US Economy: Republican Kamikaze tactics could drive economy of fiscal cliff

With little evidence of progress in the "fiscal cliff" negotiations in Washington, President Obama toook his message on the road: The president will travel to a toy manufacturing facility in Hatfield, Pa., where he will make the case that Congress should immediately extend the Bush-era tax cuts on income under $250,000 per year.

Letting the US economy go over the fiscal cliff would push the United States, and probably other countries, into a new crisis that political leaders now say they are determined to avoid.

The fiscal cliff, a combination of mandated tax increases and spending cuts, will occur in January unless President Barack Obama and Democratic and Republican lawmakers forge a long-sought deal.

If they fail, federal government spending for the 2013 fiscal year, which began on October 1, will be slashed by $109 billion.

Tax increases would be broad-based. According to the Tax Policy Center, a nonpartisan research center, nearly 90 per cent of Americans would pay more taxes, boosting the country's tax revenues more than 20 per cent above what they would be without the cliff.

Middle-class households would be hit with an almost $2,000 tax increase on average.
Economists fear that the tax hikes, likely to curb consumer spending, combined with sharp cutbacks in federal spending, would drive the world's largest economy back into recession.

The US Federal Reserve has warned for months that it lacks the means to prevent the economy from falling back into a slump. Despite massive support from the central bank, the struggling economy has not yet fully recovered from the Great Recession that ended in June 2009.

According to the latest projections from the Congressional Budget Office (CBO), the fiscal cliff would result in the economy shrinking 0.5 per cent in 2013, and the unemployment rate would rise to 9.1 per cent, compared with the 7.9 per cent jobless rate in October.

An economics professor at the University of Maryland, Peter Morici, sees that scenario as too optimistic. Morici said the fiscal cliff could trigger "cataclysmic consequences" for the economy.

EU-Digest