preventing a middle-class tax hike.”

He added, however, that the US deficit was still too high and although he was willing to compromise on budgetary issues he was not looking to increase the government’s debt ceiling which current stands at $16.394 trillion:

“There is a path forward, if we focus not on politics, but on what’s right for the country.”

See also:

• Preview 2013: Obama and America in the year ahead – January 2nd, 2013

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