Get Ready for the Next Fiscal Cliff

There will be bigger battles in 2013 than the one just concluded.

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What, you thought there was only one fiscal cliff? Sorry to break the news, but 2013 could be the Year of the Cliff.

The New Year's Day deal to avert $600 billion worth of tax hikes and spending cuts has generated a sense of relief and a minor stock market rally. It's certainly good news that 2013 won't be starting with abrupt tax hikes that could have averaged more than $3,000 per family per year.

But the deal reached by Democrats and Republicans barely addresses any of the tough issues that caused the cliff in the first place, which means there will be a lot more political wrangling during the coming year or two over entitlement spending, federal deficits and the size and role of government. "We believe this only sets us up for another bare knuckled fight in the near future," investment bank UBS advised its clients in the aftermath of the agreement.

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The New Year's Day deal will raise $600 billion in new tax revenue over 10 years, which should help narrow annual deficits a bit. But President Barack Obama had originally wanted $1.6 trillion in new revenue, and some budget experts thought even that wasn't enough.

Meanwhile, the deal postponed $110 billion in spending cuts for two months. It also extended federal unemployment benefits for another year, along with a range of other temporary programs, which will actually raise federal spending by about $330 billion over 10 years.

All told, the deal does little to address the biggest problem in Washington: a skyrocketing national debt that threatens to destabilize the economy and swamp taxpayers if politicians don't deal with it. "The deal that was crafted in another silly, eleventh-hour compromise is devoid of any spending cuts that are an essential component for getting the deficit under control," says Patrick O'Hare of Briefing.com.

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That distresses Republicans, who still control the House of Representatives and are sure to have a lot more to say in 2013 about the need to rein in government spending. Their first opportunity will come in two months, when the next deadline for imposing those $110 billion in spending cuts arises. Since all the heated battles in Washington now go down to the wire—which is when both sides feel they have maximum leverage—this will probably be another installment of fiscal cliff drama, complete with Potemkin meetings, dueling press conferences, and intense strategizing about how to make sure the other side gets the blame for a bad outcome.

This will happen around the same time that the government hits the notorious debt ceiling, which means Congress will once again have to pass a new law allowing the Treasury to borrow more. The last time this happened, in the summer of 2011, it turned into a huge showdown over government spending that accomplished nothing except to set up the spending cuts that Congress has now postponed. But it did reveal that some members of Congress may be willing to let the United States default on its debt, purely for political reasons.

The political rancor that led to the 2011 standoff was a major factor leading Standard & Poor's to downgrade the U.S. credit rating for the first time ever. "The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges," S&P said at the time. It's hard to argue that things have gotten better since.

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S&P also said that it might lower the U.S. credit rating again if there were "less reduction in spending than agreed to" in that final 2011 deal to raise the debt ceiling. Congress has now, in fact, cut spending by less than agreed to, since the new deals postpones the cuts enacted in 2011. So there's a good chance there could be further downgrades in 2013.

In addition to those two cliffs—the new deadline for $110 billion in spending cuts, and the latest debt ceiling limit—there may be tough negotiations coming over reforming the tax code and revamping Medicare and Social Security, in order to make those costly programs more affordable. With so much at stake, those could be bruising battles that make the first fiscal cliff seem like a bunny slope. Congress could also delay the deadline for spending cuts yet again, or approve only a limited debt ceiling increase that brings the issue to a boil a few months hence. One thing that seems unlikely in 2013 is that politicians will deflect attention from themselves.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.