Following America’s recent presidential election, the nation’s continued economic woes have become the primary battlefield for the Republican Party and the Democratic Party. The current political buzzword, the looming “fiscal cliff”, has generated apprehension among American citizens the international community alike.

 

United States Federal Reserve Chairman Ben S. Bernanke coined the term this past February to describe the potential consequences should Congress fail to enact legislation to mitigate the economic effects of the simultaneous tax increases and cuts in the budget deficit at the turn of the year.The tax cuts introduced by the Bush administration will expire by the end of 2012 if Congress does not change existing laws, resulting in tax increases. According to the agreement on the deficit cap between the Republican Party and the Democratic Party, should no consensus be achieved among the Joint Select Committee on Deficit Reduction, reduction of the US budget deficit will begin automatically in January 2013, and spending cuts will total 1.2 trillion dollars during the following decade. Thus Congress faces a fiscal dilemma: if the current tax rate is maintained, government take-in will be significantly less than expenditure, leading to an unsustainable budget; conversely, if taxes increase concurrent to spending cuts, economic recovery will likely suffer.

 

Given this dilemma, reduction of the US budget deficit and debt has become the focus and goal of both parties, but opinions remain divided on the scale, scope and methods to facilitate the reduction. The US budget deficit for 2012 was reported at 1.089 trillion dollars by Sept 30, marking the fourth straight year the deficit has exceeded one trillion dollars. However, it is less than that of 2011 (1.297 trillion). Reduction of the US budget deficit and debt will still be a difficult problem for the United States in the future.

 

Given the continued lack of agreement on economic policy between the two parties, combined with decades of the US economy running below full production capacity (idle assets have reached their highest levels since 1987), the road to genuine recovery is bound to a prolonged and arduous uphill journey. In recent years and in this year especially, American politicians and businessmen have warned of the looming fiscal cliff facing the US economy if policymakers continue to ignore the combination of spending cuts and tax increases at the end of 2012: businesses will be less likely to hire and will invest with caution, causing a relapse of economic stagnation. The IMF has also warned that if the White House and Congress fail to reach an agreement, the concurrence of the spending cuts and tax increases will lead to contraction of the US economy during the 2013 fiscal year.

 

At present, the global market is filled with trepidation as the end of 2012 approaches; however, there is still inadequate information to indicate the impact that plunging off the fiscal cliff may have on the US economy, and the consequent ramifications for the world economy. In the end, America will either stop in the nick of time or fall off. The fiscal cliff is the pressing political issue right now, in the wake the presidential election. Given the current situation, neither the Democratic Party nor the Republican Party is willing to jeopardize America’s already weak economic recovery by rigidly adhering to their own agendas and thus being reproached by the American public. Therefore it is relatively likely that the two parties may reach a tentative compromise in order to overcome—albeit partially—a the current crisis (though not completely) by prolonging the lower tax rate and easing budget cuts to pull America back from the cliff so that the American and the world economy will not be dealt another blow.

 

Gu Yuanyang is from Institute of World Economics and Politics at Chinese Academy of Social Sciences.

 

The Chinese version appeared in Chinese Social Sciences Today, No. 391, Dec 12.

 

Translated by Jiang Hong

Revised by Charles  Horne