28/12/2012
Trending Picks : ALL ABT FISCAL CLIFF:
What is Fiscal Cliff?
"Fiscal cliff" is the popular term used to describe the imposing question that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
What happens if it comes to effect?
* Taxes will increase on workers and all tax cuts which was introduced during Bush's era would be rolled back.
* Spending cuts will happen in many welfare schemes.
* Minimum tax rates will be increased
What are choices available?
A) They can let the current policy scheduled for the beginning of 2013 to go into effect.
Positives: the deficit, as a percentage of GDP, would be cut in half.
Negatives: Tax increases and spending cuts will weigh heavily on growth and possibly drive the economy back into a recession
B) They can cancel some or all of the scheduled tax increases and spending cuts,
Positives: Recession can be avoided
Negatives: Deficit will increase and the it would in turn into another crisis like what the Eurozone faces.
C) They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
This is best option for the US economy which the members are trying to reach to but consensus is yet to arise.
What if a deal is not reached before 31st Dec?
Still the US congress can pass the resolution retrospectively.
At the same time, even a "solution" isn't necessarily positive, since a compromise will likely involve higher taxes or reduced spending in some form - both of which would help reduce the debt, but would be negative for economic growth.