2. “Fiscal cliff” is a phrase coined by Federal
Reserve Chairman Ben Bernanke.
What’s
the
Fiscal
Cliff?
A situation in which sudden changes in
government expenditure and taxation have a
profound effect on a country's economy.
This refers to the simultaneous expiry of tax
breaks and the introduction of tax increases and
spending cuts that were due at the end of 2012,
the cumulation of which were expected to push
the US back into recession.
If Congress and President Obama do not act to
avert this perfect storm of legislative changes,
America will, in the media's terms, "fall over the
cliff." Among other things, it will mean a tax
increase the size of which has not been seen by
Americans in 60 years.
3.
4. What
Caused
Fiscal Cliff
• Often, economic crises are caused by real
physical problems – like draught, war,
demography or technological innovation
that robs one economy of a competitive
advantage over another.
• Other times, economic crises result when
asset bubbles burst, or financial markets
collapse. The Great Depression - and The
Great Recession.
• The economic crisis of the moment - the
"fiscal cliff" - does not result from any of
these factors. In fact it is not a real
"economic crisis" at all, except that it could
inflict serious economic hardship on many
Americans and could drive the economy
back into recession.
5. A number of laws led to the fiscal cliff, including
these provisions
So what
actually
caused the
cliff?
• Expiration of the Bush tax cuts enacted as part of the
Economic Growth and Tax Relief Reconciliation Act
of 2001 and the Jobs and Growth Tax Relief
Reconciliation Act of 2003, as extended by the Tax
Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010;
• Across-the-board spending cuts to most discretionary
programs as directed by the Budget Control Act of
2011;
• Reversion of the Alternative Minimum Tax thresholds
to their 2000 tax year levels;
• Expiration of measures delaying the Medicare
Sustainable Growth Rate from going into effect as
extended by the Middle Class Tax Relief and Job
Creation Act of 2012.
6. C
o
n
t
i
n
u
e
d
• Expiration of the 2% Social Security payroll tax
cut, most recently extended by MCTRJCA;
• Expiration of federal unemployment benefits,
as extended by MCTRJCA.
• New taxes imposed by the Patient Protection
and Affordable Care Act and the Health Care
and Education Reconciliation Act of 2010
…
These provisions were to automatically go
into effect on January 1, 2013 without new
legislation Some provisions increased taxes
while others reduced spending
7. CBO projections of the sources of deficit reduction in the
FY2013 budget.
8. Effect on
Domestic
Economy
Tax- A large number of Federal tax provisions
will expire, raising taxes across the board. Tax
rates on income, capital gains and dividends,
estates and payrolls will all rise and other tax
provisions such as the child care credit are set to
be cut back or eliminated.
Real GDP- Increasing the current income,
capital gains and dividend tax rates shows
noticeable negative effects on the U.S. economy
and does hurt compared to the Baseline.
Consumption Spending- The greatest damage
is to consumption spending, losses average over
1 trillion per year over the 2013-2021. Between
2013 and 2017, consumption also falls by an
average of $1 trillion as well.
9. C
o
n
t
i
n
u
e
d
Capital Spending- Spending for business
investment declines when tax rates on income,
capital gains and dividends revert back to preBush levels; on average $48.5 billion yearly
between 2013 and 2021.
Savings- A substantial decrease in the funds
available for savings occurs and a decrease in the
“flow-of-funds” savings rate, derived from
Federal Reserve flow-of-funds data.
…
Federal Government Budget Receipts- Higher
taxes on capital gains and dividends significantly
harm the economy and job growth and suggest
that the increase in federal tax receipts may not
be a worthwhile tradeoff.
10.
11. If American consumers have less money = they buy
less= not good for Indian exporters (especially polished
diamonds).
Effect on
Indian
Economy
Many American companies outsource their research
and development work to India, particularly
pharmaceuticals (clinical trials of drugs), software,
engineering. If Obama removes the tax-benefits given
to them (+consumer demand already down)= they'll
either delay payments, cancel or renegotiate the
contracts given to the Indian companies.
12. C
o
n
t
i
n
u
e
d
If American Corporate have to pay huge taxes @ home,
and consumer demand is already low, they'll try to
concentrate more on India and other emerging
economies to get new customers (Retail, Aviation,
Pension-insurance) = More FDI may come to India.
…
Americans already burned their hands in share-market
and real-estate, if this fiscal cliff leads to recession,
they'll park their money in GOLD = demand of gold
increased= gold becomes even more expensive = bigger
Current Account deficit for India (because we too love
gold) = Rupee weakens against dollar, because when we
import gold, we've to pay in dollars= we've to pay more
rupees to buy same amount of crude oil = petrol price
increase = inflation.
