US fiscal cliff deal

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US fiscal cliff deal

Halfway there The US has agreed a deal that partially averts the fiscal cliff – a $655bn package of tax rises and spending cuts that was due to take effect on 1st January. This is good news for the immediate health of the US economy as going over the cliff could have prompted a fresh recession. However, many difficult choices remain and more progress is needed before the end of February.

Economic Analysis

04 January 2013

The agreement

The agreement covers a range of taxes and unemployment benefits. Its main points are:

  • a permanent extension of the “middle class tax cuts”, worth $212bn this year, or $2,200 a year to a family of four
  • taxes on the wealthiest will rise as planned. Income tax will rise to 39.6% for those earning more than $400,000 and a variety of tax exemptions phased out
  • business taxation will be $60bn lower in 2013
  • 2 million Americans will have their unemployment benefit extended for another year

What’s next?

As part of this agreement Congress has given itself another two months to address government spending. If Congress fails to reach a second deal then automatic cuts to the budgets for defence and entitlements will kick in. These cuts are called the sequester. This second deal should also include agreement over raising the debt ceiling, the legal limit on how much public debt the US is allowed to issue. On top of all this Congress must also authorise departmental spending before the end of March to avoid a Government shutdown.

The public finances

Like many countries the US is running a very high public deficit, its tax revenue does not cover the amount it is spending. This agreement means that the tax revenue received by the US Government will be a lot lower than previously planned.

The agreement means that the 2013 deficit is now projected to be $330bn higher at $941bn or 5.9% of GDP. This is still a big fall from 2012’s deficit of $1.2tn (7.5% of GDP). The next deal must tackle spending and we expect it to reduce the deficit, though not by much in the short run.

US budget deficits (% of GDP)

Source: Group Economics, Congressional Budget Office.






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