Simon Williamson

It is not a fiscal cliff

2012-11-30 08:13

Simon Williamson

Listening to the terms rolling around the world's mainstream media over the last few weeks, one would think the global economy is going to tank on December 31 when the US' "fiscal cliff" - an automatic series of tax increases and spending cuts - kicks in.
Last year during much publicised negotiations to raise the USA's debt ceiling - negotiations which went so badly the world's biggest economy saw its credit rating cut by Standard & Poor's - the government explored dealing with its gaping pile of debt, and annual budget deficit. The gridlock eventually produced the Budget Control Act which was signed into law by President Barack Obama in August 2011, and set up a "super committee" to deal with the deficit and debt, failing which a series of tax increases and spending cuts would kick in at the end of this year - hence the "fiscal cliff" term coined by US Federal Reserve chairman Ben Bernanke.

You know as well as I do that the fortunes of the world kind of depend on the American economy's health.
Well, the super committee expectedly brought us a bucket of Imran-Tahir-Department-of-women-children-and-people-with-disabilities-Facebook-share-price zilch. Hence the current repetition of "fiscal cliff" across the headlines of America.

A self-fulfilling prophecy
In a nutshell these tax increases are actually the expiration of a series of tax cuts enacted in President George W Bush's first term, while the spending cuts are a $1.2-trillion slash in spending across the board, with a few exceptions. It sounds bad. And repeating the term "fiscal cliff" ad nauseum makes it sound even worse. As if we will reach should there be no deal, and plummet to our deaths.
And due to the media's continual use of the term, there is a very real chance the markets could be spooked if Congress doesn't reach a deal before December 31, and therefore become a self-fulfilling prophecy.
Why a self-fulfilling prophecy? Because the "fiscal cliff" isn't a cliff at all. If we get to 31 December with no deal, nothing noticeable is actually going to happen in the short term. If Congress comes up with a deal sometime in January then nothing major will have actually happened.
The few daring pundits who sought to explore exactly what will happen if no deal is reached by the end of the year have started calling it a "fiscal curb", which is a far more appropriate name. If no one ever does anything about the rules that kick in on December 31, then of course it will turn nasty.
But let's look at the reality.
The first sign that anything will have changed relating to taxes is when people are paid for days worked in January - due to the expiration of the Bush tax cuts these people will receive up to 2% less money for middle-income earners as they pay more in tax (it will be higher for upper-income earners). This can be retroactively fixed in later paycheques (ie - you will pay less tax on later paycheques) if a deal is collectively signed, so in the short term there will be the same amount of money rushing around the economy. And there are also steps those in charge of government income can take to soften the blow for everyone.
Spending will continue

The spending cuts of $1.2-trillion seem significant, and they are. But they are being phased in over 10 years. If there hasn't been a deal worked out by then… well, yes. That's a reason for concern. $1.2-trillion over 10 years is $120bn per year. For perspective: this year's proposed total expenditure was $3.8-trillion - that's just over 3% of the annual spending Obama wanted this year. While not easy to deal with, the cuts are hardly catastrophic, and the smart people in charge of national departments can mitigate its effects.
So spending by government and private citizens will continue even if a deal is only struck next year, albeit in a less desirable fashion. But the longer we all go without a deal, the worse it will get.
Which means the media's use of the term "fiscal cliff" is irresponsible, and spreads the word that from December 31 the US economy is going to unexpectedly hit the ground somewhere after falling off a ledge - thereby affecting the whole world's economy. It is most certainly not, and continually telling investors, capitalists and those with money to haul out of perfectly functioning businesses in a slowly regrouping economy that there is anything resembling a "cliff" is shameful. There is nothing that cannot be fixed from January 1 if a deal is not struck by December 31.
The only problems will come if congress never acts, and that would be a slide down a deep fiscal slope - and would be a surprise, even for the current gridlocked folks tasked with not screwing up America.

- Simon Williamson is a freelance writer.

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