Will The U.S Fall Off The Fiscal Cliff?

The ‘Fiscal Cliff’ is an economic issue the U.S government will face at the end of 2012. Undoubtedly, ‘Fiscal Cliff’ is President Obama’s greatest problem during his presidency which threatens to drag the U.S back into recession. Many observers predict this issue will be the defining moment of Barrack Obama’s presidency.

Barrack Obama faces a major problem as he must find a solution to reducing the huge state deficit, which both Democrats and Republicans are satisfied with. Furthermore, Obama knows that he must find a way of raising tax revenues without raising taxes drastically.

Several laws are set to change at midnight on December 31, 2012. This includes the end of temporary payroll tax cuts, the end of certain tax breaks for businesses and the beginning of taxes related to President Obama’s controversial health care reform. Over 1,000 government programs, including the defence budget and Medicare, are going to be cut significantly. Revenues generated from the proposed tax rises and spending cuts are expected to exceed $500 billion – this would go some way to reducing the deficit yet many analysts believe this will lead to another recession. President Obama is in an unenviable situation. However, he does have several possible solutions, which include the following:

  • Allowing the current policy to come into effect as of 1 January 2013, spending cuts and tax would be introduced, but the deficit would be reduced by half. The cuts and tax increases are expected to limit growth and possibly drive the U.S into another recession.
  • Cancelling some or all of the proposed tax increases and spending cuts. This would mean that ordinary American’s would not have to pay more taxes but the nation’s debt would continue to increase, risking a possible crisis similar to that ‘across the pond’ in Europe.
  • Holding a more moderate stance on reducing the deficit could be to opt for an approach that addresses the deficit in a limited manner, but has a more moderate effect on growth.

It seems unlikely that a compromise, which leaves both sides of the political spectrum feeling satisfied, will be achieved. Congress has been stuck in deadlock for almost a year regarding ‘Fiscal Cliff’ which is a major concern for many investors. The dramatic effect it would have on the economy is of major concern for many lawmakers and especially President Obama who is anxious to ensure his legacy is not tainted by poor economic policies. The indecision of Congress is likely to have an effect on the economy before 2013 even begins. The CBO (Congressional Budget Office) believes that a failure to find a solution will lead to consumers and households changing their spending habits and consequently, a reduction in GDP before 2013 even begins.

In the final analysis, it is improbable that lawmakers will allow the ‘Fiscal Cliff’ to remain unresolved and an 11th hour solution is the most likely outcome. However, the most important question for those not living in the United States is, “If the U.S falls off the ‘Fiscal Cliff’, what other nations will be taken down with it?”

Contributed by Namatoulah Bahram

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