L&G says fiscal cliff dilemma can be solved

Ben Southwood
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CONGRESS and President Obama will be able to reach agreement on the bulk of the fiscal cliff – the $600bn (£371.7bn) in automatic tax rises and spending cuts due in January – making the consolidation into more of a molehill, Legal & General analysts suggested yesterday.

The Republican-held House of Representatives and the executive branch will reach a deal preventing most Bush-era income tax rates from jumping and will be able to agree to halt spending cuts, the analysts forecast.

It calculates this will reduce the magnitude of the fiscal consolidation from 4.9 per cent of GDP to 2.1 per cent of GDP – or $340bn, instead of $780bn.

The US federal government debt stands at $16.4 trillion, and the government plans to add around $1.3 trillion to it this year through its deficit. The fiscal cliff would drive that deficit down to hundreds of billions of dollars – but Legal & General said so much fiscal tightening at the same time would undoubtedly push the US back into recession.

But Obama and the House have been at loggerheads over tax measures, with many representatives refusing to accept any deals that include tax hikes.