After facing the wrath of the hurricane Sandy, the US is bracing up for another one; though this pertains to the economy, not the weather. Its being termed as the Fiscal Cliff.
The US economy is slated to hit the fiscal cliff on January 1, 2013, following which, unless corrective action is taken now, significant tax increases and spending cuts will kick in to bring down the budget deficit, forcing the US economy into a slowdown. This is serious stuff.
There are four broad events starting 2001 under the Bush administration that laid the foundation of the fiscal cliff the US is staring at on January 1, 2013.
In 2001, the US was predicted to have a budget surplus of $125 billion. That is, the revenues were expected to be in excess of expenditure. The administration saw this as an opportunity to lower taxes on a temporary basis, which it did. The tax break was supposed to be withdrawn in 2010. However, the economy unexpectedly slowed in 2001 and the projected surplus actually turned out to be a deficit of $9 billion! Despite this turn of events, the tax breaks were not withdrawn. In fact, some more tax breaks were announced in 2003
The World Trade Centre twin towers were attacked on 9/11, and the US went to war in Afghanistan.
In 2003, joining the dots from intelligence inputs regarding Iraq (erroneously) indicated that Saddam Hussain was close to building weapons of mass destruction. The US embarked on the Iraq war.
In a populist but expensive measure in 2003, the Bush administration undertook a program called Medicare Part D, which envisaged subsidizing prescription drugs for medicare beneficiaries.
The above were some of the events that set a trap for the US economy in 2001-03. By not immediately withdrawing the tax cuts as soon as the US budget slipped into a deficit, the Bush administration tried to borrow prosperity out of the future. It continued to spend anticipating the things to improve in 2010!
By participating in two simultaneous, prolonged and costly wars without generating enough revenues, enormous strain was exerted on the limited resources available with the US government.
After the 2008 meltdown, the situation of the US economy turned even more precarious.
By the time the deadline for withdrawal of the Bush tax cuts arrived, in 2010, President Obama had no option but to seek extension of the deadline by another two years. And here is the US, staring at this deadline yet again!
The US is now in a dilemma on how to land in this free fall from over the cliff. If the US allows for the tax break withdrawal and spending cuts to kick in from January 1, 2013, spending power of the people and the businesses’ ability to expand will get seriously impacted, resulting in a slowdown. If the US decides to again extend the deadline as in 2010, the pain will only get postponed, even exacerbated; but it won’t go away!