THE new term in office for President Obama could be even trickier than the previous one from an economic perspective, according to QNB Group analysis.
The previous term started in the midst of the global financial crisis, while this one is starting with a looming fiscal crisis. Unless Congress can reach agreement, $600 billion of automatic tax increases and spending cuts are due to come into effect at the beginning of 2013, creating what is known as the ‘fiscal cliff’. The US Congressional Budget Office (CBO) estimates that these would cut GDP growth by 4 percent, pushing the economy back into recession.
Rising government debt means that some fiscal consolidation is needed. Federal debt reached $16.2 trillion at the end of October 2012, near the ceiling of $16.4 trillion, which was set in August 2011. The increasing federal debt, which is already over 100 percent of GDP, could lead to downgrades by ratings agencies Moody’s and Fitch in 2013.
The economy was in a steep recession when Obama entered office in 2009 as the financial crisis undermined the wider economy.
Government debt increased sharply as efforts to support the financial sector and create jobs to stimulate the economy were put in place. As a result debt increased to 103 percent of GDP in 2011 and is forecast by the IMF to reach 107 percent by the end of 2012.
During Obama’s term, Congress has been unable to agree on a fiscal policy to lower the deficit and reign in public debt, which has led to the enactment of automatic spending cuts and tax increases from the beginning of 2013. The US elections have not changed the political dynamics that drive US fiscal policy, according to QNB Group. Obama remains President, the Democrats retain control of the Senate and the Republicans retain control of the House of Representatives.
This implies a likely continuation of the status quo with ongoing lack of agreement and likely delays in implementing fiscal consolidation.
It is critical to the sustainability of the US economy that action is taken to limit increases in government debt. However, a lack of consensus between Republicans and Democrats, essentially around whether to cut spending or increase taxes, has led to delays in implementing fiscal consolidation.