Will the US jump the financial cliff? – The stock market reacts positivity in hope of headway on plan

Tuesday, November 13, 2012

There are 40 days to go before President Obama runs out of time to negotiate a concise deficit-reduction plan that will prevent the American economy ‘falling off the fiscal cliff’ – a representation of a time of undoing when current tax policies are due to expire and federal spending cuts worth $500 billion will automatically begin. Although the cuts will reduce the US federal budget deficit, they will have huge local and global ramifications, affecting business and individuals.

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If talks fail, Americans will see a federal tax rates rise and massive across-the-board cuts in federal spending among US states, causing dramatic strain on the state’s fragile economic recovery. The spending reductions would affect American states differently because of the variance and amounts of grants they receive.

The possibility of not reaching a deal is already damaging growth prospects with businesses around the globe reacting with caution to the possible dramatic effects. This negativity only worsens the business environment, causing business’ to restrict growth, the borrowing of capital and withdraw from taking on more staff. This has an effect on everyday Americans as individuals restrict their buying which delays the hope of economic recovery further.

 

The goal now for US policy makers needs to not just focus on reaching an agreement for the present that will prevent the US from slipping down the fiscal cliff but a deal that will set in place a long-term framework to address the longstanding fiscal problems facing the US economy.

 

US Government spending is led overwhelmingly by entitlement spending. Entitlement payments are payments to individuals resulting mostly from Medicare, Medicaid and social security and then to a lesser extent from income maintenance and unemployment insurance. Therefore, a focus on setting the budget on a sustainable path with a reduction in entitlement spending which will allow for more spending on other necessary services will be the way to fix the long-term financial difficulties of the US.