United States – The Fiscal Cliff
December 11, 2012 in U.S.
Much has been written and discussed about the ominous ‘fiscal cliff’ that looms ahead of the US economy by December 31.
Just as a refresher, here’s a brief description of the event that is causing so much stress on Capitol Hill and in the world’s financial markets.
In August 2011, the United States hit its debt ceiling, a statutory roadblock that kicks in when profligate spending, not funded by budgetary revenues, but instead, funded by debt, reaches the most it can.
The debt ceiling threatened to immobilize the government, and a via media was found. That was to increase the debt ceiling, but with a rider. The government must find a way to lop off about $1.5 trillion from its budgetary deficit over the ensuing decade. This action was put under the supervision of a super-committee, formed with representatives from both parties, and this committee had until November 2011 to arrive at a consensus solution for achieving the $1.5 trillion target.
There was also an ‘or else.’
If the super-committee was unable to agree on the way forward, spending cuts would automatically kick in with effect from January 1, 2013.
These cuts would cause a reduction in government spending, aggravating recessionary conditions in the country, and making unemployment worse.
There is another side to the fiscal cliff. And that is the expiry in December of a host of tax cuts going back many administrations. Add to that additional taxes imposed by President Obama which will take effect from 2013. The net result: more taxes means less money in hand means less spending means an economic slowdown. So, more recession.
The fiscal cliff refers to these twin events of an involuntary spending cut and a radical shift in the tax regime.