With the US Presidential Election being decided today, the above video primer by the Wall Street Journal (WSJ) on the US “fiscal Cliff” is useful. The fiscal cliff is $US600 billion in tax increases and spending cuts that will automatically become law at the beginning of 2013 unless Congress acts.
Under the changes, tax rates would revert back to the levels prevailing before the tax cuts brought in by President George W. Bush in 2001, and $109 billion of automatic spending cuts would be made to military and domestic programs.
The fiscal cliff’s automatic triggers were built into law as a way to force lawmakers to tackle huge US budget deficits. However, if implemented, the cuts to spending and tax increases risks cutting US GDP growth significantly, plunging the economy back into recession.
At this stage, most analysts believe that Congress will reach some kind of deal that pushes the deadline for the cliff back, or modifies it in some way. But there remains an outside chance that a deal won’t be struck in time, sending the economy and markets into a tailspin. This scenario is probably more likely should Obama win today’s Presidential Election, resulting in a Democratic President and a Republican-majority Congress.
Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
