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'Fiscal cliff' would plunge the US back into recession – Congress

If re-elected United States President Barack Obama does not reach an agreement with Congress on the impending "fiscal cliff", the US economy risks going back into recession, according to a report just released.

The "fiscal cliff" – a term first used by Federal Reserve chairman Ben Bernake in February – refers to a tipping point on January 1, 2013, when major spending cuts are due to come into force at the same time as the Bush-era tax cuts expire.

The Congressional Budget Office, which provides economic data to Congress, says the combination of a sharp tax increase and spending cuts would cut the federal deficit by $503 billion – which was expected to hit $1.1 trillion this year – through to next September.

However, that would also cause the economy to shrink by 0.5%.

The economic slowdown associated with the spending cuts and tax increases would lift unemployment to 9.1% by Q4 2013 from 7.9% now, the CBO says.

A lame-duck session of Congress will discuss the dilemma next week.

Mr Obama is up against a hostile Republican-controlled Congress which opposes tax increases and wants broad spending cuts.

But speaker John Boehner has given his strongest indication yet the two sides could reach an agreement, saying Congress could agree to some tax increases, but not to the top rate, and only if they are coupled with spending cuts.

"Because the American people expect us to find common ground, we are willing to accept some additional revenues via tax reform," Mr Boehner says, as reported by the Australian Financial Review.

The Bush-era tax cuts were extended in 2010 for two years.

If they were to be extended as they are, they would cost the government $330 billion through to September, the end of the 2013 budget year.

Mr Obama wants to increase the top two income tax rates to 39.6%, up from the top rate of 35% now. 

More by Caleb Allison

Comments and questions

The policies needed to correct this situation and the ideology of Obama do not match. Big trouble ahead.

No different to Greece, Spain, Portugal et al. There is only one solution: stop spending. But that does not win elections. Especially when it is touted against blatant dishonesty by a political opponent.

I suspect that outsourcing jobs laying off workforces and the entire short sighted nature of the US economy is to blame along with the corruption present within the US political system. Can it be fixed? I doubt it.

It's ironic that Barry Obama's first term failure was saved by a monster destructive storm. It's symbolic his second terms starts preceding a monster destructive storm.

Do you really expect anyone to take your comments on world politics seriously when you don't even know the President of America's name?

Red top!

Im afraid sir that anonymous has it correct. Obamas real name is Barry Soetoro

America will get what it deserves for electing a fiscal no hoper like Obama.

The problem for us is that the damage wrought by Obama will not be restricted to the US alone;NZ will feel the ripple effects;Greece here we come!

The US is the only nation that can just print its way out of trouble because it has a monopoly on the energy dollar/ global currency... other nations must sell bonds etc (which is just as inflationary after govt spends).

The whole monetary system is flawed its time we realised this. The notes in your pocket are only a representation of debt not anything of value. the debt based money system is designed to farm the productivity of the people that dont survive the artifical boom/bust cycles that are controlled by the lending strategies of international banks.

Obama just wants the rich to pay a little bit more tax. He seems to have no understanding that the rich then do a little bit less. Less risk, less employing, less productivity etc etc.

As mentioned before his ideology prevents him from seeing the wood for the trees