Oxford Analytica believes that fears that US political leaders may precipitate renewed recession by allowing a fiscal crunch or voluntary debt default late this year are wildly overblown.
Congress will raise the statutory debt ceiling and reduce the severity of scheduled fiscal consolidation regardless of the outcome of November’s elections — though the debate may spill into the next Congress, unnerving markets.
Republican leader John Boehner vowed that the House of Representatives would not vote to increase the debt limit beyond the current threshold of 16.39 trillion dollars unless there were offsetting cuts in spending or unspecified “reforms” — raising the spectre of another destabilising standoff over fiscal policy. The United States might hit the ceiling before the end of the year, adding to market anxiety about Congress’s ability to avert the 8 trillion dollar fiscal consolidation crunch scheduled to hit under current law by January 1, 2013. Unless there is legislative action to avoid overly rapid consolidation, many economists view this cocktail of tax increases and heavy spending cuts (’taxageddon’) as lethal to US growth.
However, OxAn says:
- The elections will determine the nature (cuts vs revenue increases) of fiscal consolidation; it will occur regardless who is in office.
- Even if ‘tea party’ influence grows, it will not be sufficient to stymie the process or block a debt ceiling increase and fiscal deal.
- Even if lawmakers engage in further political brinkmanship, the hit to confidence will be less than during the August 2011 debt debacle.
For details see UNITED STATES: Fear of a fiscal debacle is excessive
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