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SO US government spending can be cut after all. This was the outcome of a deal between the Republican Party, which has a majority in Congress, and President Barack Obama's Democratic Party after emergency negotiations.
The emergency negotiations arose after Congress refused to ratify the budget without its inclusion of significant spending cuts. Without the endorsement of Congress, the US government would have closed down.
It would have resulted in soldiers not being paid, and thousands of civil servants staying at home. That would have been a disaster in anybody's book, so it was in Obama's interest to agree to a spending cut.
The last-minute budget deal sees a cut of about $38bn in spending for this fiscal year, which ends on September 30. Reuters reports Congress then approved a stopgap funding measure to keep the federal government running until the deal can be formally approved in the next few days. The agency reports Obama said the agreement involved painful compromises.
"I would not have made these cuts in better circumstances. But we also prevented this important debate from being overtaken by politics and unrelated disagreements," he said.
The US government differs from the UK and Europe among advanced countries in that, instead of introducing austerity measures at the end of last year, it ushered in further fiscal stimulus.
Obama then reached a deal with the Republicans which saw the "Bush tax cuts for the rich" extended in exchange for more spending on unemployment benefits and tax cuts for the not-so-rich.
Living on borrowed time
The stimulus led the International Monetary Fund to raise the US' growth outlook for this year by 0.7 percentage points to 3%. By contrast, Britain had negative growth in the final quarter of last year and could slip back into recession if that's repeated in the first quarter of this year.
But there are some strong voices warning that the US has been living on borrowed time, and that measures to bring down the deficit - about 10% of gross domestic product (GDP) - will have to be taken soon.
Part of the problem is that so much US money goes towards healthcare and retirement, leaving very little for discretionary spending. This is particularly a problem during times of war, when defence spending is high.
Republican representative Paul Ryan said: "Unless we act soon, government spending on health and retirement programmes will crowd out spending on everything else, including national security. It will literally take every cent of every federal tax dollar just to pay for these programmes."
According to Wikipedia, the significant long-term risk posed by the increase in entitlement spending is widely recongised, with healthcare costs (Medicare and Medicaid) the primary risk category.
Alan Greenspan, former chairperson of the US Federal Reserve, noted that "only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation can close the deficit".
It's the age-old conundrum: guns or butter? The Republicans are more likely to choose guns over butter, and vice versa for the Democrats.
Some say the US is a special case and can run high public deficits and a lot of public debt without getting into trouble. After all, Japan has lived with public debt of 200% of GDP for a while – which, for another country, would prove to be disastrous.
But most of Japan's public debt is held domestically, which makes the country less prone to foreign capriciousness and bond market "vigilantes".
- Fin24
The emergency negotiations arose after Congress refused to ratify the budget without its inclusion of significant spending cuts. Without the endorsement of Congress, the US government would have closed down.
It would have resulted in soldiers not being paid, and thousands of civil servants staying at home. That would have been a disaster in anybody's book, so it was in Obama's interest to agree to a spending cut.
The last-minute budget deal sees a cut of about $38bn in spending for this fiscal year, which ends on September 30. Reuters reports Congress then approved a stopgap funding measure to keep the federal government running until the deal can be formally approved in the next few days. The agency reports Obama said the agreement involved painful compromises.
"I would not have made these cuts in better circumstances. But we also prevented this important debate from being overtaken by politics and unrelated disagreements," he said.
The US government differs from the UK and Europe among advanced countries in that, instead of introducing austerity measures at the end of last year, it ushered in further fiscal stimulus.
Obama then reached a deal with the Republicans which saw the "Bush tax cuts for the rich" extended in exchange for more spending on unemployment benefits and tax cuts for the not-so-rich.
Living on borrowed time
The stimulus led the International Monetary Fund to raise the US' growth outlook for this year by 0.7 percentage points to 3%. By contrast, Britain had negative growth in the final quarter of last year and could slip back into recession if that's repeated in the first quarter of this year.
But there are some strong voices warning that the US has been living on borrowed time, and that measures to bring down the deficit - about 10% of gross domestic product (GDP) - will have to be taken soon.
Part of the problem is that so much US money goes towards healthcare and retirement, leaving very little for discretionary spending. This is particularly a problem during times of war, when defence spending is high.
Republican representative Paul Ryan said: "Unless we act soon, government spending on health and retirement programmes will crowd out spending on everything else, including national security. It will literally take every cent of every federal tax dollar just to pay for these programmes."
According to Wikipedia, the significant long-term risk posed by the increase in entitlement spending is widely recongised, with healthcare costs (Medicare and Medicaid) the primary risk category.
Alan Greenspan, former chairperson of the US Federal Reserve, noted that "only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation can close the deficit".
It's the age-old conundrum: guns or butter? The Republicans are more likely to choose guns over butter, and vice versa for the Democrats.
Some say the US is a special case and can run high public deficits and a lot of public debt without getting into trouble. After all, Japan has lived with public debt of 200% of GDP for a while – which, for another country, would prove to be disastrous.
But most of Japan's public debt is held domestically, which makes the country less prone to foreign capriciousness and bond market "vigilantes".
- Fin24
