A SIMSREE FINANCE FORUM INITIATIVE
ARTHNEETI DECEMBER 2012 ISSUE
Features of the bill passed by the Senate:
tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that.�
Past its own New Year's deadline, the Senate agreed to a deal to avert the fiscal cliff. Democratic-led Senate passed the measure that seeks to maintain tax cuts for most of the Americans but increase rates on the wealthy. According to different estimates, this legislation would raise roughly $600 billion in new revenues over 10 years. Republicans stood for higher tax rates for the wealthiest Americans, while democrats suggested a higher threshold for the people who are wealthy enough to face higher taxes. According to President Barack Obama, the law would be signed that would raise taxes on the wealthiest two per cent of Americans while preventing tax hikes that could have sent the economy back into recession.
Brighter Side to This If we think on the issue of fiscal cliff, we can see some brighter side to it. If at all the fiscal cliff happens, it might not be that much bad as it is imagined.
The Worst Case Scenario If there would have been no change in the current policy chalked out to deal with the fiscal cliff, there wold have been a two way effect on economy. The step of spending cuts and raise in taxes would reduce the deficit by $560 billion approximately. But on the other hand, according to Congressional Budget Office, the policy would have slowed down the gross domestic product by four percentage points in 2013 which would have sent the economy into recession. Also, it was predicted that unemployment would rise by a per cent point which could have caused almost two million people to lose their job.
The other school of thoughts argues that the cliff would bring some long-term positive changes on the cost of some short term hardships. The argument says that U.S. has to tackle its deficits at some point, and this sort of "bitter medicine" would be a harsh, but definitive, step in that direction. Now, this short term effect could be severe and might cause recession in 2013. But, at the same time it can fetch long term benefits like lower deficits, better growth prospects, lower debt, etc. According to the projections of the Congressional Budget Office, by 2022, the budget deficit would fall to $200 billion from its current level of $1.1 trillion. To achieve this, nation might have to face some tough situations as mentioned earlier.
A May 16, 2012 Wall St. Journal article estimated the impact in dollar terms as: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sun setting of the Bush 15