US Fiscal Cliff: Agreeing To Meet Half Way

The stalemate in the world’s largest economy, on whether to tip over the “Fiscal Cliff” or not gives a sense of déjà vu of what happened in July last year. It was then that the US was fast approaching its debt ceiling limit. The impasse between both the parties in the US to increase the debt ceiling had pushed the world economy to the edge of a major disruption. Nonetheless, it was resolved at the eleventh hour thereby avoiding a major disaster. The delay in arriving at a decision in the matter however resulted into the US being stripped off the prestigious AAA rating S&P.

The current scenario in the US is no different. There are barely two weeks before the spending cuts and steep tax hikes come into force if both parties do not come to an agreement and decide on a middle road to managing the situation. The proposed tax hikes and spending cuts if come into force will have serious repercussions on the future of the US and in turn other global economies as well. If the matter remains unsettled till the midnight of December 31, 2012, automatic spending cuts and tax hikes will come into force from the 1st of January 2013. This will take away almost USD 600 billion from the US economy next year, enough to send the economy back into a recession.

However, latest developments indicate that both the parties are ready to give ground and agree to avoid the ‘Fiscal Cliff’. The official version of what is being decided is yet to come out. But if media reports are to be believed, Democrats are ready to accept a higher tax rate for those who are earning more than USD 400000 a year. Earlier, the tax hike was to be applicable to everyone who is earning more than USD 250000 a year. Against this, the Republicans were demanding that the tax hikes be applicable only to such persons who are earning more than USD one million a year. The current position is that, they too have lowered their stance. Similarly in another case of compromise, the president lowered the tax revenue he is seeking in a deal from USD 1.4 trillion to USD 1.2 trillion in the next ten years.

As mentioned above nothing has come out officially and there are various other matters that need to get resolved, before a final solution to the problem comes up and aids in avoiding the ‘fiscal cliff’. Nonetheless, in a world that is already fraught with various issues the US ‘fiscal cliff’ conundrum was the last thing one would have expected. The stock markets have already given a thumps up to such an effort and major US indices are showing up the gains.  In fact as mentioned in our morning pre-market call, the US markets have ended at their 8-week high yesterday. Stock markets hate uncertainty and timely resolution of the matter will make the New Year less uncertain.