OPINION: US needs foot on gas, not brakes

IT is more than a decade since the US last ran a budget surplus - and as negotiations to avoid America's fiscal cliff sailed past their new-year deadline, it seems the country will have to wait another 10 years before it happens again.

Bill Clinton was the last President to oversee a budget that prevented the country falling further into debt.

The deal between the US Senate and President Barack Obama maintains most tax breaks for middle-income groups and the moderately rich that were brought in by George W Bush almost 10 years ago - at great cost - while at the same time delaying cuts in government spending.

As such it will do little to reduce America's $1 trillion annual deficit of recent years, which has taken its total debt to more than $16 trillion, or just over 100 per cent of GDP.

But according to many economists, the last thing the US economy needs now is a dose of austerity. If anything, there has been too much already.

In the last two years the US has cut almost as much from public spending as the UK, mainly at state and local level. Cities such as San Bernardino in California have declared bankruptcy after a severe drop in tax receipts.

Princeton economist Paul Krugman wrote before the Senate deal that the US needed several more years of public deficits to counter the steep cuts in borrowing by private-sector firms and households.

He has long argued that the lack of private investment since the financial crash, with the flow of credit having dwindled to a trickle, has left a huge hole in the economy that only the public sector can fill.

Despite being a consistent critic of Mr Bush's deficit budgets in the last decade, Mr Krugman argues that now is not the time for the type of austerity that pushes up unemployment and de-skills the urban working classes, increases social security costs and undermines confidence.

The poor can expect to be hit hard by whatever spending cuts are finally agreed in the coming months. Mr Krugman said: "The reality is that President Obama has made huge concessions. He has already cut spending sharply, and has now offered additional big spending cuts, including a cut in social security benefits, while signalling his willingness to retain many of the Bush tax cuts, even for people with very high incomes."

While Mr Krugman has berated Mr Obama for caving in to persistent right-wing demands, other liberal intellectuals have conceded the need to forge a long-term deal that gives some ground to the numerous champions of low taxes and smaller government.

Health and pension costs are the two big-ticket items over the next 20 years, just as they are in the UK and continental Europe. Americans spend more than 17 per cent of their national income on healthcare. Some studies estimate that could jump to 30 per cent by 2030.

The US government only provides a safety net through Medicare and Medicaid, leaving most care to the private sector, but even this burden is expected to increase sharply.

Pension liabilities remain high after years in which private schemes have withered and workers have come to rely more heavily on the state. Schemes for public sector workers remain hugely in deficit.

For the rest of the world the benefit of Congress striking a short-term deal is obvious. Chinese manufacturing has spent much of the last 18 months in the doldrums and has only recently begun to revive, largely on the back of a US economy that has slowly recovered.

The eurozone, which has found cutting subsidies to powerful interest groups even more difficult, is desperate for the US economy to accept its role as the engine of world growth.

Going over the fiscal cliff would be a disaster. The markets never believed it would happen, but they are equally sceptical that the long-term issues will be resolved.

Guardian News & Media


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