the u.s. and the fiscal cliff’ (part 2)

But first… a reminder of what I wrote about last week. The idea was to set the scene for what might happen at the end of this year by reminding you what happened a year ago. The US Congress decided that it was perfectly OK to play Russian roulette with the US economy by refusing to agree a federal budget. Only at the eleventh hour, just as the US government was about to run out of money, did the politicians come to their senses.

 

As a direct result of this fiasco, the US lost its triple-A credit rating for the first time in its history, the stockmarket and other markets plunged, and the already low level of esteem that the electorate had for politicians took another downward lurch.

 

I left you last week with this question hanging in the air: Could something similar happen again. The answer: Yes it could. Within 5 months. And it’s all down to the fiscal cliff.

 

Now read on!

 

This is what is meant by the fiscal cliff. At the end of this year, if nothing is done, these events take place simultaneously:

• The Bush era tax cuts will come to an end, as will a temporary cut in payroll tax. The result: An average middle-class family will see its tax bill rocket by $1,750 next year. Collectively, Americans will pay an extra $450 billion in tax, sapping fragile consumer spending power.
• Taxes on capital gains and dividends will rise, potentially threatening new investment.
• The Pentagon’s budget will be automatically slashed by $500 billion over the next 10 years. 
• The budgets of other federal departments apart from the Department of Defense will be slashed by $50 billion in 2013. 

All around the world, for example from the EU and IMF, there is deep concern that the frail recovery in America cannot stand up to to this level of spending cuts and tax increases.

 

With the two US political parties as polarised as they are, coming to some sort of compromise would be difficult at the best of times.But it will be even worse than usual in the run-up to the new year because of the looming elections on 6 November. The period from then to the end of the year is known as the “lame duck” session, because nothing much gets done until the newly elected law-makers take up their seats in January.

 

So the omens don’t look good.

 

But there’s more. Last week, I told you about the US budget debacle. We could get a repeat of that in 2013. 

 

In August 2011, the debt ceiling was raised at the eleventh hour to $16.4 trillion. Since then, debt has already risen to more than $15.8 trillion, and all the indications are that the ceiling will be hit again at the end of the year, just as America is poised on the brink of the fiscal abyss. 

 

Believe it or not, it gets worse.

 

As part of the last budget compromise, a special committee of Congress was charged with identifying a further $1.2 trillion in government savings over the decade. The deadline for agreeing these savings was November last year. Predictably, the Committee failed to agree. That has triggered $1.2 trillion of automatic across-the-board cuts… starting in 2013.

 

So there you have it. A triple whammy for the US economy.

 

US commentators have had a fine old time mocking the EU. And some of the mocking is deserved. But at least when the chips are down, EU leaders have always come up with some sort of compromise, imperfect though it may be. 

 

If I had to bet on the chances of political agreement in Congress, I reckon the odds would be about the same as no more rain falling on Britain in the next 24 hours.

Courtesy ot Trendwatch