The Global Economy in Turbulent Times

CHAPTER 40 Growth Dims after the “Cliff”¹

It was a close shave. It even passed the January 31 midnight deadline. But in the end (as always with politicians), the United States avoided falling off the fiscal cliff in the new year with, again, Band-Aid half-measures. The International Monetary Fund (IMF) is right: US actions to avoid the cliff did not go far enough to address the nation’s long-term fiscal deficit and debt problems. More remains to be done to put US public finances back on a sustainable path without harming the still-fragile recovery.

For Moody’s, the United States needs to do much more to lift its Aaa debt rating from the current negative outlook. Of course, it did bring in the first major tax increase on high earners in 20 years. But this is not enough to provide a basis for meaningful improvement in its debt ratios over the medium term. Most economists concede that the deal will negatively impact growth and blunt efforts to create more jobs, but will likely avoid the most feared, a double-dip recession. Still, much uncertainty remains.

“Cliff” Deal

Major elements of the compromise deal included:

• Raise tax rates to 39.6 percent on income over US$400,000. For earners below this threshold, the lower 2012 tax rates will now become permanent.
• Limit the value of personal exemptions/deductions.
• Raise capital gains/dividends tax to 20 percent (from 15 percent).
• Raise the estate tax to 40 percent (from 35 percent) for assets of more than US$5 million.
• Delay US$110 ...