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US fiscal cliff crisis – postponed, not resolved

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The majority of financial analysts and bourgeois economists were quite optimistic about 2013. They expected that, after a continuation of the shallow growth rates in the first two quarters, the long awaited cyclical upturn in world economy would finally materialise in the second half of the year. Just a glance at stagnating growth rates, falling purchasing indices, high unemployment rates etc, would suggest this optimism was about as well founded as the Mayan calendar's prediction of the apocalypse. Moreover, the optimism assumed a great deal - such as the Euro-crisis being resolved, China returning to expansive growth and the US solving its fiscal problems. Whatever the prospects for Europe, it is clear that the grounds for optimism in the US are already evaporating at the beginning of the year.

The “fiscal cliff” refers to the simultaneous increase in taxation and swingeing cuts in public spending that were planned to come into force automatically in the New Year as a result of past Congressional decisions. The tax increase would actually have been the ending of tax cuts that were made early in George W Bush's administration to boost spending after the bursting of the “” bubble and again after the attack on the World Trade Centre. Despite his programme of “change”, Obama agreed a temporary extension of these cuts, which are worth some $1.7 trillion, until the end of 2012. A return to the old taxation rules would have meant that taxation of the super-rich would increase from 35% to 39.6% or, on average, by about $90,000.

The threatened cuts in spending were a result of a compromise between Obama and Congress which allowed the president to raise expenditure by $2 trillion above its supposed ceiling of $14.6 trillion in 2011. The deal was that a programme of budget cuts would be agreed by the end of 2012 or else spending would be cut automatically at the beginning of 2013. Although giving both tax cuts and spending increases a common end point was supposed to focus minds on the need for a new spending and taxation package, it has, in reality, highlighted the political paralysis at the heart of US government.

Not only has nothing approaching a comprehensive agreement been reached but, in the meantime, spending is already close to the new, raised ceiling of $16.4 trillion. Treasury Secretary Tim Geithner faces the prospect of US fiscal insolvency by the end of February 2013. The “Fiscal Cliff”, with its threat of cutting $109 billion every year for 10 years, the danger of insolvency and the paralysis of the law makers – all this promises several months of drama with enormous consequences for the US and the rest of the world.

First of all, the deficit spending of the US, together with the quantitative easing of the FED were central for the shallow recovery after the global recession of 2009. The annual rates of budget deficit compared to GDP in these years were -11.2%, -10%, -8.7%, while the overall indebtedness is above 100% of the GDP. If the US were a member state of the Eurozone, these rates would put it in the category of crisis-economies like Spain and Greece. On the other hand, this deficit spending was essential for increasing global trade and returning the US industry and service sectors to growth again.

On the world scale, the 2011 compromise was essential for turning the global tendency towards recession in the second half of that year into a sharp upturn at the beginning of 2012. Although that upturn only lasted for less than six months, it was successful in preventing the feared recession, at least until now. Finally, one of the essential aspects of this whole “pro-Wall Street” policy of low taxation of the superrich combined with low interest rates and quantitative easing, is the maintenance of an enormous volume of liquidity, available for investment around the world, which supports the financial markets.

Obviously, given the fiscal cliff problem, there was no way that US politics could avoid at least an end to any further expansion of deficit spending. If all the taxation and spending measures had been implemented, this would have meant $600 billion being withdrawn from US citizens or public institutions. The estimated impact on the growth rate of the US was about -4%, meaning a turn of the US economy to recession. Given that the US still accounts for 20% of the global GDP and given the current recession in the Euro-zone, this would definitely have pushed the world economy into recession again.

It was this danger, and the more immediate prospect of the impact on world financial markets, that finally forced the Republicans in the Senate to agree a compromise in the early hours of January 1st, when, technically, the US had already “gone over the cliff”. Similarly, after a great deal of sound and fury, enough Republicans broke ranks in the House to allow the compromise to go through just hours before the markets were to open.

But what exactly was achieved after all this drama? Almost none of the fundamental issues were even addressed and the most important were merely postponed for two months. That means the time bomb of fiscal insolvency is already ticking away.

What has been settled is that there will be a tax increase, from 35% to 39.6% for those earning over $400,000 per year, or for households on more than $450,000. This is actually a major retreat by Obama from his campaign pledge to raise taxes on those on more than $250,000. This element of the deal means that all the other tax cuts made by Bush now become permanent. However, because taxes are not due until the end of the year, this measure will have little effect on the existing fiscal crisis.

What will have an immediate effect is the raising of the “payroll tax”, that is, payments towards social security, by 2%. This will mean an extra tax burden of some $1,000 per year for working class families on an income of $50,000. The only real concession to the millions of working class voters who supported Obama is the continuation of unemployment benefits payments – but even that is only guaranteed for 12 months.

All the other issues, most importantly those concerning cuts in public expenditure, have been postponed for two months. That does not just guarantee a repeat performance of the Congressional drama but an even bigger crisis because by then the state debt is expected to have reached its legal ceiling – the biggest economy in the world will be facing insolvency!

Given the existence within the Republican Party of a faction that is opposed in principle to any tax increases or any raising of the “debt ceiling”, further substantial compromises may prove impossible. While there is a kind of fundamentalist irrationality in the politics of the “Tea Party”, their programme is also an expression of the dominance of financial capital in US imperialism. After losses during the 2008/2009 crisis, the essence of US politics was to rescue big financial assets and their powerful role in the world financial markets.

As long as there were also stimuli to provide growth in the industrial and service sectors and to underpin consumer spending, all this could be brought under the umbrella of an expansionary fiscal and monetary politics. Now, with the fiscal cliff and the danger of state insolvency, the inner contradictions between the different factions of the US bourgeoisie are coming to the fore and expressing themselves in a paralysis between Tea Party fundamentalism and Obama pragmatism. In the end it is clear that the working class and the poor are those that do not count at all in any of the compromises at stake at the moment.

In this situation it is more important than ever that the working class, the youth and the poor enforce their own position against the Obama-Democrats. Taking place alongside the fiscal cliff drama, the longshoremen’s dispute and the threat of an all-out strike of all the east-coast ports showed that the unionised working class still has the strength to strike back against the US bourgeoisie.

However, it is also clear that the union bureaucrats' backing of Obama’s politics has to be fought by a class struggle oriented opposition within the unions. The protest against the severe social cuts, increases in mass taxation and the anti-union politics of the political establishment in the US not only has to be the starting point of a new wave of protest – but also a spur to all class struggle oriented forces to fight for a new political party of working class and youth resistance against this capitalist system in the US!