Monday 12 November 2012

USA: Political cliff to fiscal abyss


A creaking siren on an unprecedented fiscal crisis has rung in the United States of America just the next day of the re-election of Barak Obama for four more years to US presidency. Three days after his victory speech, President Barak Obama rendered his first public comments giving birth to the pending debate over looming fiscal cliff. The debate is divided as usual. Obama reiterated his stance to not budge on Republicans’ demand of keeping taxes alike for all and sacrificing social expenditure. He is still of the view that people making more than $250,000 a year must pay more taxes which he says is acceptable to the vast populace of America as is validated by him achieving four more years. This is likely to start a new phase of political wrangling over sensitive fiscal issues, that will keep the whole financial world on cliff of uncertainty for weeks to come.

The beginning of the New Year sees the deadly combination of automatic tax increases and spending cuts that economists predict could push the US back into recession. In order to prevent its occurrence, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of moderate cut in spending cuts and while steep increase in taxes.

Americans have long been pampered with low tax rates. Apart from this, colossal public spending on education, health care, infrastructure and technology has led to the current crisis of higher fiscal deficit in the US economy. America has to resort to tax increases and spending cuts at the sunset of this year to fix this deficit crisis. US Congressional Budget Office (CBO) estimates that this combination of lower spending and higher taxes is expected to conglomerate about $600 billion from the economy but at the same time would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). It also predicts that unemployment would rise by almost a full percentage point reaching to 9.1 percent range, with a loss of about two million jobs. Due to the expected negative impact of fiscal cliff, the American lawmakers are in a tizzy whether or not raise the taxes and reduce spending.

Obama is ready to compromise to some extent but vehemently refuses to agree on  Republicans’ demand of annulling tax hikes for affluent. Exit polls of voters released Tuesday showed that 47% of Americans supported Obama's proposal to raise tax rates on income above $250,000 for couples. In addition, 13% said everyone should pay more in taxes, while 35% were against any tax increases. On the other hand Republicans who are in majority in the House of representatives, the lower  house, avert to go along with the President on the ground that it would cripple the growth of small businesses those are still struggling hard to overcome the repercussions of earlier recession. Republican House Speaker John Boehner said he remains unwilling to raise tax rates on upper-income earners. But he left open the possibility of balancing spending cuts with new revenue that could be achieved by revising the tax code to lower rates but also eliminate some tax breaks. Hence it is a tough call for Obama to reach an agreement in the Congress.

 Obama and speaker Boehner in their respective speech seemed to put the burden of averting fiscal cliff on each other while the whole world expected prudent answers from them. The vicious altercation between democrats and republicans over the issue of debt-ceiling in 2011 is well known. It led to an unprecedented downgrade of the US credit rating BY S&P. Hence, if the deadlock between both the parties still persists and no legislation passes before the year-end the US economy will be badly affected resulting into an economic disaster worldwide. Is the world going to view another round of brinkmanship in US politics ? … Clock is ticking for America. 
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