Avoiding the fiscal cliff

Stock markets in Europe have responded positively to news that the so-called ‘fiscal cliff’ has been avoided in the US.

Shares on the FTSE 100 were up by over 2% at lunchtime, as the index of leading UK company shares surged through the 6,000 barrier in morning trading.

As a result of US politicians agreeing on a deal, spending cuts and tax rises worth $600bn will be postponed for at least two months.

If no agreement had been reached, there were fears that the US economy would be pushed into recession.

Most of the fiscal cliff measures, which would have automatically happened if no deal was struck by midnight on Monday, have been averted as a result of the deal.

This postpones tax rises worth $536bn and spending cuts to benefit programmes of $109bn.

Some tax rises are however going ahead, such as an expiry of a payroll tax holiday which is expected to raise $95bn in additional annual revenue.

Whilst investors appear to have welcomed the news, it does raise fears that the US economy has simply deferred the tough decisions required to avoid a future economic cliff.

With the sovereign debt crisis in Europe also deferred rather than solved, perhaps the economic theme for 2013 revolves around kicking problems down the road.

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