The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
To nations suffering austerity, it must seem as if Washington has gone mad. First, the U.S. Congress fails to agree on a 2011 budget. Then lawmakers overwhelmingly pass another giant stimulus. But both events actually hint at some chance of more disciplined fiscal action next year.
President Barack Obama will quickly sign the $858 billion stimulus/tax cut bill that funds unemployment benefits for 13 months and extends Bush-era tax cuts for two years. Of course, the bulk of the headline cost — $500 billion — comes simply from keeping tax rates as they have been, so it’s not traditional stimulus. It’s just keeping bad stuff from happening. And government bean counters would not score the renewal of a temporary welfare program as a spending increase. Still, the bill does delay any effort at deficit reduction since it does not pay for funding jobless benefits.
All this makes budget hawks wince, both at home and abroad. But even the International Monetary Fund concedes that America has the capacity to boost its sluggish economy through short-term tax cuts or spending increases — as long as it has in place a credible plan to reduce the longer-term fiscal gap. (And the best deficit strategy is cutting spending while also boosting growth through smart ( meaning low) tax policy.
That plan isn’t drawn up yet, but it could be getting closer. Democrats and Republicans in Congress are gridlocked over the $1.1 trillion budget for 2011. So they will probably pass a temporary spending measure to keep the government running for another month or two. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.
Indeed, some GOP insiders believe the president – with a bit of nudging — may be ready to strike a deal to reform the tax system and cut future Social Security benefits along lines suggested by his own debt commission earlier this month. And as the tax compromise shows, Obama now seems willing to anger some within his own party in order to get legislation passed.
The key to any longer-term deal on the deficit is to make it happen before presidential politics starts to intrude by the middle of 2011. That’s not going to be easy — but the flurry of activity at the end of 2010 provides a glimmer of hope.