In a move that was not without a heavy dose of brinkmanship, America’s Senate and House of Representatives literally provided a last-minute face-saver to President Barack Obama by finally approving legislation late on Tuesday that would prevent the United States going over what is now popularly known as the “fiscal cliff”. Plainly put, the fiscal cliff is a budgetary crisis the US government would have faced from January 1, 2013, by having to cut $110 billion of budgetary spending, primarily on the military and welfare schemes for the poor and unemployed. In a pre-dawn vote on Monday/Tuesday, the US Senate voted to allow tax rates to rise from 35 per cent to 39 per cent on rich American couples earning over $450,000 a year and individuals earning $400,000, and phased out taxes on those earning less than $250,000 a year. It also agreed not to slash unemployment benefits for the jobless. Critics, including many Democrats, say this will hardly touch the periphery of America’s fiscal deficit. This deal is expected to garner around $600 billion over 10 years, while the US fiscal deficit will be $11 trillion over the next 10 years.
While the deal is a definite political victory for President Obama, who made taxing the rich one of his key re-election issues, the news buoyed sentiments across global stock markets. The Indian markets hit two-year highs while London’s FTSE index breached the 6,000 mark for the first time and Hong Kong’s Hang Seng was up 655 points. The markets had languished in December as tensions between Republicans and Democrats had got heightened over the “fiscal cliff” issue.
Had there been no deal, the ruthless budget spending cuts would have kicked in automatically, setting off a tsunami of economic hardships for already hard-hit economies across the globe. The Eurozone crisis is also a continuing drag on global economies. Stock markets would have sunk in knee-jerk reactions, and uncertainties are bad for markets. With lower spending by the world’s largest economy, all other economies that depend on the United States for their exports would witness economic depression. The US is also one of the largest export markets for India, though in recent times there has been some diversification to Latin America, Africa and Asia. But a further fall in exports would have affected this country’s current account deficit, which is already very high and a cause of concern. It would also have weakened the rupee further against the dollar.
The world’s economies are still not out of the woods. Nor is the issue of the US deficit, that is ballooning out of its permitted limits, anywhere near a resolution. The problem will continue to hang like an albatross over the world’s economy and stock markets.