An American risk to the world

The Obama administration is walking a tightrope as far as U.S. finances are concerned because Democrats and Republicans have not yet reached full agreement on the nation’s fiscal reform. The U.S. economy appears to be on an upward path as production and employment are recovering and consumer spending including car sales revives.

But a failure to reach an agreement on fiscal reform will put a brake on the U.S. economic recovery, thus negatively impacting the global economy. It is hoped that the Obama administration and congressional leaders stop bickering and settle this important economic issue at an early date.

Currently obligatory federal spending cuts of $1.2 trillion (worth about ¥112 trillion) over 10 years has been put on a two-month freeze. If the freeze ends without any new agreement, the spending cuts will start March 1. Thus the U.S. will face a fiscal cliff — a combination of an end to large-scale tax cuts plus obligatory spending reductions.

During the freeze, tax cuts for households whose annual income is less than $450,000 continue. The freeze, agreed on in Congress as a result of negotiations from late December to early January, has softened the blow to the U.S. economy. But a fundamental solution to the problem was postponed after serious partisan conflict emerged, subjecting the question of how to carry out fiscal reform to political bargaining.

If the spending cuts agreed on in the summer of 2011 between Democrats and Republicans are implemented from March 1 as originally scheduled, it is clear that it will frustrate the U.S. economic recovery. As part of the cuts, defense spending will fall greatly. U.S. defense industry has reportedly started curtailing investments and the hiring of new employees.

According to an estimate by the Japan Research Institute, the end of the tax cuts for the rich and of the payroll tax cuts already agreed on by the ruling and opposition camps will have the effect of increasing the tax burden on a household by an average of about $1,300 in 2013. A decrease in consumer spending caused by the tax burden increase is expected to push down American GDP growth in 2013 by 0.75 percent in real terms. If the obligatory federal spending cuts kick in, the shape of the U.S. economy will worsen.

President Barack Obama on Feb. 5 proposed that the start of the spending cuts be delayed for several months. But Republicans demand that the president first present a meaningful plan to reduce spending. The Democrats are cautious about spending cuts, including cuts in social welfare spending, and demand tax increases for the rich. Both camps should realize that if they do not strike a compromise, the U.S. and other major economies could plunge into a state of confusion. It is hoped that Mr. Obama will soon present an outline for long-term fiscal reform to help a compromise emerge.

  • US social welfare eats up 44% of the annual budget of 2.45 trillion USD. Defense another 25% making a total of 69%. Any deep cuts in these two heavy weights would affect the US economy. Even small steady cuts would impact the growth of the US economy unless the US can find other growth sectors to make up the difference. One promising sector is Shale Oil export and export of coal. But would US environmentalist put a spanner in the works..