On December 31st the fiscal cliff, a raft of tax increases and spending cuts, is due to come into effect, which if left unchanged could tip the US economy back into recession. To avert this crisis, US Democrats and Republicans in Congress must reach a consensus on a series of budgetary measures before the deadline. The structural deficit has been widening at a rapid rate since 2000, while the political system has become ever more polarised, making an agreement all the more difficult. Time is of the essence!
But what exactly is the fiscal cliff and how did we get here? To better grasp the economic risks associated with the fiscal cliff, Saxo Capital Markets UK has created this infographic.
Based on the US Congressional Budget Office’s forecasts we can identify two clear outcomes: 1) A deal to prolong the Bush-era tax cuts and extension of the debt ceiling, 2) Failure to reach an agreement, resulting in sharp cuts in entitlements and an increase in taxes to middle class families.
The former would allow the US economy to maintain its current growth path at the expense of an increase in the budget deficit. The latter would see the US economy go into recession, but significantly reduce its debt stock pile. The outcome will also have a major impact on currency markets. A deal is likely to be positive for risk and expected to weaken the dollar relative to most major currencies. No deal and the US dollar is expected to strengthen as a decline in risk appetite drives investors into the safe haven of the greenback.
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