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U.S. still faces political fights on spending, debt

By The Associated Press

This article was published January 2, 2013 at 7:12 a.m.

— A last-minute deal will keep the U.S. from driving off the so-called fiscal cliff, but higher taxes and continued political fighting in Washington threaten to shake the fragile economy well into 2013.

A bill passed by Congress late Tuesday averts widespread tax increases and delays deep spending cuts that had threatened to return the country to recession. World stocks went up in response.

Many economists were disappointed that Congress and the White House couldn’t reach agreement on a broader deal to significantly reduce the deficit over the next 10 years. That could have boosted business and consumer confidence and accelerated growth.

“Nothing really has been fixed,” said Joseph LaVorgna, an economist at Deutsche Bank. “There are much bigger philosophical issues that we aren’t even addressing yet.”

Lawmakers postponed tough decisions on government spending, giving themselves a reprieve from cuts that were scheduled to start taking effect automatically Jan. 1. That just sets the stage for more hard bargaining later. Spending cuts could hurt growth even more.

Another standoff is likely to arrive as early as February, when Congress will need to raise the $16.4 trillion federal borrowing limit so the government can keep paying its bills. House Republicans, who objected strongly to the latest fiscal deal Tuesday before the chamber finally voted to approve it, probably won’t agree to raise the debt limit without offsetting spending cuts that Democrats are sure to resist.

President Barack Obama warned Republicans late Tuesday that “if Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff.”

Meanwhile, the economy doesn’t have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a weak 2.2 percent in 2012. Unemployment stands at 7.7 percent.

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