The world’s media were focussed on the potential ramifications of the US economy falling over the “Fiscal Cliff” at the turn of the year, It was feared that unless a deal could be struck between Obama’s Democrats and the Republicans that the mix of automatic, mandated tax increases and spending cuts, agreed during the 2010 fiscal impasse, would send the economy into a fresh recession. In the end, an overtime compromise was found which put a tax deal in place but booted the issue of spending cuts into the long grass, two months down the line. But, as they say, time flies and the extension is now all but over with mandatory cuts coming into force on the first of March.
The problem America faces is that the Republicans control Congress whilst the Democrats hold the presidency and the Senate and there is little common ground between the parties with respect to economic philosophy. The Republicans want to see significant cuts in government spending whereas the Democrats want to ensure that tax loopholes are closed and the rich pay more tax.
President Obama warned that a “meat cleaver” approach to spending cuts would cost jobs. The automatic cuts would see $85 billion cleaved from government spending. “These cuts are not smart, they are not fair; they will hurt the economy. This is not an abstraction. People will lose their jobs. Changes like this, not well thought through, not phased in properly, changes like this affect our ability to respond to threats in unstable parts of the world,” he said.
The president said he was open to cuts to government programmes seen to be unsuccessful or unnecessary, but said that Republicans were not open to tax increases because of “ideological rigidity”. Unsurprisingly, he lent his support to a move to close tax loopholes and boost income and a budget plan proposed by Senate Democrats which had received the predictable reception by Republicans in the House of Congress.
Democrats want to remove tax breaks for the oil and gas industries and from businesses outsourcing labour from the USA overseas. They also want millionaires to pay at least 30% tax. Whilst the Republicans are in agreement with closing some tax loopholes, they want to see it as part of an overhaul of the taxation system and not as a (partial) solution to the current predicament. The question is if politicians are willing to set aside partisan issues to find a workable solution which is in the national interest – prepare for another all-nighter at the end of the month.