President Barack Obama must act quickly to reach an agreement with the policy makers in the country to avert the fiscal cliff. Fitch Ratings warned that United States could lose its AAA credit rating if the President and members of the Congress fail to put in place a balanced budget to address the impending spending cuts and tax increases.
Fitch Ratings pointed out, “The economic policy challenge facing the President is to put in place a credible deficit-reduction plan necessary to underpin economic recovery and confidence in the full faith and credit of the US.”
Economists believe that the implementation of the automatic spending cuts mandated by the 2011 Budget Control Act, also known as “sequestration,” which will start on January 1, 2013, and the expiration of the Bush tax cuts, would bring the economy to a fiscal cliff.
The government also needs to raise its $16.4 trillion debt ceiling as soon as possible. The country is close to reaching its debt limit by the end of the year. Although the Treasury Department said it would be able to take necessary measures to allow continued borrowing; the United States could face a default early next year, if Congress is not be able to raise the debt ceiling.
Fitch Ratings said there is “no fiscal honeymoon” for President Barack Obama. He needs to work with Congress immediately to prevent the unnecessary and avoidable recession. The crediting firm estimated that fiscal cliff- approximately $600 billion in tax increases and spending cuts would result in an increase in the unemployment rate by more than 10 percent in 2013.
“Avoiding the fiscal cliff and a timely increase in the debt ceiling would support the economic recovery and send a positive signal that agreement can be reached on a credible plan to reduce the federal budget deficit and stabilize federal debt over the medium term, consistent with the US retaining its ‘AAA’ status,” said Fitch Ratings.
In addition, the credit rating company opined that the result of the general election did not resolve the political standstill in Washington, if the President and the Congress fail to reach a temporary agreement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff.
Fitch Ratings pointed out, the most important policy priority for the President, and Congress is reaching a deal on a deficit reduction plan, with clear targets, specific taxes, and spending measures, to ensure that US public finances are moving towards a firm and sustainable path over the medium to long-term.
During his re-election speech, House Speaker John Boehner emphasized that he is against tax increases, but he indicated his willingness to compromise. On the other hand, President Obama was re-elected by the people knowing that his platform is pushing for tax increases for the wealthy.
Bill Frenzel, former Republican Congressman and guest scholar of economic studies at the Brookings Institution, noted the wide separation of interest between Boehner and Pres. Obama based on their speeches. He said, the key is Obama’s strength of leadership to resolve the political gridlock. He needs to sit down with the majority and minority leaders of both House and the Senate and tell them, “Boys we’ve got to make a deal.”
Frenzel said, “The fiscal cliff is such a catastrophe in waiting that it seems that the Congress and the president are going to have to work things out together no matter how disparate their views. We’re looking at a cliff that threatens to remove a little less than 5 percent of our GDP in the ’13 calendar year, and that’s something that nobody wants. There’s some incentive to sit down.”