Barack Obama faces the 'fiscal cliff'

Richard Edgar

Former Economics Editor

U.S. President Barack Obama applauds after his election night victory speech in Chicago Credit: Reuters

"Politicians never hesitate to seize the opportunity to postpone difficult decisions." A senior British policy maker delivered that rather damning verdict to me last week, talking about Europe's leaders - but he might just as well have meant American politicians. And oddly that might be a good thing.

As I write this, the ticker-tape is falling on Barack Obama at the convention centre in Chicago as he celebrates winning a second term. But the most powerful man in the world still does not have the power to get legislation on the books in America. As results roll in for the House of Representatives and the Senate it is clear that Congress remains divided making Mr Obama's job very hard.

The principle concern is the "fiscal cliff," a matrix of tax increases and spending cuts, which are due to come into force on New Year's Day, taking a hefty $600 billion chunk out of the US economy and sending it back into recession.

The measures were agreed as a compromise last year when the President needed Congress to allow him to borrow more to stop the country running out of cash. Lawmakers could not settle on a long-term solution to America's budget and debts so set the automatic payroll, income and capital gains tax rises, coupled with swingeing spending cuts - especially in defence - in part to focus minds on tackling the substantial problems.

They did not, they have not and they may yet not fix them. Republicans will be bitter at tonight's loss and, retaining power in the House of Representatives, may feel mandated to battle any suggestion that taxes should rise to help pay down debts.

So how will this play out? In his concession speech, Mitt Romney has urged politicians on both sides to "put the people before politics" and set aside the partisan bickering which has come to define American debate. Likewise, President Obama spoke a few minutes ago about how he would talk to Mr Romney about "where we can move this country forward." I wonder how long it will last.

Despite the momentum the president now has, do not expect that partisan bickering to evaporate. What is most likely is the skill for politicians to put off the difficult decisions with a temporary stay, pushing the fiscal cliff back another six months or more while they try to sort out the real issues. That will prolong the uncertainty which business and investors hate but if it staves off a huge shock to the US economy - and ultimately the world economy - that will be a good thing.