Election season is done. Now that we know we will be seeing Obama at the White House for another four years, the focus shifts to the 'Fiscal Cliff' which has been increasingly drawing public attention. I wouldn't use the term 'panic' just yet to describe the developing situation, but come the end of the year, and if no action is taken, panic might very well set in.
Fiscal Cliff
As I learned in the past two-three weeks, Fiscal Cliff is nothing but a bunch of policies that expire at the end of the year. Policies such as the Bush tax cuts (which favors the wealthy Americans) and Payroll tax cuts among many others are expected to expire at the end of this year. So, if no action is taken, tax rates are going to shoot up for ALL leaving households with fewer dollars to spend.
Secondly, the 'sequestration' cuts will also go into effect come January. These include Pentagon budget cuts of $55 Billion in 2013, $12 Billion cuts to Medicare among other cuts that will see the around $1.2 Trillion reduction in deficit over 10 years.
Potential repercussions
It's quite simple: higher tax rates leads to lesser dispensable income, add to that the fact that money coming into households also goes down as a result of government spending cuts, and we will be faced with a severe 'fiscal contraction'. While the government spending will aide in the long-term deficit reduction, it will not do much good to the economy which is trying to claw its way back to recovery. Large spending cuts leads to slower and slower GDP growth. According to the Congressional Budget Office, these policy changes could lead to almost a 4% decline in the growth of real GDP, meaning a negative growth rate which could thrust the economy into recession again.
Can this be tackled?
If Obama and Congress can eke out a compromise on the policy changes needed, then yes, falling over the fiscal cliff can be averted. Obama wants Bush tax cuts to be extended to all except those those who earn over 250k - he demands that the rich Americans pay a higher tax rate - to which the Republican House has been vehemently against for a while now. They feel that taxing the rich Americans, who they label as 'job creators', would impact business in a negative way, and lead to fewer job opportunities.
Fiscal Cliff
As I learned in the past two-three weeks, Fiscal Cliff is nothing but a bunch of policies that expire at the end of the year. Policies such as the Bush tax cuts (which favors the wealthy Americans) and Payroll tax cuts among many others are expected to expire at the end of this year. So, if no action is taken, tax rates are going to shoot up for ALL leaving households with fewer dollars to spend.
Secondly, the 'sequestration' cuts will also go into effect come January. These include Pentagon budget cuts of $55 Billion in 2013, $12 Billion cuts to Medicare among other cuts that will see the around $1.2 Trillion reduction in deficit over 10 years.
Potential repercussions
It's quite simple: higher tax rates leads to lesser dispensable income, add to that the fact that money coming into households also goes down as a result of government spending cuts, and we will be faced with a severe 'fiscal contraction'. While the government spending will aide in the long-term deficit reduction, it will not do much good to the economy which is trying to claw its way back to recovery. Large spending cuts leads to slower and slower GDP growth. According to the Congressional Budget Office, these policy changes could lead to almost a 4% decline in the growth of real GDP, meaning a negative growth rate which could thrust the economy into recession again.
Can this be tackled?
If Obama and Congress can eke out a compromise on the policy changes needed, then yes, falling over the fiscal cliff can be averted. Obama wants Bush tax cuts to be extended to all except those those who earn over 250k - he demands that the rich Americans pay a higher tax rate - to which the Republican House has been vehemently against for a while now. They feel that taxing the rich Americans, who they label as 'job creators', would impact business in a negative way, and lead to fewer job opportunities.
***
This is where the situation stands at the moment. While Obama has repeatedly said that he is willing to compromise, talks are still not very productive as far as an amicable solution is concerned. The next few weeks will be very interesting indeed.
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