2013 Is Heading Toward “Fiscal Cliff,” Another Recession

2013 could very well be another economic nosedive for the US, reinstating our all-too-familiar recession atmosphere due to the looming issues Congress is facing regarding the expiration of tax cuts of 2001 and 2003, (the “Bush tax cuts”), and the plan of too sharply curbing runaway government spending. The acute cuts of both defense and non-defense spending would cut the federal deficit by $607 billion, or 4 percent of the GDP, and the GDP could fall a similar amount — giving a double whammy on the economy, resulting in what some economists are calling a “fiscal cliff.”

The expiration tax cuts of 2001 and 2003, if not reinstated, would hit America with one of its highest tax raises. Obama has said he will not extend the tax cuts for those earning $250,000, whom he categorizes “the wealthy,” but who include most small businesses and family owned businesses. Their tax rates will leap from 35 to 45 percent. This burden on the nation’s job creators is expected to cost an estimated 300,000 to 2.9 million jobs. The estate tax, meanwhile, will leap up to 55 percent.

The second hit to the economy’s status quo will be the $1.2 trillion in automatic budget cuts set to occur on January 1. While government spending has been at a manic rate dwarfing other areas times in our history, a sudden and violent cut could lead to recession. Most of the spending is going into the huge and growing entitlement programs — the sorts of things criticized by Republicans all along.

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The runaway spending, if lopped in one fell swoop, could stymie economic growth to a mere 0.5 percent in 2003, costing 1 million defense and manufacturing jobs in two years.

Ben Bernanke, the chairman of the Federal Reserve, coined the term “fiscal cliff” for rhetorical reasons, to emphasize this danger. He has said that “As it is well known, US fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”

It is hoped by him and other that Bush’s wise tax reductions will be renewed, but meanwhile that the government’s runaway spending only slowly be curbed.

Posted by Daniel June on July 30, 2012. Filed under Business News,Financial News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.