30 December 2012

The Fiscal Cliff: Understand It.

By Aroun Rashid Deen, New York City
If you live in Africa and have been following news on the United States lately, you may have heard the phrase 'fiscal cliff' or 'falling-off-the-fiscal-cliff.' You may not understand what this means. If so, this article is an effort to explain it, simply, and why you should be concerned. ‘Fiscal,’ according to The Associated Press Style Book, applies to budgetary matters. The Free Dictionary, describes ‘Cliff’ as a high, steep, or overhanging face of rock.
Fiscal cliff has a negative connotation in the United States. It’s used to describe a series of tax increases and budget cuts that are set to take effect simultaneously at the beginning of 2013. ‘Falling-off-the-cliff,’ is a term for the assumed economic problems that would occur should the two main political parties in the country, the Democrats, and the Republicans (also called the Grand Old Party or GOP), fail to reach agreement on a new tax plan before the beginning of the new year. Democrats are for tax increases for the rich, while Republicans want spending (budget) cuts. These two issues are key to this economic jargon.
During his presidency, George W. Bush introduced across-the-board tax cuts for almost all income earners, including the country’s wealthiest. The theory was that such tax breaks, particularly for the business community and the middle-class, would boost economic growth. The Bush tax breaks vary, depending on the kind of tax and the level of a tax payer’s income. The Democrats saw things differently. They believed that the Bush tax plan was meant to appease the wealthiest who, the Democrats claimed, will benefit from it more than low income earners. The Bush plan was to expire in 2010. However, when President Barack Obama took office, he reached a deal with the Republicans to extend the tax cuts plan until December 31 of this year.
Given that the United States, like other advanced nations, is facing its own financial crisis, the worst since the Great Depression, 1929 to 1941, and that the current U.S. national debt stands at $16.3 trillion, both the Democrats and Republicans have been looking at ways to at least reduce the debt and boost investments to help the economy. With the Bush cuts expiring, both parties saw an opportunity to push for adjustments they believe would help the economy and shrink the budget.

The Republicans believe that a major way forward is to reduce, drastically, government spending on domestic programs. The Democrats, on the other hand, want the new tax plan that would come into effect this January, to include the Bush tax breaks for lower income earners only, not for those making $400,000 and above. That’s compromise from their earlier target of $250,000.
The Democrats say that if the Republicans refuse a deal by December 31, tax rates for everyone, including those in the middle-class bracket will rise to pre-Bush levels. That would hurt economic growth because consumer spending will fall and in turn hurt other parts of the economy.
Obama and the Democrats also believe, that if the government cut ended domestic spending in such areas as military health care ($16 Billion annually), employment retirement program ($11 Billion), agricultural subsidies ($30 -36 Billion), food assistance ($4 Billion), home health care ($50 Billion), higher education ($10 Billion) and Social Security ($112 Billion), this will not only affect the middle-class but also will lead to massive job cuts in those areas.
The Republicans’ position was simply that raising tax rates on anyone, rich or not is not the way forward. They blame the country’s economic problems on excess spending by the government. However, like the Democrats, they too have so far given up some ground. They now say a new tax plan should target only those making above one million dollars.
The Bush-era tax cuts aren’t the only taxes that are scheduled to go up. A 2 percentage point cut in payroll taxes that employees pay is due to end. So are a series of business taxes. At the same time, government spending on domestic programs and the military would be cut drastically. While this would mean savings for the government, this combination could, according to many economists, eventually plunge the US into a recession because millions of jobs in the government and private companies would be lost. It would affect US military defense as well. Unless they reach a compromise by December 31st, America goes off the ‘fiscal cliff’!!

What does this mean to you?

It is no secret that the global economy, meaning that of almost every country of the world, including your home country in Africa is going through terrible times. Though the European Union has now replaced the US as the world’s biggest economy, it is, nonetheless, not as integrated as that of the US. The US economy is structured in such a way that it could withstand many of the challenges facing the EU, China and Japan and other countries. Take Germany, for example. It’s the EU's biggest economy and the only one that has not suffered because of the continent’s financial woes. Germany’s biggest consumer market is the US. Should the US fall off the fiscal cliff, it will significantly affect the German economy, and thus, the entire EU's, placing the EU in an even bigger financial mess. The same is true for China which is fast becoming Africa’s biggest trading partner. Again, the US is presently China’s biggest export market, according to a November 20, 2012 Agence France-Presse report, quoting China’s Commerce Ministry source. The report states that for the first 10 months of 2012, China's exports to the United States totaled $289.3 billion, while shipments to the EU came to $276.8 billion.

If the United States should fall off the cliff, it would mean fewer imports from China. This might force China to hold back on some of its dealings in Africa. Also, in order to make up for export revenues it would lose, China could raise the prices for essential items it exports elsewhere, such as medicines, foodstuffs and toiletries, to Africa. The outcome of this is that African countries would end up spending more for fewer imported items. You must know the math: the fewer the goods, the higher the prices. Again, if the government in your country provides subsidies on such items as petrol to food, it might stop doing do. Members of the public would have to pay more purchasing such items.

Although the effects of ‘falling off the cliff’ would not be felt immediately, they are, nonetheless, inevitable in the months that follow. So, as the saying goes in Europe, “when America sneezes, you catch the cold.”

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