As the beginning of this year approached, America careered carelessly towards the edge of the fiscal cliff. The political establishment in Washington was frozen by bitter animosity between the two parties and for some time it seemed this mutually assured inaction would lead to a potentially perilous tumble over the cliff.
The situation arose from another round of grubby political gamesmanship in July 2011, when the administration came within hours of being forced to default on its debt repayments. In return for agreeing to raise the debt ceiling in 2011, the Republicans, who control the House of Representatives, insisted that by 2nd January 2013 the administration had to pass a plan to tackle the deficit, or else a programme of tax rises and deep sequestration would automatically take effect: the fiscal cliff.
At the foot of the cliff, the rich would have been immersed in the chilly waters of moderate tax rises, with the top rate of income tax rising from 35% to 39.6%. Moreover, the Alternative Minimum Tax would have expanded, leading to 28 million more Americans paying the same rates of tax as the very richest four million.
It is poorer Americans, however, who would have taken the hardest fall, being cast onto a craggy escarpment of tax rises and savage spending cuts. The tax bills of middle class households would have risen by an average of $2,000 under the removal of the Bush-era tax cuts, whilst the unemployment benefits of two million of the poorest and most vulnerable in America may not have been extended. Federal spending on Medicare, the programme which guarantees health care to the over 65s, would have been slashed with doctors’ practices potentially facing cuts of 30%.
Falling over the fiscal cliff would have led to the state being legally obliged to cut federal spending by $109 billion every year for the next ten years. Given the sluggish growth of the American economy, currently around 2%, this would likely have pushed the country into a new recession and caused the rate of unemployment to rise from 7.9% to around 9%, a tragedy for the millions of Americans and their families who would have seen their incomes disappear.
It is, therefore, to be welcomed that the House of Representatives reluctantly agreed to a deal which averted the majority of the planned tax increases and spending cuts, which would have disproportionately impacted on poor and middle class Americans.
It is not, however, to be celebrated as any sort of victory. Current levels of federal spending in America are unsustainable: the national debt sits at around $16.3 trillion, an almost incomprehensible figure, whilst the annual budget deficit is over $1 trillion. Yes, with tax receipts of $2.3 trillion, the state continues to spend $3.6 trillion every year.
Federal debt is set to reach the legal ceiling of $16.4 trillion again in February, and there is some speculation that the President could instruct the mint to cast a $1 trillion platinum coin as a means of postponing negotiations to raise the ceiling. This will almost certainly not happen but it demonstrates the depths to which political debate has sunk in America that such a gimmick is even being contemplated.
This fiscal incontinence cannot continue indefinitely: heaping such debilitating levels of debt onto future generations is unfair and deeply irresponsible given the unpredictability of the global economic weather. It is clear that fiscal consolidation, through tax reform and spending cuts, is urgently required but it must be done in a way which is fair to the less well off.
The antiquated tax code is in most urgent need of reform. It is currently possible for the rich to pay scandalously low rates of tax, as large capital gains are taxed at just 15%. Mitt Romney, for example, paid a mere 14.1% on income of $13.7 million in 2011. I suspect the President would like to reform this system, but he is held back by a political system which allows one of the legislating chambers to be under the control of the opposition. Were he to bring forward necessary reforms to the tax code, he would be defeated in the Republican-controlled House of Representatives.
The GOP, and particularly the Tea Party faction which has undue influence in the House, refuses to countenance tax reform. This is not because of any economic arguments to do with competitiveness, but a deep rooted, and very unpleasant, libertarian view that the rich have no obligation to help those less fortunate through taxation and welfare. They insist that deficit reduction should be achieved through savage cuts to entitlements such as unemployment benefits and healthcare and all but minor tax rises are dismissed without commitments to such spending cuts.
The President has not helped the situation. His rhetoric is often aloof and he has seemed reluctant to engage with even moderate Republicans. It has taken a looming crisis to force Mr Obama from his state of semi-isolation in the White House to engage in negotiations. Without the looming spectre of a fiscal cliff or a default he seems largely unconcerned by bulging federal debt.
The President has only spoken vaguely about reining in spending and his administration has shied away from all but the most minor and marginal of spending cuts. They seem to have few coherent policies in this area, and the longer this continues, the deeper the cuts will have to be when an administration eventually decides to bring spending under control.
One area in which substantial savings could be made is defence. Whilst figures from both sides have made cursory statements in favour of a reduction in defence spending, there seems to be little appetite for genuine action. It is true that Obama has hastened the withdrawal of American troops from their flagging expedition into Afghanistan, which will reduce costs, but the problem is deeper than that.
Successive administrations have been caught up in a feeling of American superiority, and consequently paranoia, a poisonous combination which has led to an inordinate proliferation of American military presence around the world. The United States military currently runs 900 different bases in 148 countries. This is provocative, unnecessary and astonishingly expensive: the annual defence budget has reached $710 billion, more than the total expenditure on defence of the next thirteen countries. Surely, even in their position as the self-appointed global constabulary, such levels of activity are excessive.
Reform of the tax code and defence spending, combined with more moderate spending reductions across other departments, could lead to a return to a more sensible fiscal policy. It seems, however, that stalemate in Washington and reluctance from both sides to reduce America’s military footprint, mean that no progress will be made in the foreseeable future.
While our friends across the Atlantic struggle with a frozen political system and a looming debt ceiling, I feel it is worth taking a moment to appreciate our Coalition Government: it is to their credit that they are tackling the deficit in a measured fashion.
Engorged spending levels are being reduced across all departments, from defence to welfare, and notwithstanding the politically foolish decision to reduce the top rate of tax, the rich will pay more in every year of this government than they did in any year under the previous administration. Faced with deeply unsettling global conditions, the Coalition has succeeded in reducing the deficit by one quarter.
What is more, we should be thankful for our appointed, scrutinising second chamber. The primacy of the House of Commons ensures that there can be no possibility of the sort of impasse which is currently crippling Washington.
Times are tough, but our legislature can be an example to some of the more hysterical, intransigent and irresponsible politicians in Washington.
By Luke Arnold