By Richard McGregor
Politicians, political parties, and a hoard of billionaires
supporting them have spent upwards of $5 billion on America’s
presidential and congressional elections in 2012, a record amount by a
But whoever wakes up elected as president on 7 November,
and whichever party finds itself in charge of majorities in the Senate
and House of Representatives, they will face the same urgent
The pundits have come up with various forms of shorthand to describe
the challenge that Washington has until the end of the year to solve.
The “fiscal cliff” is one. “Taxmageddon” is another.
Both capture in different ways the list of issues that have long
been kicked down the road by a squabbling political system and will
finally come due on 1 January. This time, they will be harder to avoid
The end of the year sees the expiration of the large tax cuts
brought in by George W. Bush. They had been due to expire at the end of
2010 but were extended for two years in a deal between President
Barack Obama and Congress.
The expiration of the tax cuts on its own would be a drag on
the economy, by taking money out of the hands of consumers and
putting it into government coffers. But that is only the tip of the
iceberg. Another stimulus measure the Obama Administration pushed
through, temporary cuts to the payroll tax, also runs out.
On top of that, there are the deep cuts that come under the banner of
“sequestration”—in other words, automatic cuts to both defence
and domestic spending that kick in at the end of the year. The
sequestration cuts are Exhibit One for how dysfunctional the highly
partisan political system has become in recent years.
With budget talks deadlocked in 2011, Congress attempted to
scare both parties into a fiscal deal by saying that if they didn’t make
one, automatic cuts hurting the parties’ core constituencies (defence
in the case of Republicans and domestic program for the Democrats)
would kick in.
But even with the threat of sequestration hanging over them,
the Democrats and Republicans in Congress could not reach agreement
on how to rein in the budget.
The result is a singularly scary scenario for the Keynesians
in Washington who believe that a sudden cut in government spending and a
sharp rise in taxes will plunge the country into a deep recession.
The Congressional Budget Office, a non-partisan agency that analyses
the effects of legislation on the finances of the US government, says
that without a deal the economy will contract at a rate of 0.5 per cent
With the economy already slowing in the lead-up to the election, the
projection is substantially bleaker than its estimate in May, when it
was forecast that the US economy could suffer a recession early
next year but rebound strongly enough in the second half to ensure
tepid growth for the full calendar year.
There are some conservatives who see sequestration as a
major opportunity to force through cuts that otherwise have been
Far from being a fiscal cliff, they see the end-of-year moment as a fiscal solution.
This group, however, is a minority. The vast bulk of the
Republican Party supports cutting domestic programs, like spending on
the poor, but it adamantly opposes across-the-board cuts at the
During the presidential election campaign, both Barack Obama and Mitt
Romney have framed the election as a contrast in visions over budgetary
Romney wants to cut taxes and sharply reduce spending in most areas
except defence, while Obama wants to raise taxes on the wealthy in order
to maintain higher government spending levels.
But even Romney does not want to impose his cuts quickly, because he thinks they would drag the economy down with them.
The most likely outcome is another temporary deal, delaying some cuts
and extending tax relief. Under this scenario, the fiscal cliff becomes
more of a fiscal slope. But it would be a slope that would gently wind
its way down to the same place that the cliff would take
the protagonists much faster—gridlock, combined with an
unsustainable budgetary situation.
That is why the morning after the election is so important. It is
not only the White House that is up for grabs. If the Republicans take
the Senate, then, even with a victory in the presidential race, Obama
will be more boxed in than ever. If Democrats hold their slender margin
in the Senate, then he will at least wield some moral authority over
In 2012, more than ever, America needs its electorate to
speak clearly about what sort of government it wants. But don’t hold
your breath. In what is generally called a fifty-fifty country, look out
for a fifty-fifty result.
Which means, at Christmas this year, we can all expect to go off the
fiscal cliff together. The only question is at what pace we do it.