Implications of American Fiscal Cliff

By: Blair Logan

In the recent U.S. election that saw President Barack Obama return to office, attention now turns toward reconciling the “fiscal cliff” and policies to lower the United States budget deficit.

Reconciling the American fiscal cliff is at the forefront of concern across global markets  erasing rallies and optimism in investor outlook. In the previous week of trading following Obama’s re-election,  the S&P 500 lost 2.4 percent, it is biggest decline in the last five months.  As risk and uncertainty spreads throughout markets,  an effective solution towards resolving the American budget deficit remains in debate.

This week the president has invited top Democratic and Republican leaders to the White House, beginning  talks on a plan to settle the fiscal cliff. Without any action from Congress, over $600 billion in spending and tax increases are scheduled to commence effective this coming January as a first approach in the deficit reduction.

Obama also welcomed input from labor leaders and business executives including Kenneth Chenault from American Express Co. “He’s trying to build support for extending middle-class tax cuts now and designing a balanced approach that relies on spending cuts and tax increases that would require immediate concessions from Republicans”.

It appears Democrats wish to continue their political momentum following President Obama’s re-election, creating a policy increasing taxes on the most wealthy in the nation. Republicans may wish to maintain the status quo as each day goes by the U.S. approaches the $16.4 trillion dollar debt limit which would ultimately hand republicans a political edge.

Spending would most likely be reduced in the form of cuts to defense spending while increased tax rates on income, capital gains and dividends would warrant unfavourable reaction toward public American corporations.

Revenues increased in October $21.2 billion in comparison to last year shedding some light on the current situation, however, spending similarly jumped $42.8 billion according to the U.S. treasury.

Until the end of 2012,  it remains unclear whether an optimal solution to the fiscal cliff will be reached adding more uncertainty to financial markets in addition to troubles in Europe and weak corporate earnings.  Martin Feldstein of Harvard University states “ By the end of this year I think at best they can agree to put things off for six months. There is not enough time, but there is time to put something in place that is better than the fiscal cliff.”