Reaction to resolution of U.S. fiscal cliff drama

Late last night, the U.S. Congressed the American Taxpayer Relief Act of 2012. Read more about that here.

Here’s a comment on that Act this morning from BMO Capital Markets economist Michael Gregory (my emphasis):

“The bottom line is that taxes will be going up for most Americans, ranging from a 2 percentage point increase in payroll taxes for all employees, to higher tax rates on ordinary income, capital gains and dividends for those making above $400k …[There are] more fiscal battles on the horizon. For now, however, we can relish in the fact that the fiscal cliff was averted, political compromise was achieved (yes, 85 of 236 House Republicans voted in favour), and America’s finances are starting to move to a firmer footing.”

Here’s Scotiabank’s Derek Holt and Dov Zigler in their morning note on yesterday’s theatrics in Washington:

Global equities are up very smartly this morning in response to the passage of the US fiscal cliff deal …

The US fiscal agreement also extended Farm bill provisions that averted what would have been significant spikes in some prices (such as milk).

The GOP is likely simply reloading for the next round. That’s when this revenue focused deal sets in motion another fiscal cliff to be hit when the agreement’s agreed upon two-month delay in spending cuts coincides with when the US Treasury figures the just passed debt ceiling will become binding. That will arrive after taking extraordinary measures to delay the debt ceiling’s effects before default and a government shut down become renewed risks. Buy the risk trade now, but don’t get greedy and take your profits before the Cliff Part II becomes a cheesier Hollywood remake of the original.

The economists at TD Bank had this to say:

On the surface, a little more economic relief in the near term via less fiscal contraction seems like a positive development. But, the current legislation leaves considerable economic and policy uncertainty:

First, it lessens, but does not remove uncertainty related to fiscal consolidation. The lack of clarity on spending cuts could result in a persistence of underinvestment by firms, particularly those still caught in the spider web of negotiated political outcomes (industries in defense, health care, those dependent on procurement contracts).

[Also] whatever deal ultimately is made over the next two months on discretionary and defense spending cuts, reform still needs to occur with entitlements, which present to the largest source of cost pressures on US debt. Entitlement reform was not part of the near-term fiscal cliff measures, but the debt-to-GDP ratio cannot be stabilized in its absence unless draconian measures take place elsewhere.

So, Congress made a good first step yesterday, but many more still need to be taken. Stay tuned, we’re just at the 100 meter mark of this relay race.

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