The Eurozone crisis appears to be past its worst and, even if it isn’t completely over, it appears to be under control. However, it appears that the next financial crisis may well be the US.
On the 1st of January 2013 the House of Representatives passed a bill that would keep income tax at the same level for most US tax payers but would increase taxes for those earning more than $400,000 (£246,000).
Passing this bill avoided the US falling off the so called “fiscal cliff”. The “fiscal cliff” is a collection of tax increases and spending cuts that a bi-partisan committee investigating ways of capping US government spending defined for automatic implementation on 1st Jan 2013. The tax increase and spending cuts were never meant to be implemented they were only meant to set to give a immovable deadline for the committee. However, the committee missed the deadline so the House of Representatives and the Senate had to agree and approve new legislation.
The problem is that the new legislation has only tackled the tax increases. There are still two related issues outstanding:
- spending cuts – the legislation has simply postponed any spending cuts for 2 months. There will be negotiations between the White House and Congress during the next two months. However, I think there is a strong possibility that the two sides are so far apart that the decision on spending cuts will run right up to the deadline. So prepare for more news about the fiscal cliff in two months time.
- Congress define a debt ceiling and the US is forecast to hit the debt limit in two months time. This is why the spending cuts can be delayed by 2 months. So in two months time Congress must either approve an increase to the debt ceiling or have a negotiated agreement with the White House to cut spending.
- the US deficit is too high at $16trillion and is forecast to be $20trillion by 2016. The US deficit needs to be brought under control to avoid a debt crisis. The US government has to control spending but this has to be done in a way that does not stifle the economic recovery and growth.
From a personal perspective the US fiscal cliff impacts me in the UK because it will impact share prices in the UK. This will impact my pension and long term savings. Unfortunately, it looks to me as though the value of global shares may well be impacted in 2013 by on-going financial problems in the US.