FXstreet.com (Barcelona) - The US House's vote to pass the
Senate bill on 1 January dealt with the largest components of the
so-called 'fiscal cliff', the expiration of GW Bush's income tax
cuts and the payroll tax holiday. The lower income tax rates are
now permanent for incomes below $400,000 (good for growth, bad for
the deficit) but the cut in payroll taxes (which help fund Social
Security) from 6.2% to 4.2% has been allowed to expire (a hit to
growth but fiscally positive). Unemployment benefits were extended
and a compromise was reached to limit the increase in the estate
However, tn the wake of the Budget Control Act signed on 2 August
2011, the US federal debt limit was raised in three stages, by a
total of $2.1 trillion, to $16.394 trillion (104% of annual GDP).
According to the Westpac Strategy Team, "This bitterly hard fought
outcome - the most damaging since the limit was introduced in 1939
- was specifically designed to last only until just after the
November 2012 elections."
Sure enough, Treasury Secretary Geithner announced on 26 December
that the ceiling would be reached on 31 December. The Treasury used
"extraordinary measures" in May-Aug 2011 to avoid breaching the
ceiling and is now doing so again to buy time. These measures
include not reinvesting in federal employees' retirement funds and
the Exchange Stabilization Fund. Moreover, "Up to $200 billion is
likely to be available through these methods but how much time this
buys depends on income tax revenues/refunds etc."