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.

If it fails to reach a deal by Dec 31 this year, the insurance, in the form of automatic spending cuts, would be triggered. The committee failed to reach a decision.

Q: Should I be concerned?

The Fitch ratings agency said recently: "The US fiscal cliff represents the single biggest near-term threat to a global economic recovery. The dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economy into recession.

"At the very least, it would be likely to halve the rate of global growth in 2013."

Investment all over the world would also be hit. This means fewer jobs, which will lead to weak or negative growth.

The International Monetary Fund has said that the fiscal cliff could knock possibly 4 percentage points of growth off the US and undermine the fragile confidence in the rest of the world, the BBC reported.

Q: Where do the negotiations stand now?

It's not clear.

Until Dec 17, House Speaker John Boehner and MrObama were edging closer to a deal that would have included about US$1 trillion each in spending cuts and tax increases over the next decade.

But Mr Boehner, an Ohio Republican, declared MrObama's last offer unacceptable because it lacked enough spending cuts. He then tried to advance his own plan through the House. In the end, he scrapped it, saying he did not have enough votes to pass the Bill.

Q: What happens next?

Each side wants the other to act.

Mr Obama urged leaders of both parties to work out an interim measure to prevent taxes from rising on middle-income Americans as they work on a more comprehensive package.

Lawmakers in the Senate and House headed home for the Christmas holiday and were back yesterday - giving them less than a week to act before the so-called fiscal cliff.