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In particular, the coming negotiation over the U.S. debt ceiling, as well as the spending cuts put off by the eleventh-hour agreement, means that Republicans and Democrats will clash bitterly – again – about two months from now.
“There’s euphoria because we’ve avoided a recession, which would be pretty damaging to Canada as well. But what we’ve done is swap one crisis for another,” said Paul Ashworth, chief U.S. economist for Capital Economics in Toronto.
“Out of the frying pan, into the fire.”
The hastily-passed American Taxpayer Relief Act of 2012 steered the U.S. around a recession by shrinking a slate of automatic tax increases and spending cuts that would have carved $ 600 billion out of the economy.
The bill contains modest tax hikes for most Americans and larger ones for higher income earners. But it also postpones until next month the question of what to do with about $ 110 billion (U.S.) in automatic spending cuts.
The problem is that mid- to late-February is also when the U.S. will bump up against its $ 16.4 trillion (U.S.) debt ceiling. That’s the maximum amount that the U.S. is allowed to borrow, as set by lawmakers.
“That said, there remain a number of significant risks to the U.S. economic outlook. It is my hope that leaders in the United States continue to work together to develop future action that will put the U.S. fiscal position on a sustainable path.”
“We think it would have had growth of about 4 per cent.”
Forecasts for Canada’s GDP are little changed by the deal. Economists had expected some compromise by U.S. lawmakers on tax hikes and spending increases.
They also expected the approaching debt ceiling would have been part of the fiscal cliff negotiations, but that didn’t happen.
“Our opportunity here is on the debt ceiling,” Republican Senator Pat Toomey of Pennsylvania said on MSNBC, adding Republicans would have the political leverage against Obama in that debate. “We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean.”
That last time the government brushed up against the ceiling in August, 2011, it came close to shutting down before lawmakers and the president agreed to a $ 1.2 trillion package of spending cuts in exchange for a Republican agreement to raise the debt ceiling by the same amount.
Uncertainty and stalled negotiations put investors through a ringer. Stock markets around the world fell sharply, and despite the last-minute deal, credit-rating agency Standard & Poor’s down-graded the U.S.’s Triple-A rating.
The International Monetary Fund told the U.S. today that “it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills.”
With files from Star wire services