I was reading some news about the developments in the United States economy and came across a word that is foreign to me. You know you need to have an idea on what is going in the United States because their economy is the biggest in the world and many countries depend on it including our beloved Philippines. In a way, these developments have an effect in the Philippine stock market because once the US goes down, the world normally follows. Remember the maxim, "When US sneezes, the world catches flu". That is quite true although some measures are being done to avert the contagion of the world to the US economy.
Okay, so the word i bumped into is Fiscal cliff. What the hell is this all about? I found the article below on Wall Street journal. Hope it helps.
PS. If you are in the stock market, you've got to know these developments so that you can anticipate where the market will go in the future. It's not of course an absolute stock market mover especially in the Philippines where the economy is going strong but situations like this could spill over to the world. If you have some comments or questions, please feel free to email me or comment.
Here you go... Enjoy!
By WSJ Staff
Here are some answers to common questions about the “fiscal cliff” facing the U.S. economy. This is a revised version of the original post published earlier this year.
What is the “fiscal cliff”?
The fiscal cliff is the combination of large spending cuts and tax increases that are scheduled to be automatically enacted at the start of 2013. Bush-era income-tax cuts will expire for tens of millions of Americans, and billions of dollars of spending cuts will take effect because Congress couldn’t reach a deal last year to reduce the deficit by at least $1.2 trillion over 10 years. Democrats want a combination of spending cuts and tax increases, while Republicans want to cut spending, but don’t want to raise taxes. Both want to avoid the fiscal cliff, because it forces severe cuts, particularly in defense.
What taxes and spending are affected?
A payroll-tax holiday ends, which means a tax increase for workers of as much as 2% of wages. Income-tax rates revert to pre-George W. Bush levels, rising not only for the rich but for nearly all taxpayers. Across-the-board cuts in domestic and, particularly, defense spending are triggered.
What is the immediate cost to the economy?
The sudden rise in taxes and cuts in spending would have a harsh impact. In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 million from the expiration of the Obama payroll-tax holiday; $40 million from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to J.P. Morgan.
How would this impact growth?
The nonpartisan Congressional Budget Office projects that if the tax increases and spending cuts go into effect, the economy would contract at a 2.9% annualized rate in the first six months of 2013 and the unemployment rate would rise to 9.1% at the end of next year. The jobless rate was 8.3% in July. If the spending cuts and tax increases are averted, the economy would grow at an anemic 1.7% next year and unemployment would fall slightly to 8.0% by the end of next year.
.How worried is the Fed?
Federal Reserve Chairman Ben Bernanke has warned lawmakers about the potential effect of the “fiscal cliff,” adding that “there is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset that effect on the economy.” The Fed has been concerned about the fiscal cliff all year. In the minutes of its April meeting, for instance, the Fed said that if lawmakers don’t reach agreement on a plan for the federal budget, “a sharp fiscal tightening could occur at the start of 2013.” That uncertainty “could lead businesses to defer hiring and investment” and weigh on economic sentiment, officials worried at the meeting. Agreement on a long-term plan could alleviate some of that uncertainty. On Wednesday, the Fed released minutes from its July 31-Aug. 1 meeting, in which it said participants see “a sharper-than-anticipated U.S. fiscal consolidation” as a “significant downside” risk to the economic outlook.
What is the state of play in Congress currently, and what are some possible scenarios?
No final action is likely until the end of the year, when hitting the fiscal cliff is imminent, because of partisan divisions in Congress and the political risk of taking tough votes on taxes and spending ahead of the November elections. In the short term, House leaders plan a vote to extend Bush-era tax levels for all taxpayers temporarily, possibly for one year, to give the next Congress time to work on overhauling the tax system to make it more competitive with other countries. That pre-election vote likely will include a fast-track mechanism so the eventual tax overhaul will get an expedited vote next year, and won’t get hung up by parliamentary maneuvering. The badly divided Senate doesn’t appear likely to take a vote on basic tax rates until after the election. A big question is whether and how lawmakers in a lame-duck session will seek to soften the blow of scheduled spending cuts.
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