United States Fiscal Cliff

Posted By : Kishore B.S

United States Fiscal Cliff

The Fiscal cliff in United States refers to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the budget deficit if existing laws remain unchanged.

The laws leading to the fiscal cliff include the expiration of the 2010 Tax relief act and planned spending cuts under the budget control Act of 2011.

The budget control was a compromise intends to resolve dispute concerning public debt ceiling.

Key laws leading to the fiscal cliff:

1)      Expiration of the bush tax cuts extended by the tax belief, unemployment, Insurance Re-authorization & job creation act of 2010.

2)      Across the board spending cuts to most discretionary programs as directed by the budget control act of 2011.

3)      Reversion of the Alternative minimum Tax Thresholds to their 2000 tax year levels.

4)      Expiration of the 2% social security Payroll tax cut.

5)      Expiration of Federal Unemployment benefits.

6)      New taxes imposed by the Patient protection and affordable care act and the Health care and Education Recondition Act of 2010.

Congressional Budget Office Projections: (CBO)

Decisions regarding the Fiscal cliff will have Implications for deficits, debts & scenario for the year 2013 to 2022 they are:

1)      The Baseline Project

2)      The Alternative Fiscal Scenario.

 

1)      The Baseline Project

Under the baseline, tax cuts are allowed to expire and spending cuts are implemented in 2013, resulting in higher tax revenues plus reduced spending thus lowering deficits, debt and the interest for next decade and beyond. Future deficits would be reduced from an estimated 8.5% of GDP in 2011 to 1.2% by 2021. Revenues would rise towards 24% GDP, versus the historical average 18% GDP.

The total deficit reduction or reduction or debt avoidance over ten year could be as high as 7.1$ trillion, versus the $10-11 trillion debt increases if current policies are extended.

CBO estimates under baseline Projection that Public debt raises from 69% GDP of 2011 to 84% by 2035. In long run, lower deficits & debt should lead to relativity higher growth estimates. For short run the GDP may go down by 1% in 1 year.

2)        Alternative Fiscal Scenario:

The scenario involves extending the bush tax cuts, repealing the automatic spending cuts, restricting the reach of the AMT & keeping Medicare reimbursement rate at the current level.

Under this scenario, public debt rises from 69% GDP in 2011 to 100% by 2021 and approaches 190% by 2035.

Summary:

Fiscal or Economic Measure CBO Baseline Alternative Scenario
1)      Federal deficit in FY 2013 $ 641 Billion $ 1037 Billion
2)      Economic growth in FY 2013 -0.5% of GDP 1.7% of GDP
3)      Unemployment rate for October this December 2013 9.1% 8.0%
4)      Public debt in 2022 58% of GDP 90% of GDP

 

The Alternative scenario has considerably higher debt and Interest payment than the bare line projection. Hence baseline projection is a better option.

(Inputs: Basket Option Research Bureau)

Cheers!!

Team SMI

www.stockmarketinstitute.org

 

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