Daily Times

In the early hours of Tuesday morning January 1, 2013, the US Senate hastily approved a tax deal that prevented the country from falling off the fiscal cliff. The legislation now awaits the President’s signature.

The term ‘fiscal cliff’ was being used, in its present context, in order to refer to the possible decline in the budget deficit that could have occurred at the beginning of the year 2013 due to an increase in taxes and reduction in spending. A few analysts opined that the term ‘fiscal slope’ would be a more suitable expression since its economic effects, though significant, would manifest not at once but gradually with the passage of time.

The Senate passed the bill two hours after the deadline. It was approved in the House of Representatives 21 hours later. Technically, the US government went over the fiscal cliff because the details of the deal were not finalised until after the passing of the deadline.

The bill known as ‘The American Taxpayer Relief Act’ averted the fiscal cliff but its winners and losers will only be ascertained once the bill becomes law. Evaluating the merits of this agreement largely depends on the perspective of the evaluator. If the purpose of the deal was to avoid the fiscal cliff and gain more time, then the deal can be considered a success. However, if the objective was to devise a comprehensive agreement that would avoid future fiscal disasters, then the deal was a failure.

Some rich Americans will now be required to pay a little more tax but this will hardly be enough to reduce America’s huge debt. The New York Times summed it up in an editorial by elucidating that the bill is still generous to the rich while failing to address America’s dire need for public investments. Officials from the White House insist that the deal was necessary in order to renew provisions regarding unemployment insurance, tax credit and alternate minimum tax. These provisions would have expired in case the budget dispute had not been resolved within the deadline.

The eleventh-hour compromise between the Democrats and the Republicans cannot be hailed as a breakthrough but it does demonstrate a rising trend in American politics: deferment and deals rather than solutions and resolutions. There are many more problems down the road like the debt ceiling and austerity that will require comprehensive solutions rather than desperate last-minute deals.

Since the re-election of Barack Obama, Congress, as a whole, has failed to perform. Despite repeated warnings of looming recession from economists, Democrats and the Republicans wrangled till the last minute and nearly missed the fiscal cliff deadline that would have resulted in a severe tax hike for every American.

The basic problem behind this state of affairs is the straying away of one of the parties in a two-party consensus-based system of government. In the US, the government and the opposition are both involved in the legislative process. The opposition may not hold the White House but it may, and does, have a majority in the House or the Senate, or both. This makes it an equal partner in the governing process. If one of the parties begins to oppose everything then the system will no longer work.

The fiscal cliff fiasco has made it very clear that the Republican Party, in its present state, is making it very difficult for the smooth running of the country. After haggling for more than one and a half years with the Republicans, President Obama — a Democrat — could only procure a slice of the fiscal deal.

The Republican Party seems to have lost its edge. In fact, a noted historian recently pointed out in his recent book that the marginalisation of moderate Republicans has stripped the Party of its much-needed diversity. The rise of right-wingers within the Party is posing a threat to the very stability of the country.

The rift within the Republican Party became evident during the fiscal cliff negotiations when the Republican Speaker of the House had to make a retreat in the face of rising dissent from his own group. The deal was finally struck between the Vice President and the Republican Senate Minority Leader.

The President announced in a news conference that he would opt for a further reduction in the deficit by imposing more taxes and cutting expenditure. The inference being that the Republicans, having once voted for an increase in taxes, will do it again. This was, however, not the case. In case the fiscal cliff compromise had not been achieved, every American would have been subjected to higher taxes. The Republicans did not vote until midnight, and when they did, after the New Year’s Eve, it was, technically speaking, a vote for tax cuts rather than an increase in taxes. Republicans can always justify their support for the bill as an outcome of unusual circumstances and not a deviation from their policy of no new taxes.

The fiscal deal is not the end of the story. Rather, it is the beginning of more confrontations to come. Angry Republicans have vowed to squeeze out deep cuts in spending when the next round of debates, regarding the debt-ceiling, begins. Republicans are sure that they will be in a better position to coerce Democrats in February under the imminent threats of the looming debt default and Credit Rating downgrade. Republicans are viewing it as an opportunity and openly declaring that they are willing to endure a short-term government shutdown in case a deal is not struck in time.

Within the Republican Party, right-wingers are admired and respected. All of them voted against the fiscal cliff compromise. All of them are likely candidates for the next presidential election. The current course of the Republican Party not only jeopardises the governing process, it also threatens to instate a fundamental divide in the US electorate.

The writer is an investment banker and a freelance columnist for various publications. He can be reached at syedatifshamim@hotmail.com