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January 4, 2013 / politicsbitesize

Averting the Fiscal Cliff

Obama 2013On the first day of the New Year a hotly debated issue was finally resolved and the financial markets began to breathe once more.  A deal to avert the fiscal cliff was struck in Congress after the Republicans gave way to calls for tax rises on the richest households in the United States.  President Obama signed the American Tax Payer Relief Act 2012 into law on the 1st January 2013.

Despite the many complaints raised by the Republicans that the legislation would raise taxes but not deal with the issue of government spending, it passed by a margin of 257 to 167.  The result was that stock market confidence grew around the world and London’s FTSE 100 rose to above 6,000 for the first time in seventeen months.

All this is great news for the global economy, but what exactly is the fiscal cliff that the world’s biggest economy nearly fell off?  The fiscal cliff represents the sharp drop in the budget deficit of the United States that would have occurred in the early months of 2013 due to increased taxes and reduced spending.  A deficit is the difference between what a government receives in revenues and what it spends on services and in the United States this was projected to be reduced by half of its current figure.  If this decline in the budget deficit had been allowed to happen then a recession would have followed.

President Obama signed the American Tax Payer Relief Act 2012 into law and it has eliminated many of the tax issues that surrounded the fiscal cliff.  The Act has pushed through tax hikes for the wealthiest individuals in the United States.  Now, those who enjoyed tax breaks on income over $400,000 will pay more in taxes and they will also be hit by an increase in tax on their investments.

On this side of the Atlantic the United Kingdom’s budget deficit is being handled in a very different way.  George Osborne has cut back on government spending by slashing funding to the NHS, the police and schools and by cutting welfare for the poorest individuals, whilst reducing the rate of tax for high earners.  It would be fantastic if the special relationship that has endured between the United Kingdom and the United States went so far as to encourage the Chancellor to follow in the footsteps of Obama and to increase taxes on the wealthy.  If this were to happen perhaps then we might all feel like we were in this together.


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