Fiscal Governability in the US

The fiscal debate in the U.S. has become a recurring theme that keeps the world and the economies of Latin America and the Caribbean on edge. A brief respite has been allowed by the agreement reached a few days ago; the U.S. has avoided, for now, being dragged over the metaphorical cliff by the weight of fiscal unbalance. The bad news is that the solution has not definitively fixed the problem. The next round of negotiations about the debt ceiling and spending cuts are predicted to be difficult because of the increasing divide between Democrats and Republicans.

Our region has attentively followed the discussions about the so-called “fiscal cliff” because of the grave implications created by uncertain fiscal governability in the country to the north. It comes down to no longer postponing a political pact that will define the level of debt, revenue, public spending, and the funding strategy through issuance of dollars or assets in that currency.

Uncertainty imposes significant risks on our economies. In the first place, it presents greater volatility in the markets that complicate the management of monetary, exchange and financial politics. Likewise, this uncertainty destabilizes consumption, production and investment decisions, thus negatively affecting the growth of the U.S. economy in particular and of the world economy in general. This will translate to a decrease in international trade flow with negative effects on our region’s prospective growth.

Latin America and the Caribbean — Mexico, Central America and the Caribbean in particular — are strongly linked to the U.S. economy and are especially sensitive to the magnitude, timing and style of the fiscal plan adopted in the United States. South American countries aren’t exempt from the negative effects that are a probable result of this situation.

The U.S. economy is prepared to go through a dangerous territory. If this territory is to be navigated, a greater desire and ability to arrive at a consensus in 2013 (and the following years) will be required. Before the middle of the year, the need to increase the Treasury’s debt ceiling will be put on the table again. Now, no one doubts the urgency of implementing some type of agreement that breaks the unsustainable increase of the U.S. public debt, and everyone understands this fiscal deficit has been accumulating since the first years of the new century, due to tax cuts and an increase in military spending.

The impact the strategies to be followed will have on the level of activity will depend on the magnitude, timing and structure of the necessary [fiscal] adjustment. It is fundamental to try to minimize the regressive distributive bias of the agreement — meaning to avoid cuts in social spending and in productive and social infrastructure — and instead to opt for a decrease in military spending and an increase on income taxes, especially for people with higher salaries. These ideas coincide with what President Barack Obama has suggested.

Because of this, it is imperative that the participants in the political discussions about the fiscal governability of the United States take the reins and assume responsibility in their historic role. There is a call to urge a general consensus that will allow [the U.S. to take] a clear, moderate path and avoid high and irreversible political costs.