The looming 'fiscal stuff'

The re-election of President Barack Hussein Obama (contrary to much media noise - partisan TV and horse race-style newspaper reporting of national polls) has undoubtedly been received with great relief across the world, except perhaps by Israeli Prime Minister Benjamin Netanyahu, who intervened in a partisan way in the US elections to boost the chances of Mitt Romney against Obama.

For the rest of the world, a Mitt Romney (with his George W. Bush era foreign policy advisors on the campaign team) in the White House next January was alarming enough.

But prospects on the economic front are nightmarish even before Obama is sworn in next January.

Traditionally, President-elects (even re-elects) take some time off to relax after a hectic and almost-year-long electoral campaign.

However, President Obama, who returned to Washington from Chicago (his campaign headquarters) late on 7 November, will not have that luxury - with the country facing the "fiscal cliff".

Obama has won a mandate from the US public for a second term, an impressive majority in the electoral college, and a majority in the popular vote. But the same voters have however chosen not to end the Washington "gridlock" of a hostile Congress obstructing the President.

They have elected a Congress (of the same Republican hue and leadership as in 2010), and a Senate where Democrats have marginally increased their tally (but not enough to overcome Republican filibuster and obstructionism).

Unless Obama and the Congress reach compromises over the next few weeks, the economy will be over the "fiscal cliff" - plunging the US and the rest of the world into a major financial and economic crisis.

The US "fiscal cliff", as it is commonly referred to, arises from the expiry on 31 December of the Bush-era tax cuts (unless the current law is amended), and several of the middle class reliefs (such as temporary suspension of payroll tax), and other concessions to families, such as the "Alternative Minimum Tax" (AMT), estate duty, various deductions and corporate taxes; also on 31 December-1 January 2013, absent accords, there will be the "sequestration" or the across-the-board ten percent cut on all spending that will kick in if no budget and appropriation bills are agreed and enacted.

For the current law to be amended, both the House and Senate must adopt compromise legislation and Obama should sign it before it becomes law.

Otherwise, all of the Bush tax cuts will expire at the end 2012, as will various other temporary tax provisions, for example, AMT relief for middle-class Americans, extension of estate tax relief, and a variety of tax credits enjoyed by individuals, as well as the R&D tax credit and a host of other tax credits relied upon by the business community, some of which need to be extended retroactively to the beginning of 2012.

Further, Congress and the Administration also must decide how to protect physicians serving Medicare patients from sustaining steep cuts in reimbursement rates and whether to extend enhanced unemployment insurance for the long-term unemployed. In addition, decisions need to be made whether to extend, replace, or allow to lapse the two percentage point payroll tax cut for all working Americans.

As for the "sequestration", $109 billion in across-the-board spending cuts, mandated by the Budget Control Act of 2011 will begin to kick in on January 2013.

Half of the automatic spending cuts will hit the Pentagon, while the other half will reduce spending by the rest of the government, with most agencies facing funding cuts of 8.2%.

In popular parlance, the United States will fall off a fiscal cliff with potentially no safety net in place unless the President and the Congress agree to amend current law.

Further complicating the compromises needed, the Obama administration is bound to insist on making raising the debt limit a part of this package - lest in the new year, this has to be negotiated separately, and the Republicans will demand an additional price for this.

All US economists of different hues, though for opposing reasons, and economists across the globe, are agreed that it would be an economic disaster, and will send the US economy (and with it the world economy) back into the Great Recession, if not the Great Depression.

As Paul Krugman notes (in his blog), the worry for US economists, of the Keynesian view, arises from the fact that bringing down the budget deficit when the economy is already depressed makes the depression deeper. The same logic, Krugman adds, actually says that not only should spending cuts be avoided (as "sequestration" would require), but spending should be raised right now.

However, the anti-Keynesians, the "neo-liberals", and the "deficit hawks", far from welcoming the "sequestration" and the tax-rise cutting deficits, are positively upset. For, the across-the-board 10 percent cut, not only cuts programmes benefiting the poor and the working classes (that they want), but also programmes benefiting their own; and contrary to the further tax cuts that they (and Romney and Republicans on the campaign trail) have been promising, the expiry of Bush-era tax cuts mean increased taxes for the top percentiles and the "one percent".

Obama, and the 112th Republican Congress that will convene for the lame-duck session, will have to negotiate and reach some compromise on the budget and taxes.

- Third World Network Features