Print options

December 12, 2012

Contentious US Fiscal Debate Has Worldwide Implications

by VOA News

U.S. President Barack Obama and his Republican opponents in Congress are engaged in a contentious dispute over government spending and tax priorities that could have implications for the world economy.

In Washington, officials are calling it a "fiscal cliff."

It is a financial precipice calling for $500 billion in mandated government spending cuts and tax increases for most American workers that are set to take effect on January 1 unless Obama can reach a compromise with the Republican lawmakers on a new financial plan to begin to rein in chronic overspending by the American government.

Independent analysts say that if the crisis is not averted, the spending cuts and tax hikes would be so sharp that the jolt would likely plunge the U.S. economy, the world's largest, into its second recession in three years.

With the U.S. economy playing such a key global role, cascading over the fiscal cliff could prove detrimental to the world economy, said Steven Smith, a political scientist with Washington University in St. Louis.

"A lot of those economies in Asia, in Europe that count on a market for their goods in the U.S. would find that the U.S. consumer would be buying a lot less and it would exacerbate already serious conditions in those locations," he said.

Obama, the newly re-elected Democrat, has been trading proposals with the Republican leader of the House of Representatives, Speaker John Boehner. But the two sides do not appear to be close to an agreement. They remain hundreds of billions of dollars apart in the size of spending cuts the Republicans want compared to the White House and the scope of increased taxes being sought by the president and generally opposed by Republicans.

Boehner said he is still hopeful of an agreement, but concedes a wide gap remains in reaching one.

"I remain the most optimistic person in this town, but we've got some serious differences," he said.

The current dispute is one of Washington's own making.

Obama and his Republican foes were unable to reach a comprehensive spending agreement last year, and essentially agreed to postpone the tough choices until after last month's presidential and congressional elections. Now they are faced with the end-of-the-year deadline.

Obama wants to fulfill a campaign promise to end a tax break for the country's wealthiest households, those making more than $250,000 a year, but Republicans have balked, while saying they would agree to end unspecified tax loopholes that mostly benefit well-off families. Republicans, in turn, wants sharp cuts in the country's popular government health care plans for older people and impoverished Americans and pensions for senior citizens, programs most staunchly supported by Democrats.

The philosophical divide between the two parties is contributing to the stalemate, said Smith.

"It’s this balance, and where to achieve that balance, that is making things so difficult," he said. "Republicans are emphasizing more immediate deficit reduction and the Democrats are emphasizing the need to be patient and allow the economy to more fully recover."

Despite the rancor of the moment, Smith said he sees Obama and his political foes eventually reaching a compromise.

“My guess is that no one’s going to be happy with it. They’re also likely to kind of muddle through by not coming up with a large, long-term plan," he said. "My guess is that they can do some things to get through this crisis that will take them through a few months or a year that will have to be addressed again at a later time."

Smith predicted the two sides will make modest changes in the social welfare programs, impose spending caps on various government programs and modestly increase taxes on the wealthy.

He said a more comprehensive package is unlikely. "It seems unlikely they will come to a grand compromise. There’s a lot of pressure on them to do that... But it would require pretty serious concessions on both sides that neither side at the moment seems willing to make.”