Congressional leaders reach budget deal

August 1, 2012

By Richard McGregor, The Financial Times

US congressional leaders have reached a short-term budget deal to fund the government for six months from September, extinguishing a potential partisan fiscal fight ahead of the election.

Although legislation enshrining the deal still has to be written and must be passed after the August congressional recess, the agreement appears to have ended one of Washington’s numerous budget battles sapping investor and consumer confidence.

News of the six-month funding deal came in statements from John Boehner, the Republican speaker of the House of Representatives, and Harry Reid, the Democratic Senate majority leader.

“It will provide stability for the coming months,” Mr Reid said.

The agreement also has the imprimatur of Barack Obama, whose spokesman said the president was “encouraged that both sides have agreed to resolve this issue without delay”.

The budget deal does not resolve the bigger issue of the so-called “fiscal cliff” looming at the end of the year, when Congress will face a series of difficult and costly budget decisions.

At year’s end, tax cuts introduced by George W. Bush expire and huge reductions in defence and welfare spending will kick in automatically in the absence of a broader budget deal.

Ben Bernanke, the Federal Reserve chairman, and the Congressional Budget Office have warned of a probable US recession in early 2013 if more than $600bn in scheduled tax increases and spending cuts take effect as planned.

The latest stopgap deal keeps spending within the limits set by the 2011 Budget Control Act, but apparently without extra cuts to overall outlays demanded by Tea Party Republicans.

Mr Boehner has had to balance pressure from his more conservative members pushing for deeper and faster cuts to government spending with crafting agreements that can win support among Democrats as well.

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