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US deficit: paper chase

The Financial Times

The latest US budget accord is not the worst last-minute agreement in history. Barack Obama, the US president, may be weak, the leaders of Congress foolishly stubborn and the agreement not enough to calm markets for long, but Sunday’s piece of paper (assuming it becomes law) has more going for it than, say, the 1938 Munich Agreement (which failed to prevent the second world war).

The US will be able to keep borrowing until after the 2012 presidential election. And dreamers can wish that the bipartisan commission, set up to find $1,500bn of cuts, will blaze a trail from sloppy compromise to final resolution.

Realists, though, will note that the sensible recommendations from the leaders of the last bipartisan effort, the Bowles-Simpson commission on fiscal responsibility and reform, have been ignored. Realists will also worry about the upward pressure on the deficit caused by the frustratingly slow pace of growth.

Worse, the US deal does not come close to solving the government’s fundamental problems – the too large fiscal deficit (expected to be about $1,000bn, or 7.5 per cent of gross domestic product, in 2012) and too generous entitlement programmes (relative to the national willingness to pay taxes).

The agreement calls for a deficit reduction of $2,400bn over a decade. That is well below the $4,000bn Standard & Poor’s suggested was needed to avoid a ratings downgrade, so the triple A US rating is unlikely to survive much longer. Further, a deal that shelters from pain “the middle class, seniors and those who are most vulnerable” sends exactly the wrong message.

Indeed, this inadequate deal is grimly reminiscent of the latest eurozone accord to support Greece. But while Europeans squabble, they agree on the virtues of solidarity and balanced budgets. The ideological fight in US could ultimately be more dangerous for the global economy.

Post-Crisis World Institute