What Is the "Fiscal Cliff"? A Threat to the Global Economy?

Currently, the news regarding tax in the U.S., as in many countries, is punctuated by the vote on the Finance Bill of 2013. If discussions are rough between Republicans and Democrats — and even among Democrats — it is clear that the Obama administration will increase taxes while making drastic cuts to public spending. This is the “fiscal cliff.”

What Is the “Fiscal Cliff”?

The fiscal cliff is the term used in the U.S. to refer to the combination of high tax increases and a sharp decline of public spending planned for 2013.

Measures to raise taxes and cut public spending are necessary for the U.S. In debt for 100 percent of its GDP and with a deficit of almost 8 percent, the world’s largest economy must react. Like many states, including France, the U.S. has decided to raise taxes on individuals and on American companies and to reduce public spending.

Within the scope of tax increases, the Obama administration has included plans to end the tax breaks enjoyed by the middle class,* broaden the base of the alternative minimum tax, and raise payroll taxes by two points. With regard to lowering expenses, the program to extend the duration of unemployment benefit payments will be terminated.

The Fiscal Cliff Will Impact the Global Economy

If the purpose of this operation by the American administration is to clean up its economy, the fiscal cliff will not be without an effect on the American economy, as well as the global one. Indeed, its consequences could be significant.

By reducing public spending, billions of dollars will not enter into the economy in 2013. The tax increases will mechanically lower the spending power of households, which will consume less and reduce their business investment. The result will be that all companies that export to the U.S. should see their rate of orders decrease in 2013.

These decreases should therefore lead to downsizing of companies and an increase in unemployment, which in turn will lead to an increase in public spending, which would certainly be offset by tax increases. If this fiscal shock takes place in the U.S., it seems very probable that the economic crisis is far from over.

*Editor’s note: The Obama administration wants to extend middle class tax cuts, not let them expire, a position that the president clarified during his Weekly Address on Dec. 8, 2012.