So markets finally have a deal on the US debt ceiling, and it has been passed by the House of Representatives, but was all the fighting over how to cut spending really worth it? One economist thinks so, but warns this is only the beginning of a long road back to fiscal sustainability.
“Despite entrenched positions, the parties were after all able to find a compromise. Second, the debate has highlighted how big the US debt problem really is, and that austerity measures are unavoidable,” said Dr. Harm Bandholz, chief US economist at Unicredit Research, in a note to clients following the agreement.
The problem for Bandholz is that there will be little or no spending cuts until late 2013.
“Unfortunately, the current proposal does not yet reflect this new awareness. Instead, it once again kicks the can down the road! First, the so-called 'immediate' spending cuts of $917 billion do of course not begin this year. And they barely have an impact in 2012 or 2013 either.”
Pointing to a quote from Ron Paul, the outspoken Libertarian congressman from Texas, Bandholz predicts far more pain ahead.
“This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda,” Paul said.
“There is certainly some truth in this statement," Bandholz said. "The deficit cuts over the next decade are almost certainly not yet deep enough."
“The prolonged and partly messy political debate about the debt ceiling did not improve the final product. The compromise proposal to reduce the deficit is in our view disappointing as it merely kicks the can down the road and represents the smallest common denominator between the political parties,” he said.
“Hot-button issues, such as entitlement reform and tax reform, were simply ignored so far. Such a deal could have been reached months ago, without putting the government on the brink of default!” said Bandholz.