WORLD ECONOMIES AT THE EDGE OF "FISCAL CLIFF"

RAEES UDDIN KHAN
(feedback@pgeconomist.com)
Nov 26 - Dec 2, 2012

Fiscal Cliff, a term that has become a buzzword after President Obama's victory in US elections on November 6.

WHAT IS FISCAL CLIFF, ITS BACKGROUND AND WHY IT IS GAINING SO MUCH IMPORTANCE NOWADAYS?

Fiscal Cliff is not a new word invented just after US election, but has been in discussion in economics circles around the world for quite sometime. It has gained Importance, as world is approaching December 31, 2012. The US president, along with its opponent Republican Party has to make decision in January next Year 2013 on the important economic issues which will directly have impact on the 320 million population of America. Not only that, the major world Economies like that 17 Euro zone countries , China and Japan and many more countries around the globe will have a trickle down effect of the crises if not handled affectively.

Factually, American economy in the present state has a consumption of around quarter percent of goods and Services produced in the world, holding highest Gold reserves with a competitive advantage on Oil production consumption and reserve, and dominate in world institutions like

IMF and World Bank. Any Economic decision on major issues like spending cuts and taxation in USA with such ramification around the world has to be watched and understood.

The "Fiscal cliff" is the popular shorthand term that has been used to describe the problem that the US government will face at the end of 2012 when the terms of the budget control Act 2011 are scheduled to go in to effect. Among the laws that are going to change when the New Year begins are the end of last year's temporary payroll tax cuts. This will result in an Increase of 2% of taxes for workers. It will end certain tax breaks for Businesses .While all this occurs, spending cuts that were agreed on as a part of Debt deal of 2011 will begin to go into effect. This will also affect about 1000 government programs that include Defense budget and Medicare that will fall in line for deep automatic cuts.

If this is allowed that is scheduled for 2013 to begin with, it will result in number of tax increases and spending cuts that would weigh heavily on US growth and could drive the economy back into recession.

This problem has existed for the past three years but nothing has been accomplished. As we get closer to the Cliff the end of Year December 31, 2012, investors around the world are worried and concerned as the current political environment conflict in USA has to reach a compromise for the betterment of the world economy.

Republicans want to cut spending and avoid raising taxes, particularly on rich. Democrats are working for combination of spending cuts and increase Tax on Richer section of the population.

Everyone wanted to avoid the cliff the dead time of December 31, 2012 but due to election thoughts of compromise have been put a side. Now that the election is over both sides will look for solution by the next Congress to be sworn in 3rd January 2013.

The term "Cliff" indicates an immediate fall a disaster that would occur at the beginning of 2013 if the solution is not found out and the current laws are allowed to go into effect on 2013 which will have dramatic impact on the US economy. The deficit would be reduced by $560 Billion, GDP would be cut by 4 percentage points in 2013 that would put the economy into recession. Unemployment would rise by a full percentage point and would lose about Two million jobs. With the world biggest economy of USA going into recession and Euro zone countries already facing economic crisis, one could imagine the economic disaster the world economies will face in 2013 onward?

HOW DOES AMERICAN NATION TAKING THE ISSUE?

Republican challenger Mitt Romney told disappointed supporters, "This is a time of great challenge for nation. I pray that the president will be successful in guiding our nation. He further said, "Put the people before the politics". What is the great challenge for President Obama? Obama faces the task of tackling 1trillion$ annual deficit, annual 16 Trillion$ national Debt and over hauling expensive social program to avoid the cliff

WHAT IS THE ALTITUDE OF OBAMA?

In his President Obama's first address since his re-election on Nov-6, pulling a pen inside his blazer Obama said, "People like me earning $250,000 annually must face tax hikes rather than the poor or middle class." I am ready to sign the bill right away, for the nation. He even contemplated to appoint Mitt Romney ,the most power job as Treasury secretary.

This is the behavior of US President and opponent in USA.

How does it compared with Pakistan? Pakistan is not on fiscal cliff but rather it has reached the "fiscal mountain". Pakistan has one of the least effective fiscal regimes in the world -from a population of around 180 millions; only 260,000 people have paid Tax consecutive for the last three years. Total tax revenue amounted to a 9.1% of GDP last year, which is among the lowest in the world. In case of fiscal deficit, against a target of 4.5 percent, the deficit may cross 6.5 percent of GDP this year.

How does the rulers and main opposition party, react to the economic woes of people of Pakistan? The general public has no information as to the income they are earning , their source, and tax they are paying and how they are maintaining the lavish standard of living?

The biggest opposition party in their economic policy wants to treat rich and middle class at the same level and want to apply 10% tax flat rate on everybody thus protecting the rich class.

The Government on the other hand has come up with the tax amnesty scheme, where for one off flat payment of Pakistani rupees 40,000 just $420 even lifelong tax evaders will have the slate wiped and cleaned in return for committing to pay tax regularly from next year.

Instead of going for amnesty scheme, we should be cracking down on tax evaders not letting them off the hook. This is in fact an invitation to money laundering. This scheme is discriminating in favor of cheaters and evaders. It is like "Economic Reconciliation" as we had "Political Reconciliation", which ultimately had to be struck down.

Its time for us to learn and apply what history is teaching us

The writer is Director Research and Training, Institute of Securities Management and Research