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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 tax.

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."

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