America avoids taking the plunge over the cliff but the alternative leaves many unsatisfied, especially Republicans, 151 voting against such a deal while 85 approved. Despite the still shakily put together agreement, this has helped Obama gain back some momentum and a relief to the majority of American tax payers who won’t see a rise in their taxes for now.
Obama knew the looming fiscal cliff would be the first hurdle after his re-election. A difficult reality especially when unemployment figures had been steadily falling since September. While the US economy still remains fragile this fiscal cliff crisis has the potential in setting its recovery back dramatically. Coupled with the uncertainty within the euro area and looming bailouts, adding on a weaker American economy will have a devastating impact on the global economy.
This cliff involves a set of federal tax hikes and spending cuts to hit in early 2013 amounting to $600bn. This has led economists to warn of a double-dip recession creating an increase in unemployment and hitting more middle to poor income families hardest. This crisis would also effect military budgets, payroll tax cuts, unemployment benefits and healthcare programmes. These tax increases and spending cuts come in response to the expiration of the Bush tax cuts which see income tax rates raised from 35% to 39.6% on incomes of up to $250,000. What’s more, the government is set to max out its borrowing capacity of $16.394tn, reminiscent of the debt ceiling crisis in 2011 which resulted in a downgrade on the US credit rating by the rating agency Standard & Poor’s.
If both parties knew that the country was being driven towards this fiscal cliff, why haven’t they tried to see past their differences and work towards an agreement? The deadlock comes from the Republicans forcing more spending cuts through in order to bring down the deficit, while Democrats want tax increases to continue to reduce cuts to public spending that would damage their healthcare and welfare benefit schemes. So once again, the Republicans fail to barter out a deal with the Democrats out rightly opposing any deal that will raise taxes, creating uncertainty on the world markets which I am sure we will see again in 2013. If America were to fall over the fiscal cliff, the projections show that its growth would contract by 0.5% and unemployment would rise to 9% according to the Congressional Budget Office.
Now, a deal has been finally agreed giving world markets a relatively optimistic forecast and at least two more months of respite until a more tangible deal must be struck. This deal has seen relatively many losers on both sides as Obama will only raise about half the amount of money he was hoping to receive from tax rises on the wealthy. However, cuts to welfare programs will be less brutal, the government will inevitably have to borrow more in order to pay for this deal. This will mean when the two month fix nears its deadline, we will see America returned to the edge of the cliff once again.