Last updated: April 21, 2015



The 'fiscal cliff' and what it means for the US and the world

Barack Obama Fiscal Cliff

President Barack Obama pauses during a statement on the fiscal cliff negotiations with congressional leaders. Source: AP

AS Americans spend New Year's Eve awaiting a decision by the US Congress that could avoid a "fiscal cliff", ANZ senior economist Tom Kenny explains what it all means.

What is the fiscal cliff?

ON January 1 about $US610 billion ($A589 million) worth of tax hikes and spending reductions will begin to take effect on the American economy, the world's largest.

Without this ''fiscal'' support, the nation will likely plunge back into recession.

The tax hikes would strip about $US500 billion ($A483 billion) from America's workers - the consequence of allowing supposedly temporary Bush-era tax cuts to lapse.

The spending reductions stem from the Budget Control Act, which forces the US Government to slash spending by $1.2 trillion (A$1.16 trillion) over 10 years, starting with $US110 billion (A$106 billion) in 2013.

The scale of these tax hikes and spending reductions is staggering - equal to two-fifths of Australia's entire economic output.

For the US, it could lop 4 per cent from GDP next year. It is forecast that unemployment would rise to more than 9.1 per cent from 7.9 per cent now.

Would it have an effect here?

Yes.''If the US goes into recession I would say that would have quite a dramatic effect on the global economy and Australia,'' ANZ senior economist Tom Kenny said yesterday.

The US is one of the better-performing major economies, Mr Kenny said. If it suddenly began to shrink it would have a ''destabilising impact'' on the global economy.

The world couldn't really afford any additional economic shocks, he said.

''And it would hard to see how Australia would be immune to that shock.''

Treasurer Wayne Swan has said fears of the cliff are already having an effect.

''Even though unlike other countries we have low debt and very strong public finances, we're not immune from global developments,'' Mr Swan posted on his Twitter account on Friday.

''The impact of America's fiscal cliff saga combined with Europe's deep problems is having a real impact on the entire global economy.What is being done to stop the US going off the fiscal cliff? Lawmakers on both sides of politics are talking, but they have left it very, very late.

''It's a crazy situation,'' Mr Kenny said. ''They've had so long to deal with it.''

On Saturday, President Barack Obama said: ''The hour for immediate action is here.''

The President wants the tax hikes imposed on the rich. Republicans had been resisting this but over the weekend appeared willing to give ground.

Both sides' leaders in the Democrat-controlled Senate set a deadline of 3pm Sunday (7am Monday AEDT) for reaching a compromise that could be voted on in the Senate and then the Republican-controlled House of Representatives.

Will a deal be done?

Mr Kenny said he was hopeful that the party leaders would strike a deal - but not necessarily before January 1.

''I am pretty sure they are not that stupid that they will grind the economy into recession,'' he said.

He believed an agreement would likely avoid imposing tax hikes on lower-and middle-income earners, and that it would reduce the severity of the spending cuts.

''But right now it feels Y2K-ish - that planes are going to start falling out of the sky and that clocks are going to stop ticking.''


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