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US Fiscal Cliff Deal Reached at the 11th Hour

January 3, 2013 by Jessica Leave a Comment

US lawmakers averted the dreaded fiscal cliff just in the nick of time, preventing $600 billion in simultaneous spending cuts and tax hikes on all income levels which were set to start this January.

The US Congress and President Obama have enacted laws in the last three years which had a common deadline of January 2013. All these laws and its effects comprised the so-called fiscal cliff.

Deficit-reduction meetings between Democrats and Republicans have been ongoing for more than two years, but cross-party discussions only started after the November 6 US elections nailed Obama, the Republican-ruled House, and the Democrat-controlled Senate to their seats for two more years.

Both sides jostled for compromise until the remaining weeks of 2012. House of Representatives Speaker and Republican John Boehner met extensively with President Obama along with other officials, and at times came close to an agreement.

At one time, Boehner offered an alternative proposal, “Plan B,” which will grant higher tax rates to those who earn an annual income that exceeds $1 million. He failed to raise support for this plan from his caucus.

Eventually, a compromise between the Obama and Boehner was never reached, and it went up to the Senate and Vice President Joe Biden to strike a deal. Senate Majority Leader Harry Reid and Kentucky Republican leader Mitch McConnell reached out to each other for a compromise over spending cuts, income tax rates, and estate taxes. In the end, Senate Minority Leader McConnell and Biden forged a last-minute deal on New Year’s Eve, which the Senate and House of Representatives approved on January 1.

The significance of this deal cannot be stressed enough; the economic effects are wide-ranging. With the agreement, most notably, the probability of another US recession this year was dashed; short-term fiscal stimulus is retained while increasing revenue over the long run; low-income families and college students will continue to enjoy their refundable tax credits; a tax hike by more than $3,400 for each household was prevented; unemployment insurance for nearly 2 million unemployed Americans, whose unemployment benefits have expired, is extended; tax cuts for married couples, who earns less than $450,000, is permanently extended; at least one-year federal production tax credit extension for wind power is granted; and inequality will be leveled somewhat as the top 1 percent of income earners will shoulder the most burden of higher taxes.

With the fiscal cliff of automatic spending cuts postponed and sweeping tax hikes extensively avoided, the US economy is in better shape to start the new year. However, US lawmakers will have to deal with the budget ceiling soon, and Congress is expected to discuss raising the debt ceiling by February.

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Filed Under: Analysis

About Jessica

Jessica has been a trader in the forex market for the last decade. She specializes in technical analysis and writes for several forex blogs about the topic.

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