The fiscal cliff is inevitable, what to expect?

Following prolonged automatic budget fixes, the celebration of 2013 it is expected to come along with enormous tax increase and huge spending cuts in the United States. Taxes will increase by approximately $500 billion and spending is to be cut down by about $100 billion due to the expiration of Bush tax cuts.

That is about 4% of the GDP at the current economic state of the US. According to most economists, this will be just enough to put the recession back into the spotlight. The result of this event will drive taxes upward just about for everyUS citizen. At the same time, government spending will decrease significantly causing pause to many projects. It is certain that the fiscal cliff consequences won’t make anybody happy. The US government is familiar with this fact and that is why it may try to prevent this scenario from development.

Such forecast is nothing closer to a relief. The fiscal cliff is dangerous and resolving its multiple impact won’t be an easy task.

Some things couldn’t be avoided in order to get off the problem. First of all, the US legislators must find a way to reach a compromise deal on the current law and the automatic execution. Second, tax increases and spending cut are inevitable. They have to be applied, in order to lower down the deficit levels and reduce the debt in respect of GDP.

The results won’t be as damaging as if the planned $600 cut were applied. But have in mind that the US economy would be definitely hurt. If the American economy tumbles back into recession, this will greatly affect all international markets and discourage investors considering placing their assets into equities. Such view is a contrarian to Merrill LynchWealth Management’s rather optimistic projection for 2013.

Resolving the fiscal cliff issue is due to happen sooner than you think. The problematic topic is widely discussed since the summer, yet we are in the wake of 2013, and there is not enough time. All the terrifying expectation would take place, but on a smaller scale.

Property prices and gift taxes are expected to rise in the US, though it is possible that the Alternate Minimum Tax won’t be reconsidered as it was on previous basis. The cut in salary taxes for Social Security would be probably barred. At the same time a cap on mortgage interest and charity will be deducted. Basically, certainly there will be increases in taxes on dividends and major gains.

That way tax rates won’t rise, while all of these revenues will be enhanced. The Republican Party is expected to approve this policy. Spending will be modified in similar defense and non-defense cuts from Budget Control Act of 2011. Yet, healthcare will be affected on the account of social security. As a result – the budget gap will get tighter, sooner or later. Despite the harsh measures, the recession is inevitable – driving deficit forward through the following 2013.

The events would be similar to the ones that have taken place in the Euro Zone recently. Their effect on global markets would most probably be negative in the short term, re-positioning gold and the rest of the precious metals as safe haven for investors assets.

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