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Looking Down the Fiscal Cliff

Looking Down the Fiscal Cliff

607,000,000,000 (607 billion) – a gigantic number. The United States faces budget cuts of this magnitude on New Year’s Eve if the Obama Administration and the Congress will not be able to reach a solution on Governmental austerity measures this year.

The background: With the Budget Control Act of 2011, President Obama and the Republican-dominated House has set up a Joint Select Committee on Deficit Reduction consisting of six Republicans and six Democrats (the so-called ‘super-committee’) to agree on balanced cuts in governmental spending that should reduce the high deficit without dampening US economy disproportionately.

However, even though the Act secured continuing debt service, the super-committee felt prey to the prevailing ideological gridlock in Washington and so far foundered on a consensus. This means that the bold terms of the Budget Control Act will automatically take effect, resulting in ending temporary tax cuts and the introduction of new taxes related to Obama’s health care law.

In addition, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will also begin to go into effect. Over 1,000 government programs – from the defense budget to Medicare – will face tremendous, automatic cuts. This “fiscal plier” of rising taxes and decreased spending would not bode well for the country.

Economists frequently use the term “fiscal cliff” to describe the possible negative impact on the feeble US economy. The analysis of the Congressional Budget Office (CBO) augurs that the GDP will shrink by heavy four percentage points while Unemployment will rise to 9% in the second half of 2013, eradicating about two million domestic jobs.

Both parties agree on the pending issue of budget cuts, but the dichotomy in terms of tax increases has so far torpedoed any joint declaration. Even though nobody wants to bear responsibility for the abysmal effects, decision-making has been delayed over and over again – and thus preparing the country for a cliff-jump.

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About Hendrik Depenau

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