Wednesday

27th Jul 2016

US Congress still divided as 'fiscal cliff' deadline looms

  • Congressional leaders have hours to avoid the fiscal cliff (Photo: wikipedia)

US lawmakers remain divided over the so-called 'fiscal cliff' which would usher in spending cuts and tax rises worth $560 billion unless a cross-party deal can be brokered to cut the US budget deficit.

Failure to reach a deal before midnight on Monday (31 December) would automatically see tax rates go up for 88 percent of Americans, with over 2 million long-term unemployed losing welfare benefits.

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The tax rises would be the result of the expiration of tax cuts originally passed in 2001 by George W. Bush before being extended under the Obama Presidency, as well as an end to exemptions on employee payroll taxes.

The impasse comes as Democrats and Republicans ponder the best way to cut its budget deficit and government debt pile.

Although the fiscal cliff would halve the US's 8.5 percent budget deficit rate in 2013, the Congressional Budgetary Office, as well as other analysts including the IMF, say it could lead to a double-dip recession.

On 17 December Democrats offered a package of $1.2 trillion in higher taxes over ten years, and public spending cuts of $925 billion over the next ten years.

However, Republicans, led by House speaker John Boehner, are demanding over $1 trillion in spending cuts and have so far maintained that they will oppose any tax rises. President Obama wants those earning over $250,000 a year to pay a larger share of tax.

The row over how to reduce the US debt and deficit levels comes as the fiscal compact treaty agreed by 25 of the EU's 27 member states enters into force on Tuesday (1 January).

The deal commits governments to a 'golden rule' capping budget deficits at 3 percent of GDP, reducing the scope for governments to put in place stimulus measures in a recession. The treaty, agreed by EU leaders in December 2011, also includes possible fines of up to 0.5 percent of GDP if countries fail to keep to the thresholds.

IMF officials are now urging France and other EU countries to rein in their deficit reduction targets, fearing that the cuts needed to meet the 3 percent benchmark would damage economic performance.

Speaking to German news weekly Die Welt, IMF managing director Christine Lagarde commented that "Germany ... and others ... can allow themselves to go a little more slowly than others in the push to straighten out their public finances."

Edward Gardner, head of the IMF mission in Paris, told reporters last week that the French government should focus on "the credibility of the medium-term orientation policy" rather than specific targets, adding that loosening the timetable for deficit reduction would be "more effective".

Although the Socialist-led National Assembly has put through a 40 billion euro package of spending cuts and tax rises, the IMF and European Commission estimates that France's budget deficit will come in at 3.5 percent in 2013.

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