The world nervously watches as US fiscal cliff drama unfolds

The world nervously watches as US fiscal cliff drama unfolds

Washington : DC : USA | Nov 13, 2012 at 6:48 AM PST
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The eurozone debt crisis and a looming fiscal cliff in the United States could have

The mainstream media, bloggers and pundits have, during the past week, immersed themselves in post election analysis and the David Petraeus sex scandal. While the drama is played out very publicly, another drama is unfolding in Washington, the fiscal cliff. As it unfolds the world is watching nervously, hoping that US politicians find a reasonable solution.

The fiscal cliff: What is it?

The term fiscal cliff was first used by Federal Reserve Chairman Ben Bernanke during congressional testimony. It refers to the sequestration agreed to by the White House and Congress, should a solution to reasonable spending cuts and deficit reduction not be found. The US is currently forecast to operate with a $1.1 trillion deficit for 2013, and the debt has reached $16 trillion.

While both Democrats and Republicans agree that current spending is not sustainable, they have continued to kick the can down the road and are now forced to act.

The fiscal cliff refers to approximately $600 billion in spending cuts and tax hikes, primarily based on payroll tax cuts for Social security, elimination of the Bush tax cuts, and spending cuts to defense roughly worth $110 billion.

Estimates are that the elimination of the Bush tax cuts would put a tax burden of an additional $3,500 on American households. It goes without saying that this would adversely affect families and consumers. The Congressional Budget Office estimates that it would impact the unemployment rate by jumping from 7.9 to 9.1 percent, while cutting growth by 5 percent, pushing the economy into a recession. The sequestration would automatically take effect on January 1, 2013.

Partisan politics

For the past two years both political parties took an ideological stand. The Democrats advocate retained the Bush tax cuts for those with incomes under $250,000 and eliminating them for the rich. The battle cry was that the rich need to share in the pain and pay their fair share.

On the other hand, Republicans are stuck on no tax cuts at all, but to increase revenue through comprehensive tax reforms and elimination of some redundant programs.

The past two years have been filled with gimmicks, innuendo and accusations, but there seems to be an appetite to resolve the problem, with concilliatory remarks by both sides. How much of that is rhetoric remains to be seen. President Obama has invited congressional leaders to the White House to find a compromise.

Effects on the global economy

As the worlds largest economy, what happens in the US impacts the remainder of the world. Nowhere is this more apparent than in Canada. Approximately $1.7 billion in export crosses the US/Canada border daily. To remove that kind of money out of the US economy would certainly impact on consumer confidence and will leave less disposable income for discretionary spending.

The impact would also be felt in Europe, which has its own debt crisis, and Asian economies. A failure to act would, in all likelihood, push the global economy into recession.

Canada's Prime Minister Stephen Harper recently opined that the world would be immensely helped if the US could deal with this immediate issue. He also told Obama that he must deal with the fiscal cliff.

This was echoed by Canada's finance minister when he told reporters that the fiscal cliff is the "biggest" international economic risk facing Canada and other countries.


While failure to act will not play out immediately, it will have an effect througout 2013. Congress has an obligation to act and show leadership both in the United States and the world. Americans should expect it and the world does.

The financial calamity of 2008 has affected the global economy and the world certainly doesn't need another US-initiated recession.

Congress and the president need to act, find a suitable compromise and get this situation resolved. Two years of uncertainty is enough. The election is over and politicians should get over their collective ego and do the right thing. Nothing less will do.

Source: CBC Canada's stake in the US fiscal cliff

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Fiscal Cliif - Consumer Confidence
Not acting on the fiscal cliff will adersely affect the economy and consumer confidence
Karl Gotthardt is based in Edmonton, Alberta, Canada, and is an Anchor on Allvoices.
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