US Plunges Off Fiscal Cliff…

… and lands on a ledge a few metres below. The US legislature had until midnight on New Year’s Eve to come to an agreement on spending cuts and tax rises before George Bush-era tax cuts expired and a programme of automatic spending reductions and tax rises came into force – the so-called “Fiscal Cliff”. In the event, Republicans and Democrats could not conclude a deal before the New Year dawned and so the nation plunged off the cliff only to find that there was a ledge just out of sight and only a couple of metres or so into the abyss. The ledge is in the form of an interim agreement that both sides could agree to that was signed off on a few hours after the deadline had passed.

The deal will see tax rises avoided for individuals with incomes below the $400000 mark – initially, Democrats wanted the threshold set at $250000 and Republicans sought an exemption up to $1000000. A decision on spending cuts on the details of a programme to cut $1.2 trillion from government spending over the next decade has been deferred for two months to give the two major parties more wrangling time.

Markets around the world are closed for the New Year’s Day holiday, but are likely to react well to the news that a crisis has been averted since it had been widely forecast that the $600 billion in mandatory cuts and tax rises would have pushed the US economy into recession – the middle classes were looking at between $2000 and $3000 in increased taxation out of disposable income. Since something like 70% of US economic output is consumed within the domestic market, such a large decrease in disposable income would have had a significant effect on the US economy – and further afield.