US 'fiscal cliff' deal only provides short-term relief

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Markets worldwide rallied Wednesday after U.S. Congress averted the fiscal cliff, but the deal failed to address the massive spending that threatens the world's economic growth engine, analysts said.

The world's eyes have been fixed on Washington amid a nail biter that saw Congress cut an eleventh-hour deal to avert the " fiscal cliff" -- a spate of tax hikes and spending cuts that economists said would trigger another recession.

The deal caused markets to soar, with Hong Kong's Hang Seng Index closing up 3 percent, London's FTSE 100 index seeing an 18- month high and numerous green arrows in New York's stock exchange.

However, analysts said U.S. lawmakers simply kicked the can down the road, and the Jan.1 agreement adds 4 trillion U.S. dollars over the next decade to the already massive U.S. debt, according to the non-partisan Congressional Budget Office.

Moreover, another battle looms in February when the bitterly divided U.S. Congress must agree over a debt ceiling, and some analysts expect more gridlock to come.

"At the moment there is a relief rally going on," said Bernard Baumohl, chief global economist at the Economic Outlook Group and frequent guest on PBS' Nightly Business Report.

"But I think now we're going to have to deal with phase two of that poison pill," he said, referring to cutting federal spending and the upcoming debt ceiling talks.

U.S. Congress has tied the economy to a bungee cord, he said. " We jumped off the cliff temporarily on January 1st, then came the deal on taxes, so we came back up safely back on the cliff. But now we may go back off the cliff if there is no agreement on the spending side."

Spending cuts are a highly incendiary topic for Democrats and Republicans. "They go right to the very core of the philosophical difference between the two parties," he said, adding that he foresees a heated debate over the next two months on the issue.

Still, he emphasized the belief that Congress and the White House will ultimately strike a deal.

Andy Busch, editor and publisher of the Busch Update, a financial and political newsletter, billed the "fiscal cliff" deal as a "short term positive, long term negative."

He noted positive outcomes including extension of the Bush tax cuts for families earning less than 450,000 U.S. dollars per year and that both capital gains and dividend tax rates rose only by 5 percent, which has helped markets rally.

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