What is the fiscal cliff?

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As the year approaches its last month, several big events are set to occur in the US that are likely to significantly impact Americans. Unless US President Barack Obama is able reach an agreement on budgetary action needed before the year-end, 2013 will usher in automatic spending cuts, leaving governments potentially with no funds for essential activities. Tax breaks would end, higher taxes would reduce consumption at a time when the economy is weak.

Big events set to occur by 2012-end

The expiration of tax cuts initiated by former US President George W Bush, including current lower tax rates on capital gains, dividends, income, and estates

The expiration of stimulus measures like payroll tax cuts and extended unemployment benefits

Spending cuts scheduled to be triggered automatically in January

Impact on India

A major downside risk to global growth is now looming from the US ‘fiscal cliff’. The US Congressional Budget Office forecasts that the country’s fiscal deficit will decline by 3.3 percentage points to 4 per cent of GDP in 2013. However, such a sharp fiscal consolidation may have a deleterious impact on global growth. If demand in the US falls, it would spillover globally, impacting India’s exports, and the growth prospects. If global growth slumps, and imports remain at current levels, it will impact the current account, which may be offset if global commodity prices fall.

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