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Fiscal cliff deal doesn't solve budget woes

This week's agreement settled a number of tax issues. But Congress still has to make hard decisions about spending cuts, the debt limit and the national debt.

By MSN Money Partner Jan 4, 2013 1:12PM

This post is by Connie Cass of The Associated Press.


Image: Dollar bills floating over U.S. Capitol © CorbisThe "fiscal cliff" compromise on taxes leaves a big part of the nation's budget crisis still dangling.


Lawmakers bought a little time with a New Year's Day agreement to hold income tax rates steady for 99% of Americans, while allowing payroll taxes to go up. But they left themselves only two months to settle seemingly irreconcilable differences over how much the United States should borrow and spend and where painful budget cuts should land.


Here's a look at what's been resolved and what's left hanging:


Automatic spending cuts


The bipartisan deal approved by the Senate and House put off dealing with the nearly $110 billion in automatic spending cuts set for this year.


Unless Congress stops them by March 1, automatic cuts of 8% to 9% are set to sweep through nearly all federal agencies, with half the money coming out of the military.

Both parties talk about the need to control spending, but lawmakers don't want the kinds of chaotic cuts now barreling toward them. Republicans worry that the Pentagon would be hamstrung; Democrats say vital federal programs would be crippled.


Federal workers would face furloughs or even layoffs, Americans would see all sorts of government services curtailed, and businesses would feel the pinch of reduced government spending.


Debt limit showdown


Around the same time, the United States would lose its ability to borrow additional money to pay its debts, unless Congress acts. That's a big deal, especially since the government borrows about 31 cents of every dollar it spends.


The U.S. bumped against its $16.4 trillion borrowing limit Monday, but the Treasury Department is using special accounting measures to avoid default for now. Private economists say those methods could probably stretch through late February or early March.


After that, the United States would risk its first-ever default.


Hopes of wrapping the issue into the year-end negotiations were dashed, setting up the potential for another standoff. House Speaker John Boehner, R-Ohio, says any debt increase must be paired with equal spending cuts. Obama says the debt ceiling is too important to negotiate.


The last time such a showdown brought the nation close to default, in the summer of 2011, it roiled financial markets and contributed to Standard & Poor's decision to strip the U.S. government of its AAA bond rating.


A government shutdown?


Yet another deadline looms on March 27. The stopgap measure that funds government activities expires; congressional approval will be needed to keep the government running. It's another chance to fight over spending.


In 2011, the nation came within hours of a partial government shutdown that would have furloughed an estimated 800,000 government workers, closed national parks and halted the work of the IRS.


The national debt


The fiscal cliff deadline was originally designed to force lawmakers to confront trillion-dollar annual budget deficits that pile the nation's debts higher each year. As more baby boomers begin receiving retirement benefits in coming years, the strain on the budget will be unsustainable.


Obama says Medicare's climbing costs must be addressed to fix this. Republicans want to rein in Medicare, Social Security and other entitlement programs more sharply. Many Democratic lawmakers object. And tampering with programs so popular with voters is never easy.


The fiscal cliff was supposed to be a way to force Washington to confront the long-term debt problem. The next two months will be another opportunity to come up with a plan or dodge this issue again.


The tough, unpopular decisions are further complicated by concerns that cutting spending too quickly could damage the nation's sluggish economic recovery.


What’s done


The year-end fiscal cliff deadline did inspire compromise between Republicans and Democrats on some hotly debated tax questions. Some of the issues settled:

  • Payroll taxes are going back up, after being trimmed for two years to help stimulate spending and boost the economy. For most workers, that means paychecks will shrink by 2% — $1,000 for someone earning $50,000 a year. The wealthiest pay a lower share of their income, however, because the Social Security payroll tax applies only to the first $113,700 of earnings.
  • The members of the top 1% are getting socked with higher income tax rates. Income over $400,000 for individuals or $450,000 for couples will be taxed at a top rate of 39.6%, up from 35%. Everyone else gets to keep current income tax rates, which date back to the George W. Bush-era tax cuts.
  • The wealthiest Americans will pay higher taxes on their investments. Rates for their capital gains and dividends are rising from 15% to 20%. And the tax on estates worth more than $5 million will go up to 40%, from 35%.
  • The alternative minimum tax -- designed to keep the wealthy from using loopholes to avoid taxes -- will be permanently indexed for inflation so it doesn't catch millions of middle- and upper-middle-income people in its net.
  • Tax breaks for families with children, college tuition and low-income workers will continue for five years. An array of temporary business tax breaks was extended for one year.
  • Emergency federal unemployment benefits to help 2 million people out of work for at least six months will be extended a year.
  • A scheduled 27% cut in Medicare payments to doctors will be held off for a year in what's become a congressional ritual.


Copyright 2013, The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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