FISCAL CLIFF - THE POLITICS OF BRINKSMANSHIP

By Ruma Dubey

There is a precipitous cliff we are quickly coming to and the way USA moves will decide whether USA and the rest of the world, goes over the cliff or hangs on to the edge. For us here in India, there will be no direct impact apart from paying price for being a part of the flat world. And that indirect impact does not bode well. But USA, which is always shown in Hollywood as the perpetual ‘saviour of the world’ will most likely remain true to its image and get back the country and the world from the brink.

The deadline for the fiscal cliff looms large as we step into 2013. Like our Parliament, their Congress is also not able to come to a consensus on the ways to deal with this fiscal cliff and with the deadline, 31st Dec looming large, a solution needs to be worked out as fast as possible. For now, till Tuesday, nothing will happen as its Christmas and the President is at Hawaii with his family. But once he is back, he will have to move really quickly to avoid falling over.

Fiscal cliff in a sense, to put it simply is the repercussion of the country piling up debt without real fiscal prudence. US has a debt of $16 trillion and it needs to bring in tax hikes and spending cuts.

The Obama Govt has been urging the Congress to hike taxes and cut spending and its borrowing limit is also not being allowed to be increased.  And the ‘cliff’ we are talking about is a self-set time bomb by the Govt itself; the Congress passed the legislation wherein if a deal is not reached before 31st Dec, automatic spending cuts would be triggered and the slew of temporary tax cuts will automatically expire. This means companies and individuals in USA, if they go over the “cliff” will be hit with a double whammy – higher taxes means lower income and spending cuts means fall in Govt contracts, lower defence budget, no employee tax holidays, higher personal income tax and major changes in Medicare allowances. The unemployed might not get any more ‘dole’ and low-income levels will stands to get poorer. All this is expected to save around $600 billion for the Govt.

Actually, USA is at the edge of this cliff, all thanks to George Bush. It was during his regime, in 2001, that he pushed through a programme of tax cuts worth $1.7 billion and it was set to expire in 10 years, in 2011. But in 2010, Obama had to strike a deal with the Congress, which is dominated by the Republicans, to extend the deadline by two more years and that now ends as 2012 comes to an end.

The fiscal cliff is almost fatal at this stage as the world is yet to emerge out of the financial crisis which USA put us all into in 2008. And if USA, the largest economy of the world, cuts back on spending at this juncture, when things have just about started looking up, it will be going back two squares. Euro zone continues to suffer and if USA tightens its spending, the world could be staring hard another bout of recession.  Many confer that this could almost halve the growth rate of the world economy in 2013. IMF has warned that if the US actually fell off the cliff, it could knock possibly 4% of growth off the US and undermine the fragile confidence in the rest of the world.

So the country which always saves the world, will go over the cliff, taking the rest of the world along with it? Not likely. That is what the various talks and negotiations have been about – to work out a solution. Over the weekend, ‘Plan B’ failed which was increasing taxes only on US citizens earning more $1 million a year. One thing which has emerged is that Republicans are not all that averse now to the rich paying more taxes, not by hiking rates but closing down the various loopholes they use. Obama is not in favor of this as he feels this will not raise enough money. He is pressing ahead with expiry of the Bush-era tax cuts for the wealthy. Earlier, he was insisting that all earning above $250,000 should pay higher taxes but since then he has increased that threshold to $400,000.

What we are now seeing is brinkmanship politics. There is no doubt that neither the Democrats nor the Republicans would want to go over the fiscal cliff as what lies at the bottom is even more fatal.

Undoubtedly, a compromise will be reached but hopefully, they will end this “who will blink first” politics before we step into 2013. Let us at least get into the New Year with some optimism.