Millennium Post

Falling of the fiscal cliff

Even as President Barack Obama is on a desperate struggle to secure his second term against Republican rival Mitt Romney, who named arch-conservative Paul Ryan as his running mate, a new warning of the United States going into recession in 2013, with an unresolved ‘fiscal cliff’ hanging over the American economy, has now been sounded by the non-partisan Congressional Budget Office [CBO].

The world’s largest economy is growing currently at around two percent with unemployment at 8.2 percent. Recovery has remained tepid over the three years since the worst financial crisis and Great Recession [2008-09]. It is in this context that CBO predicts growth declining by 0.5 per cent next year, if the Bush era tax cuts, along with payroll tax cuts by the Obama Administration, are allowed to expire at the end of 2012 as scheduled, and the deep spending cuts of the Congress also take effect.

These are the elements of the dreaded ‘fiscal cliff’, about which the IMF has already expressed strong concerns. The CBO report, an update of budget projections for 2012/2013, brings into sharper focus the risks for the economy and job numbers, the dominating theme of the 6 November elections. The combatants have so far traded accusations and Obama has held up his rival’s failure to file tax returns for years.

Overlooking the Wall Street misdeeds which led to the 2008 crisis, Romney holds the Obama policies responsible for the economic slide and joblessness, and the Republicans have made no secret of their determination to repeal his two major legislative accomplishments – on health care for more Americans at affordable costs and the other setting out tough regulations for Wall Street financial institutions.

President Obama has been valiantly defending his record of having rescued the economy from collapse – stabilising the financial system, restoring the health of America’s auto industry and revving growth.

More than three million new jobs were created in the last three years, he cites, and the unemployment rate could be lowered to 8.2 per cent, though still high historically. He argues for the middle class and wants the wealthy to share the tax burden.

Both candidates appear to be engaged in an unprecedentedly tough election, though polls at intervals give the president a slight edge.

President Obama’s call on Congress to agree to a ‘balanced package’, blending significant spending cuts for the next decade with some revenues for investment-led recovery, has been stoutly resisted by the Republican-controlled House of Representatives which wants to preserve the tax cuts for the wealthy indefinitely as against the President’s proposal of limiting extension of tax cuts only for those below 250,000 dollar incomes.

The President’s approach has found resonance in IMF’s latest appraisal of the US economy which said that if policy makers did not address the uncertainties related to the fiscal cliff early, the economy would begin to contract early in 2013 with negative spillovers felt around the world. There would be even less global demand from the US while the eurozone, with debt crisis, is already in recession this year.

The IMF suggested a medium-term plan to reduce the debt to more sustainable levels through a gradual reduction of the deficits and also said the federal debt ceiling should be raised well ahead of the deadline to remove risks of financial market disruptions and loss of confidence of business and consumer, whose spending may be held back by uncertainty about tax rates and government spending levels.

The Federal Reserve Chairman Mr Ben Bernanke also warned the Congress that even the small gains in the hesitant recovery would be lost if the fiscal challenge is not tackled in a way that provides for both long-term sustainability and support for strengthening the recovery. Otherwise, the scheduled spending cuts and expiring tax breaks could cost American taxpayers 310 billion dollars in tax increases in 2013.

Coinciding with the CBO report, the published minutes of the Federal Reserve Board meeting held early in August point to the central bank’s readiness for new steps such as another round of buying bonds should the economic signs weaken further.

This possibility is coming up in the midst of the Presidential campaign and the known Republican criticisms of earlier Fed actions in enlarging its balance sheet. The Fed meets again on September 12-13. Seizing the CBO update to buttress the Administration stand, the White House said the House Republicans should follow the Senate’s lead and pass a bill that gives confidence to the middle class, some 114 million Americans, that their taxes will not go up on January 1, 2013.

Republicans have so far held such exemption for middle class hostage to the Obama Administration agreeing to give tax cuts also to millionaires and billionaires which are ‘tax cuts we can’t afford and that would do nothing to strengthen the economy’, the President’s spokesman said. It should only be for 98 percent of Americans and 97 percent of small businesses. [IPA]
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