Fiscal cliff fizzer prelude to real budget battle

While the United States government has successfully avoided the catastrophe dubbed the fiscal cliff, there is now a new concern.

The government has hit a debt ceiling and will need to raise the amount it is legally allowed to borrow.

President Barack Obama was upbeat after successfully negotiating a tax increase for America's rich, sparing the country's middle class.

"Thanks to the votes of Democrats and Republicans in Congress, I will sign a law that raises taxes on the wealthiest 2 per cent of Americans while preventing a middle-class tax hike that could have sent the economy back into recession and obviously had a severe impact on families all across America," he said.

The deal also means many US companies will still get tax credits for the research they do.

In addition, two million Americans will also continue to receive unemployment benefits.

Economists around the globe were noticeably relieved.

"Obviously, the consequences of this, if it really had hit and there was no sort of preventing it happening, that would be about a 4.5 per cent drop in GDP to the US and obviously have a major effect on the rest of the world," said David Blanchflower, a former Bank of England policymaker.

"So I think the world breathes a sigh of relief." Debt ceiling There may be less anxiety now, but Mr Obama conceded there was still more work to be done to put the US budget in a sustainable position.

"There will be more deficit reduction as Congress decides what to do about the automatic spending cuts that we have now delayed for two months," he said.

The president said that very casually, but it does have the potential to become a serious problem.

While the majority of Americans will not suffer tax increases, the issue of where to cut government spending has not been resolved.

Put simply, the US government is spending beyond its means and has now officially borrowed as much money as it currently legally can - around $US16.4 trillion.

The debt ceiling has been reached.

"With these tax delays or tax reversals, that will mean the US debt to GDP on a gross basis anyway will reach a record high in 2015 of 120 per cent of GDP," said Matt Sherwood, the head of investment strategy at Perpetual.

"That is what people are trying to get Greece down to by 2020.

So America is certainly not the shining light that it once was on this front." Tougher proposition Mr Sherwood says if you thought finding agreement on tax increases was hard for Congress, spending cuts will be a far tougher proposition.

"This is something that they're very ideologically constipated about," he said.

"What we are going to see in the next couple of months, of course, is that as these spending cuts come to the fore, markets are probably going to get a little bit more jittery if the noises from the Congress aren't of a negotiated agreement." There are now two major hurdles for the US government to overcome.

They include finding a way to cut tens of billions of dollars from the budget, and getting agreement from Republicans on the amount the country can borrow.

UBS Australia chief economist Scott Haslem says it is creating a dangerous environment for financial markets.

"The delay in government cuts for two months brings that right up to the where it is likely to going to hit the debt ceiling, and so I expect we are going to be seeing some pretty tense negotiations by the end of February again in the US," he said.

US treasury secretary Timothy Geithner has arranged a kind of bridging finance to keep the US government afloat until the end of February.

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