PARTIAL SOLUTION OF THE “FISCAL CLIFF” PROBLEM
Late in 2012, the U.S. economy was on the brink of “fiscal cliff”, because the planned efforts of stringent budget economy and cancellation of many tax benefits could trigger a new recession. However, thanks to the timely adopted adjustments, the U.S. economy will not “fall from the cliff” in the near future, though the former uncertainty has already influenced the risk perception (see Fig. 1). However, the problems of chronic budget shortage and steadily growing public debt have not been resolved so far.
The compromise achieved in the first days of January 2013 concerns budget receipts only and ignores reduction in budget expenses and transition to the stable public debt trajectory. Actually, this partial solution is an adjustment to U.S. tax treatment that remained largely unchanged. The main innovations pertain to the income, capital gain and real estate tax rate increase and cancellation of the salary tax benefits for well-to-do population groups. According to the forecasts of the U.S. Congress Budget Department, this adjustment will accelerate GDP growth by 1.5% as compared with the trends that would be in store for the U.S. economy at the “cliff bottom” (0.5% GDP reduction).
However, discussion of the budget cost items and the public debt “ceiling” was postponed by the Congress till March. Though default under U.S. obligations is next to impossible, because its debt is denominated in its own currency, the technical default threat, when any subsequent loans are prohibited upon achievement of the public debt “ceiling”, may serve as a tool of pressurizing the progress of negotiations on the shortage reduction. It is safe to say that the forthcoming “battles” will contribute to aggravation of uncertainty on debt markets. The congress is interested in the next increase in the public debt “ceiling”, because the consequences of destabilization of debt markets and automatic reduction in public expenditures are extremely undesirable.
Fig. 1. CDS price for the 5-year U.S. sovereign debt. Source: Bloomberg.
I.N. Nazarov,
Analyst, Financial Research Institute
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