FISCAL CLIFF

Fiscal Cliff



Fiscal Cliff

Introduction

The U.S. economy faces a worrisome macroeconomic situation that might occur at the beginning of next year. The phenomenon, called "fiscal cliff" (cliff tax), due to take place by the end of this year, the tax cuts enacted in the Bush administration and the enforcement of reduced government spending significant amounts from next year (Williams et al, 2012). The term 'fiscal cliff' has recently been put forward to denote the expiring date due end of the current year that is 2012 when various tax cuts will be restored which is coinciding with range of government spending cuts. Among the taxes includes the Bush era tax cuts, the 2010 Obama tax holiday, partial expensing of investments and the onset of tax provisions to support the implementation of the 2010 Affordable Health Care Act. Accompanying theses tax measures are spending changes that include the expiration of emergency unemployment benefits, a scheduled reduction in Medicare payment rates, and the start of what is referred to as “automatic sequestration” or across-the-board cuts in discretionary and defense spending under the 2011 Budget Control act (Bloomberg Brief, 2012).

The sum of both effects (increased taxes and lower government spending) could be around 5% of GDP and is almost certain that this will lead to a recession in the short term. Some analysts estimate that subsequent to the materialization of this phenomenon, the U.S. economy would grow by just 0.5% in 2013, vs. 3% or more if taken corrective action. A stagnation of the U.S economy coupled with the euro zone has global effects (RBS, 2012).

Impact

The election of the President and the renewal of houses of Congress in the election on Tuesday, will be able to unlock the very dangerous situation of an economic point of view in which lie the United States. Indeed, coincidentally, a number of fiscal and budgetary measures expire on 31 December 2012. In the absence of new agreements on these issues, we could see a massive increase in taxes and a reduction also massive spending in 2013, with a very high risk of a new recession.

Although the problem of the (very high) government deficit and debt of the United States is simple in theory, it is in practice presents a dilemma for the policy makers. On one side is the Republicans who advocate a reduction in expenses and oppose the tax increase. On the other side, Democrats believe that they can reduce some expenditure items, but not much, and that ultimate burden of adjustment would be on the side of taxes, particularly falling on the wealthy. The recent elections have regarded to major juncture in the development of this debate.

The debate does not end here. According to many analysts, this would be the best thing that could happen to the economy. It is just as tantamount to swallow a bitter but effective medicine, which will soon restore the health of the patient. If fiscal cliff moves the US economy into official recession, indeed, it would follow ...