Obama Tries To “Patch” The Fiscal Cliff

With House Speak Boehner acting childish as he was rebuffed by his own party on Thursday, after Republicans chose not to support his “Plan B” approach, Boehner dismissed Congress for the holiday break, sending Congressman back to their home districts and leaving negotiations hanging. President Obama responded on Friday by offering a simple easier short term solution, which was and is not the intention of the legislation that was designed to force legislatures to deal with the short and long term problems of taxation and debt. The impending fiscal cliff, as intended, has spurred some compromises; it also has demonstrated the steep challenges for the U.S. political system to undertake the multi-faceted, multi-year reforms necessary to place American governments on a more sustainable fiscal path.

Public debate over taxes for high-income residents has largely precluded substantive discussion of the other measures required to narrow the federal revenue-expenditure gap in order to regain some fiscal flexibility.    

Entering 2013, at least “a patch” is still possible to deal with the most urgent issues, such as extending the Bush personal income tax rates with a compromise on the top bracket. A credible commitment to develop a comprehensive tax reform package in 2013 would be encouraging, yet it will prolong some of the uncertainty. Spending and investment decisions by households and businesses will remain constrained until outstanding issues are decided, such as allowed depreciation and capital gains and dividend taxation. 

The U.S. Treasury’s use of a range of extraordinary measures after the statutory debt ceiling is broached could allow a decision on raising the debt ceiling to be deferred until late February or early March given factors such as some leeway in the timing of personal income tax refunds. By then, a rise in the debt ceiling of at least US$1 trillion is required to take Washington through another year, though staged hikes could be adopted to reflect progress on spending restraint plans. 

Positive eco indicators for U.S. economic growth, particularly in the housing sector, are reflected in federal revenues, which are up about 9½% y/y for the first two months of fiscal 2013, before potential tax hikes such as ending the 2011-12 payroll tax reduction. Economists continue to assume that the U.S. economy can sustain healthy forward momentum with a partial implementation of the fiscal cliff restraint in calendar 2013, amounting to a negative contribution of roughly 1% point to output growth. The remaining ‘cliff ‘restraint would be adopted in 2014 and 2015.

President Obama sharply curtailed his ambitions for legislation to avert the year-end “fiscal cliff” on Friday, urging Congress to adopt a stopgap measure to keep benefits flowing to unemployed workers and prevent taxes from rising on income under $250,000 a year.

The plan should also “lay the groundwork” for action next year to spur economic growth and rein in the national debt, Obama said at a White House news conference.