"Fiscal cliff" is not completely solved

2013-01-11 04:25  来源:大公报


     Both the Senate and House of the US Congress have reached a deal to ward off the "fiscal cliff" and approved relevant legislation, which President Barack Obama will sign into law. As the problem seems to have been resolved, the market becomes euphoric. But one must clearly understand the real situation so as not to be misled.

     It is in fact a political show for the two parties to reach the deal after several rounds of "tough negotiations". In order to gain political capital, the two political parties both have had to "stand firm", playing the game of political brinkmanship to strike the deal at the last moment. But this is just the end of a round (of the game). Another round will start soon: as US's fiscal liabilities have reached the ceiling of US$16 trillion, the Department of the Treasury has had to take emergency measures to reduce spending so as to sustain the operation of the government for a couple of more months. The Congress must pass a bill to raise the debt ceiling, or the US will "default" and the government will stop operation. The Republicans have planned to make use of this to press the Democrats to agree on fiscal spending cuts. Therefore, the two parties have yet to put on more dramatic shows of political struggle.

     A more fundamental question is whether the "fiscal cliff" problem is really solved. In fact it is not solved. This is like a sick child who needs to take medicine, but the child refuses to take it because he is afraid of taking medicine. So the disease is not cured. What the deal reached this time could achieve includes: 1) to reduce the shock of the problem by pushing back the "cliff" a bit and reducing its height a bit; 2) to adjust the structure of its impact by making some people contribute more while others less. Exactly because of this, it became the gaming between interest groups which intensified the political struggle: every inch of ground had to be fought for as interests are involved.

     Highlights of the deal include: 1) The rich (with annual income above US$400,000) will pay higher tax rates as their tax breaks will not be renewed, which will bring in fiscal incomes of $600 billion in 10 years; 2) Other taxes such as those on capital gains and dividends will be increased; 3) As exceptions and reductions will not be extended, payroll tax will increase by two percentage points bringing in some $100 billion; 4) Unemployment insurance and other subsidies will be extended; 5) Automatic spending cuts agreed earlier by the two parties will be postponed until March. It can be seen from above that of the two major factors causing the "cliff", automatic spending cuts basically remains unchanged as the impact of its postponement is limited, while various tax exceptions and reductions are selectively extended. On the whole, the height of the "cliff" is reduced, but the effect remains to be seen.

     It is generally estimated that the deal will result in a tightening of fiscal policy of 1.5% of GDP in 2013. The fiscal drag resulted from this is much less strong than the estimated 4% without the deal. However, there are many hidden variables. First, the direct and indirect multiplying effect of the fiscal tightening is hard to estimate, In particular, the indirect psychological impact is the most difficult to fathom: change in investment and consumption confidence can hardly be regulated and controlled. The impact of tax increase for the rich may not so big, but the increase of payroll tax will affect all wage earners. The foundation for US economic recovery remains rather weak, so it is not clear whether it could absorb the shock of tax hikes. Secondly, antagonism between the two parties will continue. The outlook for its fiscal policy remains unclear. Long-term investment confidence will especially be easily affected. Moreover, a price has to be paid for reducing the height of the "cliff": progress in cutting debts and deficits will be slowed down, which will make it more difficult to achieve a balanced budget again. This is not in favour of long-term development. It is estimated that the deal will increase US fiscal deficits by more than US$3 trillion in next 10 years. Rating agencies such Moody's and the International Monetary Fund (IMF) all agree that the US must devote greater efforts to cut debts and wipe out deficits.

     Obviously, after a brief euphoria, people must eventually return to rationality. US fiscal policy involves many aspects ˉ economic, political and even international and geopolitical, and thus is the gaming focus of various interests. The "cliff" deal inevitably will cause market turbulences. Caution must especially be exercised when the market becomes euphoric in general. In this regard, Hong Kong government and investors must especially heighten their vigilance, not to misjudge the outside environment and fundamentals because of any temporary change in market atmosphere. We must keep a close watch on whether this year US debts would become a market focus like euro debts. If the asset bubble caused by the "cliff" problem runs out of control, risks would become exceedingly high. 04 January 2013

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