US budget deal - questions about cuts Every lazy American student knows them - or did, in the pre-internet era: CliffsNotes, the yellow-and-black pamphlets summarising literary classics. Each chapter of War and Peace summarised in a paragraph, with essay topics helpfully suggested. Analogously, the US Congress and the executive branch are close to completing their assignment while avoiding the really hard work. As of midday Tuesday, the Senate has approved a plan that will prevent the automatic and indiscriminate spending cuts and tax increases - the "fiscal cliff" - from coming to pass. The deal's most prominent feature is a compromise on tax rates. Income taxes will increase on couples earning more than $450,000 and individuals earning more than $400,000. Crucially for investors, capital gains and dividend taxes will also increase, from 15 per cent to 20 per cent, but only for those at that same high income level. This mild uptick should provide relief to holders of stocks and bonds. They could have faced, for example, tax rates on dividends that matched income tax rates or an end to the tax exemption for municipal bonds. At the time of writing, the plan was awaiting confirmation by the House of Representatives. More important for investors than these tax changes is how the president and congress manage to cut spending - a question the current deal leaves untouched. Undoubtedly, very high debt (whether held by a government, companies, or individuals) is a drag on growth in the long term. But in the short term, federal deficit spending injects cash into the economy and is funded in large part by foreigners who charge low interest rates. Choking off this cash flow must result in tighter household budgets and/or lower corporate profits, unless the private sector replaces government largesse with borrowing of its own, hardly the desired outcome. The president and Congress had better do their homework before deciding where and when to cut.