Will America fall over the “fiscal cliff”?
3 mins. to read
Have you heard of America’s “fiscal cliff”? If not, be aware that in just 176 days’ time, unless the US Congress gets a grip, America could fall off the edge of of it, plunging the nation into crisis.
More about that in just a moment. But first, to give you some context, think back to the great US debt ceiling crisis of a year ago.
Under US law, the federal government can pay out its expenditures only if Congress has approved the expenditure. If there is a budget deficit (that is, if expenditure exceed revenues) then the government must borrow. But the amount it can borrow is capped by Congress: the so-called “debt ceiling”.
In February 2010, the debt ceiling stood at $14.494 trillion, thanks largely to George W Bush’s tax cuts for the rich plus two ill thought out wars in Afghanistan and Iraq.
In April 2011, Congress finally voted through the 2011 federal budget. But almost immediately after this, the debt ceiling was reached. There then followed a furious debate about whether the ceiling should be raised yet again, left as it was or even adandoned altogether. The Treasury Secretary explained that the US could stagger on until 2 August 2011 by selling assets, but then it was crunch time – a debt default by the US government that would result in a cut in spending by federal departments of some 40%.
Meanwhile, the ratings agencies warned repeatedly that a default would result in the US losing its triple-A credit rating for the first time. Finally, on 30 July 2011, the leaders of both parties agreed a complex compromise. The bill was finally signed into law by President Obama right on the deadline of 2 August.
The very next day, the US national debt rose by $238 billion (about 40% of the newly agreed ceiling) – the biggest one-day rise in US history. This put the US in a select band of countries whose debt exceeded 100% of GDP; namely Japan, Greece, Jamaica, Lebanon, Italy, Ireland and Iceland.
Then all hell broke loose. The ratings agencies carried out their threat to take away America’s triple-A rating. The Dow plunged 5.6% in one day, its biggest loss since the banking crisis of 2009. Commodities prices also plunged. International governments condemned Congress for its irresponsibe brinkmanship; and respect for US politicians among the US electorate plunged to new lows, with the Tea Party and the Republicans losing the most credibility.
The question is: Could the same thing happen again? Indeed it could. The debt ceiling will need to be raised again by early 2013. But something rather different – and even worse – could happen just before that, on 31 December. That’s when America arrives on the very edge of the fiscal cliff and peers into the abyss. If it plunges over the edge, a disastrous situation could unfold even before the debt ceiling reaches another potential impasse.
What is fiscal cliff? “Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012. U.S. lawmakers have a choice: they can either let current policy go into effect at the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – or cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe.
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