WASHINGTON (AFP) – The US Congress pulled back from the brink of “fiscal cliff” disaster and sparked a New Year stock rally with a last-minute deal averting tax hikes and massive spending cuts which threatened to unleash economic calamity.
Relief rippled out through European and Asian stock markets, with stocks in Spain and Italy surging by more than 3.0 percent, before the all-important opening on Wall Street.
The House of Representatives passed a deal between the White House and Republicans late Tuesday to raise taxes on the rich and put off automatic $109 billion budget cuts for two months, lifting the clouds of immediate crisis.
But more hard haggling is due in two months’ time over further specific budget measures.
The deal’s fate had hung in the balance for hours as House conservatives sought to add spending reductions to a version passed by the Senate in the early hours of 2013 that would likely have killed the compromise.
In the end, the House voted 257 votes to 167 to pass the original bill with minority Democrats joining a smaller band of majority Republicans to pass the legislation after a fiercely contested and unusual session on New Year’s Day.
President Barack Obama, who campaigned for re-election on a platform of building a more equitable economic system, declared the deal was a promise kept, despite falling short of earlier hopes for a grand deficit bargain.
“I will sign a law that raises taxes on the wealthiest two percent of Americans while preventing a middle class tax hike that could have sent the economy back into recession,” Obama told reporters after the vote.
“The deficit needs to be reduced in way that’s balanced. Everyone pays their fair share. Everyone does their part,” Obama said, before heading to Air Force One to resume his interrupted annual vacation in his native Hawaii.
Had the deal fallen apart, all Americans would have been hit by tax increases and the spending cuts would have kicked in across the government, in a combined $500 billion shock that could have rocked the fragile recovery.
Relief was felt internationally.
European stock markets soared Wednesday, making a bright start on the first trading day of 2013, as investors welcomed news that the United States has clinched the deal.
Asian shares also rose sharply. Hong Kong shares, for example, ended 2.89 percent higher on Wednesday.
But not all observers found the development encouraging. China’s official news agency warned Wednesday that the United States was heading towards an “abyss” — fiscal deal or no deal.
“As the world’s sole superpower, the United States is clearly not Greece,” the Xinhua news agency said. “But economics and common sense do not lie.
“People, or governments, can overspend for some time, but they simply cannot live on borrowed prosperity forever.”
China, which has the world’s biggest foreign exchange reserves, is a major buyer of US Treasury debt.
Leading up to the deal, political feuding which spanning the Christmas and New Year holidays reflected the near impossibility in forging compromise in Washington, where power is divided between a Democratic president and the Republican House.
It was also a signal that Obama, despite a thumping re-election win in November, may find it tough to achieve second term legislative goals that include immigration reform, clean energy legislation and gun control.
The truce in Washington is likely to be brief, given the fight that will ensue over the spending cuts that now loom at the end of February as well as over regular budget bill extensions.
Those fights will be paralleled by one over a request by Obama for Congress to lift the country’s $16 trillion borrowing limit. Republicans are already demanding concessions on expenditures in return for allowing it to rise.
Obama issued a blunt warning on Tuesday that he would not play ball with Republicans by enjoining in another batter over the debt ceiling.
“If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff,” he warned.
House Speaker John Boehner, smarting from a defeat by the re-elected president on tax rates, warned that the focus would now turn to Republican turf of tightening the budget.
“Now the focus turns to spending. The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised,” Boehner said.
The Republican leader promised “significant spending cuts and reforms to the entitlement (social welfare) programs that are driving our country deeper and deeper into debt.”
Senate Republican minority leader Mitch McConnell, a key figure in engineering the fiscal cliff deal, also warned of spending cuts.
“That’s a debate the American people want,” he said.
The legislation raises taxes on individuals earning more than $400,000 per year, and on couples earning more than $450,000, while retaining tax cuts for Americans with lower incomes put in place under the administration of former president George W. Bush.
The deal also included an end to a temporary two-percent cut to payroll taxes for Social Security retirement savings — meaning all Americans will pay a little more — and changes to inheritance and investment taxes.