US debt negotiations went down to the wire in January before Democrats and Republicans reached a deal to avert the so called “fiscal cliff”. Yet little has been solved.
The deal simply postponed the cliff for two months, and failed to secure agreement on raising the “deficit ceiling”, the limit on total government debt. This must be raised by March to avoid the government defaulting on its debts. This means yet another round of negotiations is imminent.
Going over the fiscal cliff would mean automatic cuts to government spending and tax increases that would take 2 per cent of GDP out of the struggling US economy, sending it back into recession.
The Tea Party movement has led the charge against government debt. While Obama and the Democrats reject the extreme scale of their plans to slash spending and cut the debt, they share the view that the debt pile has grown too large. Hence the Democrats and Republicans have committed to a “deficit reduction” plan over the next ten years.
The latest deal to reduce government debt hits the poorest and working class hardest. More than half the increased revenue from taxes in 2013 will come from higher payroll taxes, or contributions to social security and Medicare largely from the working class. This is expected to affect 163 million people and generate approximately $120 billion extra revenue. This will further contribute to rising inequality in the US, with those on an income of $50,000 paying an additional $1000 in taxes in 2013.
Obama has attempted to sell the deal by trumpeting the end of Bush tax cuts for the top 1 per cent of taxpayers and the extension of unemployment benefits and minimum increases in capital gains tax. But these are far less than the increased payments demanded of the working class and poor.
Is US government debt unsustainable?
Contrary to the arguments of the Democrats and Republicans US government debt is far from unsustainable. As Marxist economist John Weeks argues: “when we take out what the federal government owes itself [about 40 percent of the total], the US public debt is a smaller proportion of GDP than the same debt measure for any other major developed country.”
The US can also print money to repay its debts, something the Federal Reserve has already been doing.
The calls for debt reduction ignore that the expansion in US government debt is a product of the financial bail-outs, higher welfare spending due to higher unemployment, and lower tax revenues due to lower profits, caused by the 2008-09 financial crisis.
Furthermore successive governments have helped create the debt problems through slashing corporate tax, which fell over the period 2002 to 2013 from 40 per cent to 35 per cent. Reversing corporate tax cuts, or reclaiming the trillions of dollars handed to the financial system, would lower government debt significantly and provide the funds for public investment into job creation and secure welfare benefits. Neither the Democrats nor the Republicans are prepared to do this.
However the exaggeration of the fiscal cliff serves an important ideological role, legitimizing cuts to welfare and spending. The underlying concern of the US ruling class is the failure of US capitalism to rebound from the 2008-09 crisis. Profitability and private investment remains low across the US economy. They see cutting government spending as a way to boost profits through allowing cuts to corporate tax and interest rates. Cutting welfare payments also forces the unemployed to accept work at lower wages.
The US economy continues to struggle, contracting in the final quarter of 2012 by 0.1 per cent, whilst unemployment remains high at 7.9 per cent. European economies that have implement larger cuts to government spending are in an even worse state. In Greece savage cutbacks have seen unemployment triple to 25 per cent, and GDP decline by 20 per cent since 2008.
Despite this the Democrats and Republicans remain committed to making the working class and poor pay for the crisis. More austerity is on the way unless the US working class can fight back. Brief glimpses of resistance have been seen in the Occupy movement, and the Chicago Teachers Union’s successful week long strike against Democrat Mayor Rahm Emanuel in the lead up to the US elections. These struggles need to be built upon, because unless the US government is challenged from below it will continue to deliver nothing but austerity for the 99 per cent and profits for the 1 per cent.