Debt ceiling, round two

The USA is once again on course for financial disaster through no fault but their own.

Remember the debt ceiling debacle, when the broken American political system led to the country losing its triple-A credit rating, and nearly resulted in the largest economy in the world defaulting on its debt? Well, joy of joys, in nine months, it's all going to happen again.

The problem is the basic disagreement was never actually resolved, but merely postponed until after the election so that the Republicans could get back to the important business of tearing their party apart with excruciating primaries and loony-fringe candidates. The deal that raised the ceiling required a spending bill to be passed in both houses of congress that substantially removes the deficit. If no such bill is passed, then on January 1st 2013, a whole raft of automatic spending cuts are introduced at once, bringing in what American commentators breathlessly describe as "European levels of austerity".

Not only that, but on the same day those cuts come in, the the Bush tax cuts and the Obama payroll tax cuts both expire, increasing the tax burden on millions of Americans. Oh, and emergency unemployment benefits also time out.

Congress has had ample warning to sort out the mess (almost as much warning as it had before the initial face-off), but yesterday the House of Representatives rejected two possible solutions. The first, a bipartisan bill which has the most chance of passing in the Democrat-controlled Senate, was defeated 382-38; the second, the White House's preferred option, was unanimously rejected 414 to 0. Instead, it seems likely that the House will pass, along strict party lines, Republican Congressman Paul Ryan's bill, which has no hope of passing getting through any Democrats, calling as it does for "draconian reductions in the federal government's commitment to financing health care for the disabled, the elderly, and the poor", in the words of Slate's Matt Yglesias. So the Senate will reject the bill, and the whole damn thing will start again.

Faced with the unappealing task of repeating last summer, Fed chairman Ben Bernanke has weighed in, telling the House Financial Services Committee:

Under current law, on Jan. 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.

All those things are hitting on the same day, basically. It’s quite a big event.

Barclays Capital has calculated that the combined effect of all these cuts hitting at once would wipe 2.8 per cent off the annualised growth rate for the first quarter of 2013, bringing them from 3 per cent to 0.2 per cent growth. For comparison, the UK – which is voluntarily enacting "European levels of austerity" – is currently forecast by the OBR to have 2.0 per cent growth over the year, and the OECD forecast yesterday had us on minus 0.4 per cent over the first quarter of 2012, with the USA already at growing at 3 per cent annualised.

The worst case scenario is unlikely to happen; just as an actual default was unlikely to happen when the debt ceiling needed to be raised. The most likely outcome is that Congress will simply postpone everything once again, renewing the tax cuts and shrinking, but not removing, the automatic spending cuts. But all of this has led Bloomberg's Clive Cook to declare:

But there’s a much bigger threat to U.S. power [than the growth of China]: the increasingly abject failure of the country’s own political class.

Congressman Paul Ryan. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Brexit is teaching the UK that it needs immigrants

Finally forced to confront the economic consequences of low migration, ministers are abandoning the easy rhetoric of the past.

Why did the UK vote to leave the EU? For conservatives, Brexit was about regaining parliamentary sovereignty. For socialists it was about escaping the single market. For still more it was a chance to punish David Cameron and George Osborne. But supreme among the causes was the desire to reduce immigration.

For years, as the government repeatedly missed its target to limit net migration to "tens of thousands", the EU provided a convenient scapegoat. The free movement of people allegedly made this ambition unachievable (even as non-European migration oustripped that from the continent). When Cameron, the author of the target, was later forced to argue that the price of leaving the EU was nevertheless too great, voters were unsurprisingly unconvinced.

But though the Leave campaign vowed to gain "control" of immigration, it was careful never to set a formal target. As many of its senior figures knew, reducing net migration to "tens of thousands" a year would come at an economic price (immigrants make a net fiscal contribution of £7bn a year). An OBR study found that with zero net migration, public sector debt would rise to 145 per cent of GDP by 2062-63, while with high net migration it would fall to 73 per cent. For the UK, with its poor productivity and sub-par infrastructure, immigration has long been an economic boon. 

When Theresa May became Prime Minister, some cabinet members hoped that she would abolish the net migration target in a "Nixon goes to China" moment. But rather than retreating, the former Home Secretary doubled down. She regards the target as essential on both political and policy grounds (and has rejected pleas to exempt foreign students). But though the same goal endures, Brexit is forcing ministers to reveal a rarely spoken truth: Britain needs immigrants.

Those who boasted during the referendum of their desire to reduce the number of newcomers have been forced to qualify their remarks. On last night's Question Time, Brexit secretary David Davis conceded that immigration woud not invariably fall following Brexit. "I cannot imagine that the policy will be anything other than that which is in the national interest, which means that from time to time we’ll need more, from time to time we’ll need less migrants."

Though Davis insisted that the government would eventually meet its "tens of thousands" target (while sounding rather unconvinced), he added: "The simple truth is that we have to manage this problem. You’ve got industry dependent on migrants. You’ve got social welfare, the national health service. You have to make sure they continue to work."

As my colleague Julia Rampen has charted, Davis's colleagues have inserted similar caveats. Andrea Leadsom, the Environment Secretary, who warned during the referendum that EU immigration could “overwhelm” Britain, has told farmers that she recognises “how important seasonal labour from the EU is to the everyday running of your businesses”. Others, such as the Health Secretary, Jeremy Hunt, the Business Secretary, Greg Clark, and the Communities Secretary, Sajid Javid, have issued similar guarantees to employers. Brexit is fuelling immigration nimbyism: “Fewer migrants, please, but not in my sector.”

The UK’s vote to leave the EU – and May’s decision to pursue a "hard Brexit" – has deprived the government of a convenient alibi for high immigration. Finally forced to confront the economic consequences of low migration, ministers are abandoning the easy rhetoric of the past. Brexit may have been caused by the supposed costs of immigration but it is becoming an education in its benefits.

George Eaton is political editor of the New Statesman.