US teeters on edge of fiscal cliff
It’s been described as a fiscal cliff – the looming raft of spending cuts and tax hikes that will send the US economy back into recession if a deal is not done by the end of the year. But the wrangling among lawmakers makes this more of a political cliff-hanger.
Buoyed by victory in last month’s election, President Barack Obama is pressing to include tax increases on the richest Americans in any deal in order to avoid the automatic introduction of $607 billion (€460 billion) in spending cuts and tax hikes from the start of next year.
Obama’s re-election for a second term has given momentum to his case for tax increases on US households earning more than $250,000 a year.
The political capital banked from his second win gives him leverage over the Republicans at a time when the GOP undertakes painful soul-searching in the wake of Mitt Romney’s presidential election defeat.
Republican factions aligned to the far-right Tea Party movement have been uncharacteristically quiet in the bickering, while businesses have shifted position and encouraged Republican politicians to abandon their no-tax-increase foxholes.
The latest economic crisis to face the US has enlivened what is usually a quiet political period between the presidential election and the inauguration.
The crisis stems from the decision by Congress and Obama in 2010 to extend George W Bush’s tax cuts for a period and a deal last year to curb the ballooning deficit that kick-starts nine years of spending cuts totalling $1.2 trillion next month.
The effect on the economy of failure to avoid the cliff next year is the equivalent of 3.5 per cent of GDP, the value of the spending cuts and tax hikes sucking $607 billion out of the US economy.
Most of this comprises $399 billion in tax increases, mostly from the expiry of the Bush-era tax cuts. The remainder is made up of $103 billion in spending cuts and $105 billion in other changes to state revenues and expenditure.
Some see the fiscal cliff negotiations as the latest skirmish in a long-running failure to address a rising debt mountain and runaway spending growth on defence and healthcare.
“I would argue that we have already gone off the cliff, given that the country is $16 trillion in debt,” said Tad DeHaven, a budget analyst at the non-partisan Washington DC-based think tank, the Cato Institute.
“Neither party has any plan to deal with the fiscal imbalances, which are going to get worse and worse as the years go on,” said DeHaven, who has worked for two Republican senators and a governor.
As Obama and the Republican House of Representatives speaker, John Boehner, the party’s top man in Congress, slug it out on a deal while the clock ticks towards the deadline, polls show a high level of support for the President and for an agreement being reached.
Obama’s approval rating on his handling of the negotiations stood at 49 per cent this week compared with Boehner’s 25 per cent, according to a Washington Post/ABC poll.
Another poll by the Wall Street Journal and NBC News on Wednesday found that about two-thirds of Americans of all political hues would like Congress to strike a deal to reduce the federal budget deficit, even if it meant reducing Social Security and Medicare state healthcare payments, and increasing taxes.