Congress avoided the most devastating effects of the fiscal cliff when the House gave its approval late Tuesday to a compromise that will preserve tax breaks for households making less than $450,000 a year. The deal also postpones, for two months, huge spending cuts that had been scheduled to begin taking effect Jan. 1. President Obama praised the agreement — which passed over the objections of most House Republicans — and urged lawmakers "not scare the heck out of folks quite as much" the next time they engage in a major fiscal debate. Good luck with that, says Joe Weisenthal at Business Insider. The next big showdown, over raising the federal debt ceiling, is coming up in February or early March, and both sides are already bracing for battle.
This is shaping up to be a big standoff. Obama has flatly said he will not negotiate over raising the debt ceiling (i.e. honoring the nation's obligations). Republicans are spoiling for another 2011-like fight, and are calling it the big opportunity. They also think they have more leverage this time than they had over the fiscal cliff fight, since taxes aren't about to rise on 100 percent of taxpayers.
Since the agreement heading for Obama's desk doesn't raise the debt ceiling, which we've already hit, says Zachary A. Goldfarb at The Washington Post, it leaves "the Treasury to use what it calls 'extraordinary measures' as long as it can to pay the government's bills." When the bean counters run out of tricks, we could face a "catastrophic default" if Congress doesn't act fast.
In many ways, the threat of default in two months is a more serious risk than the Jan. 1 fiscal cliff deadline. If Congress does not increase the debt ceiling, the government will quickly run out of ways to pay the nation's bills and make interest payments on the nation’s outstanding debt. Any failure by the government to meet its financial obligations could be seen as a default, shaking world financial markets, given the special role that U.S. government bonds play in the global economy.
Obama is still smarting from the 2011 debt-ceiling dispute, says Neil Munro at The Daily Caller. In that fight, "the GOP eventually pressured him to accept spending curbs in exchange for an increase to the debt limit up to $16.4 trillion." Obama has been complaining about that defeat ever since, and he's vowing not to let it happen again. But the GOP-led House is adamant about using "its authority over the nation's debt ceiling to pressure Obama to shrink future spending."
The moment will be ripe for a spending debate, as the Treasury Department will be running out of cash just as the two-month postponement of the fiscal cliff's spending reductions, including deep Pentagon cuts, runs out. Once it can borrow nothing more, Treasury will have to rely solely on what it collects in taxes, which is only enough to pay 70 percent of its obligations. Brace yourselves, folks. The fiscal cliff is in the rearview, but we're barreling straight toward "Fiscal Cliff II."