The leading world economies pressed the United States on Sunday to act decisively to avert a rush of spending cuts and tax hikes, warning that the so-called ‘fiscal cliff’ is the biggest short-term threat to global growth.
A divided US Congress, whatever Tuesday’s results, needs to reach a tax agreement to prevent a looming real global recession
Unless a fractious Congress can move swiftly to reach a deal after the US elections on Tuesday, about 600 billion in government spending cuts and higher taxes are set to kick in from January first and could push the US economy back into recession.
“If the United States fails to resolve the fiscal cliff it would hit the US economy hard as well as the world and the Japanese economy, so each G20 country will urge the United States to firmly deal with it,” Bank of Japan Governor Masaaki Shirakawa said before a meeting of Group of 20 finance ministers and central bankers.
European delegates at the G20 meeting in Mexico City were particularly keen for details on the US plan, according to those present at preparatory talks.
Canadian Finance Minister Jim Flaherty said that in terms of short-term risks to the global economic outlook, the US fiscal cliff outweighed Europe's debt crisis.
South Korean Finance Minister Bahk Jae-wan forecast the global economy could suffer during the first quarter of 2013 because of uncertainty about the fiscal cliff.
“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets” said a draft declaration from G20 meeting. (emphasis added)
That same article offers three alternatives.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare are in line for "deep, automatic cuts."
Now this, of course, is not a thorough analysis but it's a good start.
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
•They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
•They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
•They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
I'm not sure I follow this, either. I could imagine a significant GDP drop the moment it's put into effect. Government spending, one part of GDP, takes an immediate hit. Riase the tax rates and investment might go down. I would expect that, since an additional 2% will be taken out of everyone's paychecks, consumption will go down.
but as a side effect lower the GDP,the GDP drop takes time to set in whereas the interest rates would drop imediatly and lower both short term borrowing and long term borrowing costs.
But didn't we try that with the stimulus program? You remember, shovel-ready jobs and green energy factories? Why would it work this time? And you're suggesting that the government borrow money and give it to private companies? That might not be politically feasible, especially since there have been cuts in Medicare, a very popular program.
you borrow at the lower rates heavily and put the savings back into the productive sector, which has fast acting short term effect on GDP, (build road internet or maintenance of infrastructure assets)