Economists Worry About Fiscal Cliff Resolution
November 7, 2012, 4:04 PM By Michael S. Derby
Economists at Wall Street’s biggest banks are warning that a resolution of the year-end “fiscal cliff” situation remains elusive despite the outcome of elections Tuesday.
Forecasters are worried that since the levers of government are in essentially the same hands as before the election, lawmakers may be hardening themselves against any form of compromise to deal with a threat many economist say could bring a new recession.
The clock is ticking: At year end, broad-based Bush-era tax cuts are set to expire at the same time a series of drastic government spending cuts are set to kick in automatically. Lawmakers generally acknowledge something does, in fact, need to be done, but that hasn’t made a solution any easier.
The central problem is the lack of change. President Barack Obama was reelected. Democrats retained control of the Senate, while Republicans held on to the House of Representatives. The fiscal cliff can only be resolved if lawmakers work together.
“Returning to status quo likely means all sides see the voters as supporting their views, which means reaching compromise is not likely to get any easier,” economists at Bank of America Merrill Lynch warned clients.
The central issue is the fight over taxation. The president is willing to raise taxes on the wealthy, while Republicans are staunchly against such an action, even if it would help reduce the deficit.
“If Republicans do not concede ground on this issue, then the risk rises that Democrats allow the Bush tax cuts to all expire in order to push their own ‘middle income tax relief’ plan,” Bank of America said. The bank says there’s a good chance that an inability to come to terms on this point could leave the fiscal cliff unresolved into the start of the new year.
Barclays Capital economists agree the chance of going over the cliff temporarily is “high.” They also reckon a comprehensive and lasting solution to the problem will take more time than elected representatives have left in the year. That means government leaders may be forced to put in place temporary fixes while they wrangle over a deal.
IHS Global Insight also sees an extended effort at finding a solution, and its analysts suspect tax hikes and government spending cuts will be part of the eventual deal. An inability to compromise “would be a recipe for turmoil in the financial markets, and would threaten such a severe shock to the economy that the pressure to come to some sort of compromise would be extreme.”
Many economists agree some form of higher taxation and lower government spending will be the end product of negotiations, even if they’re not sure when the deal will be delivered.
Wells Fargo‘s chief economist John Silvia expects the Bush tax cuts to stay, although the highest earners may pay more. There will likely be government spending cuts to the tune of $100 billion that will include defense cuts. New taxes on interest and dividends are likely, Mr. Silvia said.
RBC Capital Markets analysts expect Republican House leaders to fight strongly to keep in place all the Bush tax cuts, confident in their belief the president has no mandate to force action. But because the legally mandated budget cuts will strike hard at military spending, the administration has a “bargaining chip” to extract concessions from House Republicans.
“The probability Republicans capitulate on allowing current top-end tax rates to expire is actually higher than is probably appreciated,” RBC Capital Markets said.
Source : WSJ Blogs
November 7, 2012, 4:04 PM By Michael S. Derby
Economists at Wall Street’s biggest banks are warning that a resolution of the year-end “fiscal cliff” situation remains elusive despite the outcome of elections Tuesday.
Forecasters are worried that since the levers of government are in essentially the same hands as before the election, lawmakers may be hardening themselves against any form of compromise to deal with a threat many economist say could bring a new recession.
The clock is ticking: At year end, broad-based Bush-era tax cuts are set to expire at the same time a series of drastic government spending cuts are set to kick in automatically. Lawmakers generally acknowledge something does, in fact, need to be done, but that hasn’t made a solution any easier.
The central problem is the lack of change. President Barack Obama was reelected. Democrats retained control of the Senate, while Republicans held on to the House of Representatives. The fiscal cliff can only be resolved if lawmakers work together.
“Returning to status quo likely means all sides see the voters as supporting their views, which means reaching compromise is not likely to get any easier,” economists at Bank of America Merrill Lynch warned clients.
The central issue is the fight over taxation. The president is willing to raise taxes on the wealthy, while Republicans are staunchly against such an action, even if it would help reduce the deficit.
“If Republicans do not concede ground on this issue, then the risk rises that Democrats allow the Bush tax cuts to all expire in order to push their own ‘middle income tax relief’ plan,” Bank of America said. The bank says there’s a good chance that an inability to come to terms on this point could leave the fiscal cliff unresolved into the start of the new year.
Barclays Capital economists agree the chance of going over the cliff temporarily is “high.” They also reckon a comprehensive and lasting solution to the problem will take more time than elected representatives have left in the year. That means government leaders may be forced to put in place temporary fixes while they wrangle over a deal.
IHS Global Insight also sees an extended effort at finding a solution, and its analysts suspect tax hikes and government spending cuts will be part of the eventual deal. An inability to compromise “would be a recipe for turmoil in the financial markets, and would threaten such a severe shock to the economy that the pressure to come to some sort of compromise would be extreme.”
Many economists agree some form of higher taxation and lower government spending will be the end product of negotiations, even if they’re not sure when the deal will be delivered.
Wells Fargo‘s chief economist John Silvia expects the Bush tax cuts to stay, although the highest earners may pay more. There will likely be government spending cuts to the tune of $100 billion that will include defense cuts. New taxes on interest and dividends are likely, Mr. Silvia said.
RBC Capital Markets analysts expect Republican House leaders to fight strongly to keep in place all the Bush tax cuts, confident in their belief the president has no mandate to force action. But because the legally mandated budget cuts will strike hard at military spending, the administration has a “bargaining chip” to extract concessions from House Republicans.
“The probability Republicans capitulate on allowing current top-end tax rates to expire is actually higher than is probably appreciated,” RBC Capital Markets said.
Source : WSJ Blogs
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