On cliff’s edge

Most world economies have hurtled towards the fiscal cliff after 2008

The Americans coin visually evocative terms to describe the very essence of the economic crisis they face. Indeed, 2013 begins with the US President Obama desperately trying to avert what has been widely referred to as "America's fiscal cliff". It signifies that the US government finances, indeed the economy, could fall off the cliff if some of the tax cuts and social security benefits carried forward from the Bush era, through a timebound legislation, were to end in January 2013. Indeed, the legal mandate extending such benefits, amounting to about $600 billion a year, expires now. Obama is negotiating with the Republicans to ensure that the entire budgetary stimulus of $600 billion does not get slashed at once, causing a hard landing.

The US economy will not be able to take a hard landing of such magnitude. Six hundred billion dollars is nearly 4 per cent of the US GDP. Imagine slashing, at one go, over half the current US fiscal deficit of 7.5 per cent of the GDP. This is like asking India to cut its gross fiscal deficit (Centre and states) from 8.5 per cent of the GDP to 4 per cent in just one year. It is clearly an impossibility. But the fact is the US political class has landed itself on the edge of this cliff, knowing fully the consequences. According to experts, even a 2 per cent reduction in the fiscal deficit in 2013 could push the US GDP growth to near zero. This will have consequences for the rest of the world. In some sense, in a globalised world, everyone is standing on the edge of a cliff. The visual metaphor is compelling.

Economic analysts say Obama is still working on a grand bargain with the Republicans and has reached a broad agreement in the new year that the tax cut for most Americans shall be continued, except for those individuals earning above $4,50,000 a year. Further, Obama has asked for two months to resolve the more politically sensitive question of cutting $150 billion of spending annually, as part of the big bargain with the Republicans. Republicans are always itching to attack Obama's spending on welfare.

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