Yesterday the Congress failed to reach a consensus to strike a deal termed as “fiscal cliff”. Despite President Obama pushing for the consensus of the law makers on the deal, the Congress could not reach a decision before the deadline. The session ended late Monday night in Washington without approval by the House.
The US Senate on the other hand has approved the deal, averting proposed general tax hikes and spending cuts given the scary title of “fiscal cliff”. The reasons behind such alarming title are the fears by the law makers and economists that failing to reach a consensus could send US economy over the cliff and into deep recession.
The new bill, which raises taxes for the rich and wealthy, came after lengthy talks between the Senate Republicans and Democratic Vice President Joe Biden. The tax cuts agreed during the Presidency of Bush have expired at midnight on Monday the 31st December 2012. Without the approval in the Congress, huge tax rise for majority of tax payers would kick in automatically. The fear is if the full effects of these tax rises allowed taking effect, it could spark a new full blown recession in the USA.
The compromise deal reached on Monday between VP Biden and Republicans in the Senate seeks to avoid the threat of recession by extending tax cuts for Americans earning under $400,000, up from the earlier limit of $250,000 sought by the Democrats and President Obama.
Only four days ago a desperate President Obama urged the Congress to back an interim plan to avoid the “fiscal cliff” by agreeing to tax cuts for the Americans earning under $250,000.
To implement a deal for huge spending cuts of $1.2 trillion from the federal budget is deferred for two months giving more time for White House to re-open the negotiations. In additions to changes in Income Tax rates and spending cuts, the package also includes, rises in inheritance tax, capital gain tax. One year extension for unemployment benefits and five year extension to tax credit providing help for the poorer and middle class.
The opponents claim such deals and other arrangements to stimulate the economy and ward off possible recession are merely cosmetic, some go as far as terming these deals as hoaxes, on the grounds, such deals only amounts to a mere one tenth of the growth of USA public debt during a year.
In any case, if the measures are not in place by the end of extended two months period, US would have to not only raise the taxes for majority of its tax payers, but also cuts it’s spending to keep within the budgetary and fiscal constraints. Failing it, could push the US economy back in to the recession, effects of which are not gone away entirely, despite better than expected showings in recent month in some US economic indicators. It could also jeopardise Global economic recovery.