The Fiscal Cliff Debate

With the impending Fiscal Cliff, the US went through a series of heated debates in order to think up the best probable solution to reverse the situation. On January 1, finally, the Fiscal Cliff Bill was passed. 

Source: http://www.nydailynews.com/news/politics/republicans-happy-senate-bill-avoid-cliff-article-1.1231069

This Fiscal Bill was passed with the House voting 257 to 167. This shows that a large number was actually not favourable with this Bill. Our thoughts?

Article viewed and discussed about: http://edition.cnn.com/2013/01/02/politics/fiscal-cliff

Yu Jia Xin:

It seems that the fiscal cliff deal is merely a short-term solution where the worst of the cliff would be avoided. Undeniably, without the deal, there would be a tax increase on most households, a hit worth more than $300 billion. However, the deal will not change the long-term trajectory of debt that US is facing as it does not deal with the key components of the cliff.

The main components of the cliff are

i)                     expiring Bush tax cuts

ii)                   expiring extended unemployment-insurance benefits

iii)                  expiring payroll tax cut

iv)                 automatic spending cuts worth $110 billion per year

v)                   debt ceiling (the limit on how much the Treasury must borrow)

Unfortunately, the current deal signed by President Obama only covers the Bush tax cuts and enhanced unemployment-insurance benefits. As a result, payroll tax cut will expire as planned, cutting workers’ purchasing power. At the same time, the Treasury will soon run out of room to borrow unless there is an increase in the debt ceiling.

This place the US economy at disadvantage as a higher debt ceiling adds on to the nation’s debt burden that’s already hardly sustainable. More interest must be paid on borrowed funds, worsening the deficit in the long-run.

Wang Hua Xian:

To deal with the impending fiscal cliff, I think that the Fiscal Cliff Bill was a good shot-term measure to as least avert the situation. I applaud the US government for their speed in dealing with the situation instead of allowing it to advance well into the year, which would have lead to disastrous effects not just to the US but also to the rest of the world. At least now instead of a 'cutting spending and increasing taxes  dramatically' situation which would have brought the US economy back into recession and driven unemployment back into the 9% range, it is a 'raise taxes on the wealthiest 2% of Americans while preventing tax raise for the middle class' which is ideal as the wealthy will not feel the pinch of raised taxes as much as the middle class will. This thus protects the incomes of the middle class and allows them to maintain optimism and continue to consume. 

Furthermore, the package also includes a one-year extension for unemployed benefits as well as a five-year extension for tax credits that help poorer and middle-class families, this at least ensures security for the poorer people of society for at least a couple more years.

Therefore i feel, that as long as the US government understands that this is only a short-term solution and continue to draft up better ills to address the situation in the long-run, the US economy will do fine in the future.

So Zhi Jie:

To avert the fiscal cliff, the US government has decided on increasing taxes and reducing government spending, which would ensure that the government budget deficit improves over time. With US's US$16.4 trillion dollar debt ceiling reached, it is obvious that the government would have to do something immediately to prevent any worsening of the budget deficit. The policy employed by the US government would of course greatly aid in remedying the situation but it is at a great cost as such a policy would cause decrease in aggregate expenditure, followed by a negative economic growth. It would also lead to unemployment rates increasing and cause the US to go back into recession. Thus i believe that such a method is not a long-term solution as employing such a policy for a long time would result in weak economy with widespread unemployment, ultimately impacting on economic stability and material standards of living for the people and the country.