Find below a neat new note wrapping up the fiscal cliff conundrum from the always good value Bill Evans of Westpac. In summary:
Without an agreement over the fiscal cliff, the US is facing a potential 4ppt reduction in net government spending in FY2013 that would almost surely result in a recession.
• Yesterday’s election result with the Democrats retaining the Presidency and the Senate and the Republicans holding the House means that the parties will need to compromise.
• As in 2011, another messy debate will likely end with a last-minute agreement, postponing austerity. But in doing so, Congress and President Obama are buying short term momentum at the expense of medium to long-term prosperity. Fiscal retrenchment is inevitable as the US debt trajectory is clearly unsustainable.
• Given the scale of the debt stock and the implications of an ageing society, there is really only one solution: action to phase in a matching of receipts to expenditures. This action has to be realistic, but be mindful of the short-term damage that could be rendered on the fragile economy by an immediate fiscal tightening of the order of the current fiscal cliff.
Er 20121108 Bull President Obama Fiscal
