As the nation welcomed the new year with much optimism, the world’s biggest economy across from the Pacific teetered on the brink of disaster, poised to fall off a “fiscal cliff.”
The fiscal cliff is the coming together of two events that would have taken effect last Jan. 1—the termination of tax cuts benefiting mostly middle-income American families and government spending cuts ranging from military to education, health care, law enforcement and other social programs. (The tax cuts were implemented during the term of former President George W. Bush from 2001 to 2009 and were extended by President Barack Obama up to 2012.) Also set to end last Jan. 1 was a 2-percentage point cut in income taxes that Americans give to the federal pension system, temporary tax breaks for businesses and individuals, and some unemployment benefits. All together, these meant that about $670 billion would have to be taken out of the American economy this year. That is nearly three times the value of the Philippine economy in 2011.
Reports from Washington indicated that while these events would have reduced the US budget deficit, it meant Americans would have less money to spend, weakening an economy that was still precariously recovering from the last recession. It also meant a return to recession and a jump in the already high unemployment rate. Americans would find their paychecks diminished by higher taxes while spending more on social programs, from education for their children to health care. For the US economy as a whole, analysts believe that going over the fiscal cliff would have similar effects as the severe austerity programs in Europe that have driven many countries using the euro back into recession. Since the United States remains the world’s biggest economy, the repercussions would be felt across the globe.
The fiscal cliff was averted when Congress passed a bill last week that suspended the tax increases and delayed government spending cuts by another two months.
Here lies the bigger problem. The fiscal cliff is just one of the many economic and fiscal troubles plaguing the United States.
Many economists and analysts believe the next crisis will come in late February or early March when the Obama administration will have reached a $16.4-trillion ceiling on the amount of money it can borrow. Republicans, which control the lower house of the US Congress, are reported to not go along with raising the limit on government borrowing unless an increase is matched by spending cuts to help address the long-term debt problem. Mr. Obama has warned that he would not bargain with Republicans in Congress nor offer spending cuts in return for lifting the government’s borrowing limit. Failure to raise the debt ceiling can lead to a first-ever US default that definitely will roil global financial markets and diminish confidence in the United States. In 2011, a political deadlock on this issue brought the United States to within days of default and Standard & Poor’s downgraded the US government’s credit rating for the first time ever.
Another big worry is that the series of automatic spending cuts for most federal agencies will take effect in March as the deal last week merely suspended these for two months. If the spending cuts actually happen, economists agree that these will have a devastating impact on economic and non-economic programs, potentially pushing the country back into recession by pulling so much money out of the American economy.
The third issue is the federal budget. Every fiscal year, the US government is supposed to enact a new budget. However, it has been years since it has actually met the Oct. 1 deadline and Congress simply relied on the so-called “continuing resolution,” which basically lets the government adopt the budget of the previous fiscal year. The current “continuing resolution” ends on March 27 and failure to pass another one to tide the US through the next fiscal year can see a repeat of 2011, when the federal government came close to shutting down entirely.
Mr. Obama had warned after signing the bill that averted the fiscal cliff: “If Congress refuses to give the government the ability to pay [its] bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff.”
The world has definitely become smaller due to economic globalization. Given the immense financial and economic problems the United States faces, the Philippines and the rest of the world will continue to remain on edge in the months ahead.
Subscribe to INQUIRER PLUS to get access to The Philippine Daily Inquirer & other 70+ titles, share up to 5 gadgets, listen to the news, download as early as 4am & share articles on social media. Call 896 6000.