If you’ve been listening to American politics at the
moment you will almost certainly have heard of the term ‘fiscal cliff’.
Basically it is a series of tax rises and spending cuts that will go into effect
in January 2013 unless Congress brokers a compromise and passes new legislation.
The combined effect of the spending cuts and tax rises, most experts agree,
would push America back into recession during the summer of 2013 (remember a
recession is defined as two quarters in
a row with negative growth in an economy).
So what are the tax rises and spending cuts? Well most of
the spending cuts are a result of a political battle that took place last year.
Basically in 2011 the political system of the US was in disarray, the
Republicans (who controlled the House) were refusing to raise the debt ceiling
(and therefore cause America to default on its debts and send the American –
and world – economy into freefall), unless they got certain radical laws passed.
The Democrats who controlled the Senate and Presidency were unwilling to give
in to all of the radical demands. A deal was finally agreed just days before
the US reached the debt ceiling and defaulted. Part of the Budget Control Act
of 2011 was that if Congress did not pass a deficit reduction bill worth $1.2
trillion by the 2nd of January 2013 then automatic cuts
(sequestrations) would take place across the board, half from defence, half
from domestic spending. As well as this, federal unemployment benefits, the
bush tax cuts and the payroll tax cut would all expire, tax thresholds would
return to their 2000 level and new taxes would be imposed.
Part of the problem here is that Republicans want to take
more from domestic spending rather than defence (which is the Holy cow to
Republicans), whereas Democrats are on the opposite side. Obama is trying to persuade
the Republicans to let the bush tax cuts expire, but only for the top 2%, the
tax cuts for the other 98% would be made permanent. There is also talk of
cutting social security, which has infuriated ordinary liberals and many
Democrats in congress as social security doesn’t contribute to the deficit and
actually has a surplus!
To make matters worse, the Republican Speaker of the
House, John Boehner, has just suffered a humiliating, self-inflicted, defeat.
John Boehner tried to pass a bill in the House called ‘Plan B’, which was
basically a Republican wish list of everything they wanted. Boehner knew it
would never even get looked at in the Democratic Senate, so he didn’t pass it
for policy reasons. Boehner was trying to put on a show of strength and make
the Republicans seem united against President Obama. The only problem; he had
to cancel the vote when he realised that he would not have the support to get
it through the Republican House. As
a result he sent the House of Representatives home for Christmas. Seriously.
Although they will be back after Christmas, there will only be six full days
until the new year. American politics could get very interesting over the next couple
of weeks; if Congress and the President fail to reach a compromise then the effects
will be devastating. Expect stock markets to plummet across the globe
instantaneously, and here in Britain we will almost certainly experience a
triple dip recession. Yay.
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