Daily Archives: January 7, 2013

The last-second deal to avoid America’s fiscal cliff has been criticised by budget experts, the business community and the press. In the face of deficits still exceeding a breathtaking $1tn annually, they had hoped for a “grand bargain” – namely, a long-term, multitrillion-dollar package of revenue increases and spending cuts that would truly fix the debt problem. That did not happen. Instead, the deal is seen as too small and unbalanced, as it raises only modest amounts of revenue and cuts no spending. Outside Washington, no one has a good word for it.

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Critics are transfixed by the bitter negotiations, however, and are missing the big picture. It may be happening in stages, but the US is making real progress towards reducing deficits and stabilising its debt. Indeed, according to the Committee for a Responsible Federal Budget, a Washington-based non-profit organisation, the federal debt to gross domestic product ratio – the critical measure of financial health – will be stable at about 73 per cent for the next decade. That is because annual deficits are now on track to be halved and, therefore, the debt level will not continue to grow faster than the economy. Yes, this ratio is still too high, but stabilising it will be a crucial achievement.

But with all the weeping over deficit and debt, how is this possible? The answer is that, in two months, a course for $3tn of deficit reduction over 10 years will be set. That is about three-quarters of the amount the much-praised bipartisan Simpson-Bowles presidential commission recommended in December 2010. And, using consensus assumptions on economic growth, it is enough to stabilise America’s debt ratio. Without it, the ratio would reach nearly 100 per cent, analogous to Italy’s. Yes, after 2022, it will worsen again – reflecting the ageing population and related health costs – and more fiscal tightening will be necessary. But 10 years is enough to find those additional solutions.

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Many will be sceptical that near-term deficit reduction will reach this $3tn total. So let’s break it down. First, recall the bitter struggle between President Barack Obama and congressional Republicans in mid-2011 over raising the federal debt ceiling. The result was legislation that launched two critical deficit reduction processes. It imposed a cap on discretionary spending, reducing this category by $1.1tn through to 2021. And it ordered Congress to pass another $1.5tn in deficit reduction legislation by the end of 2011. Otherwise, cuts in discretionary spending of $1.2tn would occur automatically. Indeed, Congress did fail to act, and this spending “sequester” was to be triggered at the start of 2013. So $2.3tn of deficit reduction was legally mandated by that 2011 legislation.

Then, a week ago, we all watched the fight over the fiscal cliff, whose result again was more deficit reduction. This time, the new legislation raised taxes on high-earning Americans, generating $740bn of such reduction over 10 years. It also delayed briefly the sequester until March 1 2013. Ominously, that is when the debt ceiling must be raised again.

This sets up a third and huge budget battle for the next few weeks. Republican Congressional leaders again are demanding $1 of fresh spending cuts for every $1 increase in the debt limit. Apparently, they are prepared to take America to the very edge of default to obtain these cuts.

But Mr Obama is adamant that he will not negotiate again. That stance is correct because it is grossly irresponsible to risk financial catastrophe over political demands. The president’s position should ultimately prevail, raising the debt ceiling unconditionally.

But that outcome would also make certain the $1.2tn of deficit reduction inherent in the sequester. This is scheduled, by law, to begin in two months, and only new legislation can change that. By definition, any such change to the sequester would require approval by the House of Representatives, which is controlled by Republicans. Even though the sequester would also cut defence spending, which Republicans dislike, their assent to a change is unlikely in today’s partisan circumstances. Therefore the ultimate deficit reduction will total $3tn.

A better approach for all parties, however, would be to replace this sequester with a larger, more balanced package of deficit reduction actions. They should negotiate now towards legislation that would contain: further revenue, perhaps through capping the value of deductions and such reforms; and the types of reduction in entitlement spending the president proposed three weeks ago. After all, entitlements represent the real spending problem, not discretionary spending.

Either way, these rounds of deficit reduction are gradually solving the debt problem. Yes, it is a halting process because that is the way big change occurs in America. And, yes, more reductions will eventually be required. But surprising progress is being made.

The writer, who served as US deputy Treasury secretary from 1993 to 1994, founded and chairs Evercore Partners

Two upcoming elections will be critical for the future stability of south and central Asia and for the continuing success in the struggle to defeat Islamic extremism.

The first are the parliamentary elections in Pakistan scheduled for next spring to elect a new government. In the next few weeks President Asif Ali Zardari and the opposition have to agree to a neutral caretaker government that would be in place for three months and would be responsible for holding the elections.

However, the country faces widespread violence and mounting casualties every day – an Islamic terrorist movement to overthrow the state in the northwest by the Pakistani Taliban, a separatist insurgency in Baluchistan province and mounting ethnic and mafia violence in the commercial capital Karachi. Some fear that as the violence escalates and the state loses control of large areas, the elections may not be held or held piecemeal.

These elections are also vital for the economy which faces a balance of payments crisis, high inflation, unemployment and massive corruption scandals but Mr Zardari has proved unwilling to tackle major economic reforms as demanded by the International Monetary Fund and the international community. Such reforms would now be left to the next government.

The elections – which have to be held at the latest by May 2013 – are unlikely to produce a clear winner and the next government is also likely to be a coalition of political parties. The significance of the elections is that it will be the first time in the country’s history that one elected government which has seen out a full term will transfer power to another elected government. At the same time, despite the series of crises in the country there is no threat of a military intervention that could disrupt the democratic process.

Afghanistan will face a presidential election in early 2014 but much of the spade work for that election has to be carried out this year, especially as 2014 is also the year when the US and Nato will complete their troop withdrawal from Afghanistan.

It will be up to President Hamid Karzai in early 2013 to finalise the composition of the election commission and the rules for the elections. He is also likely to announce a candidate or raft of several candidates whom he would support to become the country’s next president. Mr Karzai is illegible to stand again having served two presidential terms already.

It will be important that he stabilises the fraught political situation in the country by next spring and take steps that ensure a free and fair election – a key demand from 17 opposition parties and groups who have all demanded that he soon announce an electoral timetable and does not support his favoured candidate with government machinery or money.

It is vital for the west which is presently preoccupied with the military transition taking place by 2014, to focus more effectively on the political transition that will also take place that year and for which preparations must start as soon as possible.

At the same time there has been a renewed boost to the possibility of peace talks between the Americans, the Afghan government and the Taliban with the recent change in Pakistan’s policy towards the Taliban, which it is now encouraging to seek a political settlement with Kabul. This makes the preparations for the elections in 2013 that could include long and complicated talks with the Taliban and the holding of them in 2014 even more important. Afghanistan needs a safe and secure political transition from Mr Karzai to the next man and from dependency on the west to greater self-reliance.

The writer is best-selling author of several books about Afghanistan, Pakistan and central Asia, most recently ‘Descent into Chaos’

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