BarroMetrics Views: The Senate Bill

Yesterday, the Senate passed a bill to ‘avert the fiscal cliff’; today the question is whether the House of Representatives:

  • Will take this bill as is and submit it to a vote; or
  • Will send it back to the Senate with amendments to increase the spending cuts.

I think the latter is the most likely. To understand my reasons, we need to go back 12 or so months when the debt ceiling crisis first came about. At the time, there was pressure on the US government to cut the deficit - the Republicans would not agree to the new debt ceiling unless the Democrats agreed to spending cuts; the Democrats wanted to increase spending and reduce the rate of the deficit by raising taxes on ‘the wealthy’.

Unable to agree, the can was kicked down the road with the ‘fiscal cliff’ legislation: automatic spending cuts and increase in taxes (to reduce the deficit) UNLESS new legislation was passed.

Fast forward now to the present and the Senate Bill.

This bill contains  provisions that according to the Congressional Budget Office would reduce revenues over 10 years by US$3.64 trillion and increase spending by US$332 billion. In short, we see the deficit go up instead of down.

Given this, and given the will demonstrated by the House, I doubt that the Senate Bill will pass unscathed.  If the House does send the Bill back to the Senate, what then will the Senate do? And amongst all this, how will the markets and ratings agency react? We live in interesting times……

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