The impact on the economy (global) and financial markets (also global) will be more of the same: high unemployment & under-employment, high food and energy costs, volatile investment environments, American, Europe and Asian debt troubles, etc. In addition to these existing conditions, elected officials will be forced to deal with the “Fiscal Cliff.”
If I may, I would like to break down exactly what the term means, so as you hear and read more about it, you will have a basic understanding of its real impact:
1. Income tax cuts set to expire will cost $400 to $500 billion and include:
* President George W. Bush’s tax cuts of 2003 which significantly lowered marginal tax rates.
* The payroll tax rates are currently at 4.2 percent. If this expires, they will go to 6.2 percent.
* Other tax cuts that will expire include the AMT patch, Affordable Care and Research tax credits.
2. Spending cuts that would be initiated under the Budget Control Act would cost $100 to $150 billion:
* One-half of this stems from automatic defense budget cuts.
* The other one-half is in the non-defense sector.
3. Government benefits that will expire would cost consumers $50 to $100 billion and include:
* Extended unemployment benefits.
* Medicare doc fix.
If Congress (which is status quo – Senate (D) and House (R)) takes no action, tax rates will increase, spending cuts will begin, and benefits will be suspended. A “no-action” approach could lead to a $500 to $750 billion hit to our economy in 2013.
Regardless of the amount, it would be very difficult to absorb this hit as it would create a 3 to 5 percent hit to the gross domestic product (GDP) next year. With Wall Street forecasting 2 percent GDP in 2013, falling off the cliff would send us into negative GDP growth territory and a recession.
So, you will be hearing much about the Fiscal Cliff now that the elections are over. Unfortunately, politicians don’t have enough time to deal with these very serious problems before year end. I expect to see an extension of the current policies so additional time and attention can be given to research options. (See the Tax Foundation’s “A Guide to the Fiscal Cliff and the Options for Congress” for further information.
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