Austerity delayed (The Economist)

Dec 7th 2010, 3:11 by G.I. | WASHINGTON

FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts.

Austerity will have to wait for its turn in the limelight. On Monday Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion  (around 5% of GDP). Though it must still pass the parties’ respective caucuses, this is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook. But it’s a political setback for Mr Obama who gave up more than Republicans did, and worse news for those who had hoped such stimulus would be coupled with a serious medium-term deficit reduction package.

The package comes in two parts. The first is an extension of all of George Bush’s tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended.

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