The presidential election campaign is being waged by President Barack Obama and conservative challenger Mitt Romney under the shadow of an unprecedented political and budget crisis. The "fiscal cliff" is the ominous and convenient nickname in Washington for the perfect storm of austerity measures already in law, the long-term budget crunch and a government shutdown in the year-end forecast.
Without a solution in the sharply divided Congress, economists warn of a screeching halt to the three-year US economic recovery. The International Monetary Fund warned on July 3 that such a US downturn would have "significant negative repercussions on an already fragile world economy."
Billionaire investor Warren Buffet, 81, has long been a critic of the soaring US deficit. The current impasse could be addressed with a compromise in which "everybody would be a little unhappy with something, but it would certainly be better than floating along like we've been doing now," he told business broadcaster CNBC last week. "We need something done."
The US government is due to run up in the last weeks of 2012 against its legal borrowing limits, which could even force a crushing technical debt default unless Congress raises the debt limit beyond the current 16.4 trillion dollars. In late June, the national debt stood at 15.8 trillion dollars. Under Obama's predecessor George W Bush, the debt nearly doubled to 10.6 trillion dollars.
After a tumultuous showdown between the two major political parties leading up to the last debt cap increase in August 2011, Congress implemented a law imposing automatic, severe cuts to both domestic programmes and military spending at the end of 2012. At the same time, 2001 reductions in income tax rates are due to expire at the end of the year.
The Congressional Budget Office, the legislature's non-partisan economic data agency, projects that the US economy under the combined austerity measures would lurch from this year's tepid 2-per-cent growth into recession, contracting at an annualised rate of 1.3 percent in the first half of 2013.
The economic whiplash would likely worsen unemployment, already stuck above 8 percent, but the federal deficit would be sliced nearly in half, from almost 1.2 trillion dollars this year to about 600 billion dollars, or 3.8 percent of gross domestic product, in 2013.
In response to the scheduled tax increases, Obama in July proposed an extension of the lower rates only for households earning less than 250,000 dollars a year, while arguing that revenue from the highest earners is needed to reduce the government's 1-trillion-dollar deficit. Romney and his opposition Republicans, who control the lower House of Representatives, countered that any tax increase would hurt the already weak economy.
Both sides may overstate the importance of Obama's tax proposal, which is estimated to be worth about 50 billion dollars a year in new revenue from the highest earners. The argument typifies the poisonous climate in Washington, with left and right agreeing on little except their unwillingness to give the other a policy success leading into the November 6 presidential and congressional elections.
The IMF said that just leaving the debt ceiling decision up in the air would already hurt the economy by fomenting "risk of heightened uncertainty and financial market disruption." The Congressional Budget Office suggested that the tax hikes and federal budget cuts would similarly start to bite even before the end of the year if Washington continues to dither. Families will pare back their own spending in anticipation of a higher tax bill, while businesses will defer investment and hiring "out of concern that the economy will weaken next year," the report said.
On July 10, Wall Street rating agency Fitch said that the US fiscal uncertainty, coupled with the potential spillover of the eurozone debt crisis, was cause for a negative outlook for the United States' top-grade AAA bond rating. Another major Wall Street ratings agency, Standard & Poor's, made an unprecedented downgrade of the US bond rating one notch in August 2011 - from AAA to AA-plus - after the Treasury nearly ran out of money before Congress' last-minute agreement to raise the debt ceiling.
Despite that action, US bond yields have actually declined since then as uncertainty in Europe and other economies drive investors to the perceived safe harbour of US Treasuries. Fiscal cliff aside, Buffett said he remained bullish on America, pointing out that his widely diversified holding company, Berkshire Hathaway, was investing nearly 9 billion dollars in the US economy in 2012. "We'll do the right thing in the end," he said. "We just shouldn't wait 'til the very end."
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