We see a 90 per cent chance that a temporary extension will be agreed before the end of the year. But every day of inaction lowers this estimate. In the latest twist, the Republican House speaker John Boehner has suggested an increase in taxes for incomes over $1m (£620k). While this is positive, it is still much higher than the $250,000 proposed by Barack Obama’s camp, and would still leave a gaping hole in reaching the President’s $1.4 trillion revenue target. As such, the divide between the two camps remains significant. If an agreement was not forthcoming and the US fell off the cliff, it would prove highly disruptive for both the markets and the global economy. In this scenario we set a 90 per cent probability that retroactive legislation will come into effect in early 2013, which would help to reverse part of the fallout from the cliff.
Michala Marcussen is global head of economics at Societe Generale Corporate & Investment Banking.
The strongest reason to believe President Barack Obama will deliberately drive America over the fiscal cliff is that it serves his interests. Beginning on 1 January 2013, five major tax increases for Obamacare totalling more than a trillion dollars begin to bite. Thousands of pages of regulations written over the past four years will now slam the economy like a hailstorm. And Obama has no intention of reducing his ongoing spending spree. Higher taxes, more regulations and more spending dropped atop an already weak economy is a recipe for another recession. How better to hide this than to drive America over the fiscal cliff, bringing some of the $500bn (£310bn) in tax hikes back, and to spend the next four years replacing “George Bush” with “fiscal cliff” when whining about how the recession is not Obama’s fault.
Grover Norquist is president of Americans for Tax Reform.