With the dust settling on a US election result that just about everyone who is not Republican (and a good few who are) is relieved by, it is back to financial business as usual—and not before time. Europe has just moved back into recession with French unemployment at 10% and one Spanish youth in four out of work.
Even though the Greeks approved (another) sweeping set of €17bn in austerity measures cutting pensions, salaries and social services, their €31bn in credit remains firmly locked and most workers remain convinced that strikes can magic good times out of thin air. The UK is in the throes of a double-dip recession and a reinvigorated Obama is immediately faced with what is being touted as a ‘fiscal cliff’ for the US economy.
The origin of all this is the series of tax cuts and unemployment benefits linked to reductions in military and domestic programmes, agreed six years ago under Dubya and designed to stimulate a faltering economy. But that had caveats of time limits attached. That flight of chickens is already in the landing path and set to come home to roost on January 1st 2013. Both sides of the House are agreed that this sudden $700m change could scupper recovery. But whether Obama can break the Washington gridlock of DEM initiatives being stalled by resolute REP opposition remains to be seen.
Much of the current energy around establishing sound fiscal conditions is focused on plans that theoretically would both contribute revenue to deficit reduction and significantly reduce individual income tax rates. But two things combine to make that desirable outcome unlikely:
- Some politicians see the scape-goat-free enforcement of tax increases and spending cuts that would result if no action is taken prior to Jan 1st as one way of increasing tax revenue in the teeth of Republican opposition and for which they cannot personally be blamed
- Despite the supposed unity within parties, some politicians from both sides (but especially Democrats) see such logjams as pork barrel opportunities, where they can insist on irrelevant attachments to bills that nonetheless suit some narrow interest for theit own local constituents (especially generous campaign donors)
While it may sound strange to European ears, where party discipline is a given, such horse trading is common in Washington. Plans to reduce many tax deductions, exclusions, etc (i.e. tax expenditures) to pay for both lower personal income tax rates and deficit reduction may seem like a politically attractive alternative to raising tax rates or cutting entitlements or other spending.
But huge swathes of people now rely on tax expenditures, such as the deductibility of mortgage interest, charitable contributions and the exclusion from income of employer-provided health insurance. Even when the substantive effects and political realities of large-scale reductions are examined, it’s obviously not possible to both reduce tax rates and also cut the deficit on this basis.
Raising tax rates for those with the highest incomes challenges the proposition that even moderately higher rates hurt growth. Clinton’s 1993 deficit reduction plan increased income tax rates for the top 1%. Republicans fell over themselves to claim this would lead to recession. Instead, the job creation powered over a decade of economic expansion that fell over only once Dubya had brought in his tax reliefs for the rich that are among those about to roll over the cliff.
Perhaps because we don’t face the same urgency of an approaching cliff, none of this seems to have percolated into the economic thinking of either Osborne or Balls. It certainly has elicited no contrition from their predecessor Alastair Darling, on whose watch the wild excesses of junk ‘financial instruments’ imploded, taking most of our economic growth with them. His new book Back from the Brink implies that politics is merely a competition in managerial competence: his stance is unchanged in a defiant macho chest-butting austerity that gets short shrift from colleagues:
“I will admit from the outset that I am not a big fan of the former Chancellor. In particular his, our cuts will be “tougher and bigger” than Thatcher’s, almost led me to giving up on the 2010 election campaign. That one stupid phrase illustrated just how managerial Labour had become in government”. —Dave Watson, Head of Bargaining and Campaigns, UNISON Scotland.
Now that Britain is four years into Osborne’s eye-watering austerity, made liquid only by extravagantly irresponsible amounts of ‘quantitive easing’ (i.e. printing money you don’t have), you wonder if the US’ dilemma of an impending fiscal cliff might not be just the thing to focus our own minds for fresh, decisive action, rather than simply applying more leeches to an already debilitated economy à la Osborne.
BASE jumpers know how to deal with a cliff: indeed they welcome such opportunity to launch themselves into the unknown. But (and this is a big ‘but’), in order to survive, they have trained, equipped and psychologically prepared themselves for something so radical as a leap into the unknown, with every intention of landing hale and hearty. It will take much hard work, good will and inspired insight for Obama and both sides of the House to design, pack and agree a fiscal chute in the short time available. But it’s still feasible.
Despite Labour having raised debt per head fourteen-fold on their watch (£432 to £6,237) and he has taken it to forty-fold (£17,523), Osborne sees no cliff—indeed maintains that the ground recently covered that has perversely sloped down and down each year, despite all his best reassurances, will soon lift us back towards the sunlit uplands that lie just ahead. The chart above shows scant evidence for this.
Right about now, you may wish to consider strapping on a parachute.