Looming fiscal cliff an 'Xtreme Mess'

Looming fiscal cliff an 'Xtreme Mess'

US President Barack Obama and Congress have cut short their Christmas break to discuss the looming 'fiscal cliff'. Just what is this economic disaster waiting to happen?

Q: What is the "fiscal cliff" that the US is facing?

The phrase, popularised by the chairman of the Federal Reserve, Mr Ben Bernanke, describes the financial double whammy that could put the US and world economies (including Singapore's) in a tailspin.

Whammy No. 1: Tax breaks introduced during former president George W. Bush's time (he became president in 2001) will lapse on Jan 1.

This means everyone pays more taxes, with the majority middle-income households (60 per cent) seeing a US$2,000 ($2,446) jump, the Tax Policy Center estimates.

The result: More taxes equals less spending equals less business equals weak economic growth.

Whammy No. 2: At the same time, US$1.2 trillion in federal spending cuts over the next decade (about US$100 billion a year for 10 years) will automatically come into effect.

This means: Less government spending equals less business equals less jobs equals weak economy.

Q: How did they let this happen?

Whammy No. 1: This came about because Mr Bush wanted to push through his tax cuts but failed to get it past the then-Democrat-led Congress. So they used a special rule which allowed them to push through the cuts, but these were supposed to automatically expire last year. The now Republican-led House of Representatives then got President Obama to extend it to Dec 31 this year.

Whammy No 2: It could have been avoided. The 2013 timeframe was introduced as insurance.

A special committee consisting of both Republicans and Democrats was set up last year to find ways to cap government spending, reported the BBC. It also had to find a way to save US$1.2 trillion over the same period.

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